Building, running and protecting your business requires hard work. To protect that work, businesses should include and enforce a restraint of trade clause in your employment agreements. Restraints of trade clauses give` you protection against employees or ex-employees exploiting your business.
There are two main types of restraint clauses. These are:
- non-competition clauses, which prevent ex-employees from working with direct competitors for a specific period or distance post-employment; and
- non-solicitation clauses, which prevent ex-employees from soliciting clients and current staff.
By including restraint clauses in employment agreements, employees are immediately made aware of the restrictions. Despite this, employees and ex-employees sometimes breach their restraint clauses. As a result, you may wish to enforce a restraint of trade clause using the steps outlined in this article.
Drafting a Restraint of Trade Clause
It is important to draft employment agreements with an appropriate and enforceable restraint of trade clause. To enforce a restraint of trade clause, it must be reasonable for your industry.
For example, it may be difficult to enforce a restraint of trade in a niche industry because you could be restricting ex-employees from working in their profession.
A well-drafted employment agreement typically includes a cascading restraint clause. A cascading time and distance clause may look like this:
(a) Six months; or
(b) Four months; or
(c) Two months.
(a) Australia; or
(b) New South Wales; or
The court will select the most reasonable option from the cascading clause and cross out the others. Your restraint clause is more likely to be enforced if it is cascading.
When an Employee Leaves
When an employee leaves, it is helpful to draft an exit deed, which is an optional agreement guiding the post-employment relationship. A deed reminds an ex-employee of their obligations and the restraint of trade clauses in their contract.
The exit deed also shows your ex-employee that the restraint clauses are essential and you are ready to enforce them if necessary. Often this reminder sufficiently ensures that your ex-employee does not breach their restraint clauses.
How to Enforce a Restraint of Trade Breach
Upon discovering that an ex-employee has breached their restraint, you can send them a letter reminding them of their obligations. The letter should:
- outline what conduct (if known) is in breach of the clauses, i.e. working for a competitor, or actively soliciting clients or current staff; and
- request the ex-employee sign an undertaking to cease their breach, and maintain confidentiality, within a specified time frame.
The letter may be enough to ensure the ex-employee discontinues the actions that are in direct breach.
If your ex-employee continues breaching the restraint clause, despite your request, a follow-up letter or letters may be necessary.
The follow-up letter can include much of the same information as the first letter, including your request to sign the undertaking. It may be worth highlighting that an ongoing breach may result in legal action.
While sending multiple letters is frustrating, it is crucial to show the court you have done everything you can to stop the breach.
If the letters do not work, you may seek an injunction. An injunction is an application to the court to stop your ex-employee from performing the action/s causing the breach. You should think about whether pursuing an injunction is a commercially-wise decision because it is costly without a guarantee of success. You will need to evaluate:
- the cost of court proceedings;
- the actual or projected cost of the breach;
- your likelihood of success;
- the extent of the breach; and
- the breach’s damage to the business.
You must prove to the court that your business will face irreparable damage unless an injunction is granted. You can do that by showing the court the real loss and damage your business has suffered as a result of the breach.
Prospects of Success
Courts refer to two pieces of legislation to determine whether a restraint of trade clause is reasonable and enforceable: The Competition and Consumer Act 2010 (Cth) and, if you are in NSW, The Restraints of Trade Act 1976 (NSW).
The courts must balance your business interests against the ex-employee’s interests and their right to gain meaningful employment. This delicate balancing act makes it difficult to determine whether a court will consider your restraint to be enforceable.
Restraint of trade clauses are complex and can be costly to enforce. It is, therefore, best practice to have well-drafted clauses within your employment agreements. If an ex-employee breaches their restraint clause, you can send them letters outlining their obligations and ask them to sign an undertaking to cease their breach. As a last resort, you can resolve the matter by going to court and seeking an injunction.
If you have any questions about drafting or enforcing your restraint of trade clause, get in touch with one of LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.
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