Finding and hiring employees can be lengthy and difficult for a business owner. There might be further complications if a particular restraint of trade is in place in a prospective employee’s employment contract with their current or former employer. When making hiring decisions, you must ask a prospective employee about any restraints on their ability to accept or carry out work in your industry and area.
This article will outline what restraints of trade are and how you can navigate them when hiring a prospective employee affected by one. Specifically, it will explain non-solicitation and non-compete clauses, how enforceable they are, and the risks to your business when hiring somebody bound by them. Further, this article will provide helpful tips for navigating these contractual terms.
What is a Restraint of Trade Clause?
As an employer, you may have heard the terms ‘non-compete’ and ‘non-solicitation’ or come across them in an employment contract. You may even include them in your business’ employment contracts. These clauses are two main kinds of ‘restraints of trade’, which operate to prohibit or limit an employee from engaging in behaviour or conduct that may be detrimental to your business’s commercial interests. Notably, they can apply during and after employment.
Generally, a non-compete clause operates to restrict an employee from engaging in activities in competition with their current or former employer (e.g. working for or opening up a business selling a similar product or service) for a specified period of time and in a specified area.
A non-solicitation clause operates during and following the termination of an employment relationship. They aim to restrain an employee from canvassing, soliciting or approaching a:
- client;
- customer;
- director; or
- worker (either employee or contractor).
Non-solicitation clauses are more commonly seen and can protect valuable business assets.
How Enforceable are Restraints of Trade?
The general position at law is that trade restraints are unenforceable for public policy reasons. Essentially, the courts do not want to limit a person’s ability to find work in their chosen field. Generally, however, non-solicitation clauses are more effectively enforced, given the value of the assets and interests to be protected.
When considering whether to enforce a restraint of trade clause, a judge is likely to consider several factors and each party’s interests, including:
- whether there is a legitimate business interest to be protected;
- the employer’s need to protect their business assets and interests, like confidential information;
- the ability of the restrained employee to find alternative work considering their training, skills and experience; and
- the reasonableness of the restraint (i.e. the area and period it operates for).
Despite issues of enforceability, including a restraint of trade clause in your prospective employee’s employment contract is not something that you can ignore. Businesses can and will seek enforcement of such clauses and have the ability to make a claim against the employee’s new employer for breach of contract. For this reason, you must conduct appropriate pre-employment checks and seek legal advice from an employment lawyer before engaging an affected employee.
Continue reading this article below the formWhat Should I Do?
When considering making an offer of employment, you can enquire with the candidate whether any restraints of trade bind them. If so, what area does the restraint operate in and over what length of time? You should then consider the commercial and legal risks associated with hiring them, including enforcement action by the previous employer. Specifically, the employer seeking to enforce the restraint may:
- seek an injunction;
- put you on notice of inducing the breach of contract and seek undertakings from you regarding compliance; or
- initiate legal action against your business for inducing a breach of contract.
These actions can be complex and costly to navigate. Therefore, it is best practice to seek advice from an employment lawyer before hiring an employee bound by a restraint of trade.
Whether it’s your first hire or your fiftieth, this guide will help you understand the moving parts behind building a high-performing team.
Key Takeaways
Restraint of trade clauses can prohibit competition and poaching of clients or workers and can be difficult to enforce. If your prospective employee has restraint clauses in their employment agreement, their current or former employer may seek to bring a claim against the employee for breach of contract. They may also seek to bring a claim against your business if you have induced the employee’s breach of contract.
If you need assistance navigating restraint of trade clauses or the hiring process generally, 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
An injunction is a court order sought by a party (usually where affected by a breach of contract) that prevents the other party from engaging in particular conduct before the matter can be heard before a court.
A restraint of trade clause will only be enforceable where it operates to protect a party’s legitimate business interests and to the extent that it is reasonable.
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