Employee Restraint Clause — Why the Devil Is in the Detail

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Table of Contents

• Restraint Clauses 
• Enforcing Restraint Clauses
• Case Law
• Cascading Clauses
• Key Takeaways
• Frequently Asked Questions 

As an employer and business owner, you understand the value of your internal know-how and client database. Put simply, your business would not function without it. One such way you may have sought to protect your business is by incorporating an employee restraint clause in each of their service agreements. However, this is not always sufficient. The question of if a court will uphold a restraint clause depends on its precise wording and application. This article will provide some key considerations when drafting employee restraint clauses.

Restraint Clauses 

An employee restraint clause — also called a restraint of trade clause — is a term in an employment agreement that seeks to prevent your employees from working with a competitor or soliciting your clients and key personnel. 

You should draft restraint clauses specifically to operate within a specified geographical area and for a limited period of time. For example, suppose you own a bakery. If a baker stops working for you, you may wish to prevent them from working as a baker in the same suburb as you for six months after their employment. While you may wish to stop an employee from working the next suburb over, a court is less likely to enforce an employee restraint clause if you have drafted it too widely.

Enforcing Restraint Clauses

Generally speaking, the courts do not want to restrict anyone’s ability to work. As such, restraint clauses will only be enforceable if you can demonstrate that it is reasonable to protect your legitimate business interests. This might be the case where the employee:

• had access to confidential information; or
• worked closely with your customers or suppliers.

This means that before drafting a restraint clause for an employment contract, you should carefully consider the employee’s role in your business and how this may impact your commercial interests should they leave. 

Case Law

Case law provides helpful examples of what the court will deem an enforceable restraint of trade clause. In the case of Sportsbet Pty Ltd v Carpanini & Anor, Sportsbet sought to restrain a former Client Services Manager, Ms Carpanini, from “providing services to, participating in, being interested in, assisting with or otherwise being directly or indirectly involved in, engaging in, being concerned or interested in a Restricted Business in the Geographical Area, in any capacity for a period of 6 months after termination of employment”

Here, the court would not order an interlocutory injunction, holding that the restraint was too wide to be enforceable. 

As the court noted, the clause essentially meant the defendant, in this case, could neither take a job with nor buy shares in a competitor. 

In another case heard in the Victorian Supreme Court, Wallis Nominees (Computing), a software consultancy business, employed Pickett as a software consultant who was contracted out to clients in various IT roles. During his employment with Wallis, Pickett contracted with Grocon on a full-time basis. He then resigned from his position at Wallis to take up a position with Grocon. His employment contract with Wallis contained a 12-month post-employment restraint preventing him from providing services to any of Wallis’ customers. The Court held that the clause was unreasonable because it was too widely drafted. 

The key lesson to be learned from both these cases for employers is that a court will not uphold restraint clauses that are too widely drafted.

Cascading Clauses

You can use cascading clauses as a way to ensure your clause is not too widely drafted.  A cascading clause refers to a restraint clause with successively reduced restraint locations and periods. An example of a cascading clause is as follows:

The nature of a cascading clause allows the court to strike out any unreasonable clauses and allow any alternatives that are considered reasonable to remain enforceable. 

Key Takeaways

Employers should be cautious to implement a ‘one size fits all’ restraint for all employees. Instead, you should customise the restraint on a case-by-case basis, determined by the:

• nature of the roll;
• level of client contact; 
• seniority of the employee’s position; and 
• restrained activities. 

If you need assistance drafting or enforcing a restraint of trade clause, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions 

What is a restraint of trade clause?

A restraint of trade is a clause in employment agreements that intends to prevent employees from working for a competing business or soliciting any of your clients, contractors or employees once they stop working for you. Restraint clauses are usually drafted to operate within a specified geographical area and for a limited period of time.

Are restraint of trade clauses enforceable?
Generally speaking, the courts do not want to restrict anyone’s ability to work. As such, restraint clauses will only be enforceable if you can demonstrate that it is reasonable to protect your legitimate business interests. This might be the case where the employee had access to confidential information or worked closely with your customers or suppliers throughout their employment.