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Building, running and protecting your business takes hard work. To protect that work, you should include and enforce a ‘restraint of trade’ clause in your employment agreements. Restraint of trade clauses protect your business from exploitation by current or ex-employees. To help you understand how you can better protect your business, this article will take you through preparing and enforcing restraint of trade clauses.
Restraint of Trade Clauses
Two common types of restraint clauses 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 your clients and current staff.
You should ensure that employees are aware of these restrictions before they start work with you. For example, you can include restraint of trade clauses in your employee’s employment agreement.
Drafting a Restraint of Trade Clause
It is important to draft employment agreements with an appropriate and enforceable restraint of trade clause. As such, restraint of trade clauses must be reasonable for your industry to be effectively enforced. For example, it may be difficult to enforce a restraint of trade in a niche industry because you would only serve to restrict your former employees from working in their chosen profession.
A well-drafted employment agreement will typically include 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
Importantly, the court will only select the most reasonable option from the cascading clause and cross out the others. Your restraint clause is therefore more likely to be enforced if it is cascading.Continue reading this article below the form
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When an Employee Leaves
When an employee leaves your business, it is helpful to draft an ‘exit deed’. This is an optional agreement guiding the post-employment relationship. In particular, a deed reminds ex-employees 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 therefore ready and able to enforce them if necessary. This reminder is generally sufficient to ensure your employee does not breach their restraint clauses, ultimately reducing and avoiding the need for legal disputes.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
How to Enforce a Restraint of Trade Clause
Suppose you discover an ex-employee is in breach of their restraint of trade clause. In this case, 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, e.g. working for a competitor, or actively soliciting clients or current staff; and
- request the ex-employee to sign an agreement to stop behaviour that is in breach of the initial clauses and maintain confidentiality, within a specified time frame.
If this letter is not enough to ensure your employee discontinues the relevant actions, you may need to take further action.
If your ex-employee continues breaching the restraint clause despite your request, one or more follow-up letters may be necessary. A follow-up letter might include much of the same information as the first letter, including your request to sign the agreement. Also, it is worth highlighting that an ongoing breach may result in legal action.
If the letters do not work, you may seek an injunction. That is, is an application to the court to stop your ex-employee from performing the action/s causing the breach. However, you should consider whether pursuing an injunction is a commercially wise decision because it is costly without a guarantee of success. Before pursuing an injunction, you should 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.
Additionally, you must prove to the court that your business will face irreparable damage unless they enforce an injunction. You can do this by showing the court the real loss and damage your business has suffered as a result of the breach.
Prospects of Success
It is important to consider that your restraint of trade clause must be necessary to protect your business’ legitimate interests. Otherwise, the court will not uphold it. Legitimate interests will usually relate to confidential information and client connections.
When determining whether a restraint of trade clause is reasonable, courts will consider the following:
- nature of the employment, such as the employee’s connection to customers;
- the negotiation process, including the bargaining position of the employee;
- duration and geographical limitations of the restraint; and
- whether the employee was given anything in exchange for agreeing to the clause.
To ensure a court will find your restraint of trade clauses reasonable, it is critical that you give your employee an opportunity to negotiate the terms of the agreement.
In conclusion, restraint of trade clauses are complex and can be costly to enforce. Therefore, it is good 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;
- ask them to sign an agreement to cease their breach; and
- resolve the matter by going to court and seeking an injunction.
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
Restraint of trade clauses give you protection from employees or ex-employees who seek to exploit your business. There are two main types of restraint clauses. The first are non-competition clauses, which prevent ex-employees from working with direct competitors for a specific period or distance post-employment. The second type are non-solicitation clauses, which prevent ex-employees from profiting from, or engaging with your clients and current staff.
If an ex-employee breaches their restraint clause, you can send them letters outlining their obligations and ask them to sign an agreement to cease their breach. If this fails, you can resolve the matter by going to court and seek an injunction. It is important to consider that unless a restraint of trade clause is found to be necessary for protecting the legitimate interests of your business, the court will not uphold it.
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