If you’re an employee preparing to resign and work for a competitor or set up shop on your own, it’s worthwhile to read through your employment contract to understand whether you are subject to a restraint of trade clause, and how it applies to your circumstances. Similarly, if you’re an employer, and a key member of staff has resigned, it’s critical to understand the extent and operation of the restraint clause, especially if you are concerned your employee will take some of your business or trade secrets with them.
Below is a quick user guide to interpreting your restraint clause. From the outset, it’s important to note that the law relating to restraint of trade clauses is complicated, and there is no one size fits all. Restraint or non-compete clause’s enforceability depends instead on several subjective factors related to the individual facts at hand.
1. Know the Law
In most states, specific legislation governs the validity of such clauses. In NSW, the Restraint of Trade Act 1976 dictates that restraint of trade clauses are void. They will only be upheld to the extent reasonably necessary to protect a legitimate business interest of the person seeking to enforce the restraint (the employer).
2. Understand how the Court Will Interpret Restraints
The court determines what is both ‘reasonable’ and a ‘legitimate business interest’ by examining the subjective factors of the employment relationship, the contractual negotiations between the parties and the employee’s proposed new venture. It also considers the following:
- The level of remuneration and seniority of the role;
- The extent to which the employee in question was the face of the business; and
- The market in which the employer operates.
The court will also scrutinise the individual wording of the various sub-clauses of the restraint, with a far-reaching restraint less likely to be enforceable at all.
3. Examine the Available Evidence
It’s one thing to be concerned about the ramifications of an exiting employee’s actions, and another to prove as a matter of evidence that his or her actions present a real risk to the employer’s business. Examples of evidence commonly adduced in such cases include emailing client lists to personal addresses, misappropriation of client files or internal system documents, and/or documentation showing the commonality of target markets.
4. Consider Your Damages
Similarly, even if you can show a threat, there is not much point to an employer in enforcing a restraint unless it can demonstrate that it will suffer real or likely damages. Such damage doesn’t necessarily have to be monetary though often it is in the form of actual or lost revenue from an existing client base. It can also include a threat to confidential information, concluding future designs and marketing plans.
This guide is a starting point for better understanding how the law will apply. An employment lawyer can provide tailored advice as to the application of your restraint clause, and help explain the various options available to enforce or resist a non-compete. If you have any questions, get in touch with our employment law team on 1300 544 755.