As an employer, it is important to know how a new employee’s restraint of trade clause with their previous employer affects you. Following an employee’s resignation, there is a risk they will seek employment with a competitor or ‘steal’ customers or staff. As such, many employers try to implement restrictions in employment agreements to prevent them from competing with them or soliciting customers or other parties during or after their employment. In this article, we will discuss how a restraint of trade may work and what you need to look out for before you hire a new employee.
What is a Restraint of Trade Clause?
A restraint of trade clause is a provision within an employee’s employment contract which prevents employees or owners of new businesses from engaging in specific competitive activities which may adversely affect the employer’s business, either during or following the employment relationship.
There are several different kinds of restraint of trade clauses. Let us explore the two most common types.
Non-Compete Clauses
Non-compete clauses prevent ex-employees from working for a competing business (including operating their own competition business) for a certain period and within a certain geographical area after the end of the employee’s employment.
Non-Solicitation Clauses
Non-solicitation clauses prevent ex-employees from soliciting individuals or businesses that may have previously had a relationship with the employer, including customers or staff of the employer’s business.
Is the Restraint of Trade Clause Enforceable?
For a restraint of trade clause to be enforceable, the employer must provide that:
- they have a legitimate, protectable business interest; and
- the scope of the clause is no more than reasonably necessary to protect that legitimate interest.
In considering the reasonableness and, thus, the enforceability of a restraint of trade clause, the court will consider several key factors, such as:
- whether the restraint is limited to a geographical area only to the extent that it protects the business’s legitimate interests;
- whether the duration of the restraint lasts for a reasonable period; and
- the nature of the employee’s role within a business, and whether that role provides them with more substantial business knowledge or a certain level of contact with the business’ customers.
Example of a Broad Restraint of Trade Clause
In a 2018 case, Commsupport Pty Ltd v Mirow, Commsupport was an information technology business that employed Mr Mirow as a computer technician. Mr Mirow’s employment agreement contained a restraint clause preventing him from acting for company clients. However, the Court decided this was too broad, as Commsupport had many clients. Accordingly, the restraint was unreasonably broad and thus invalid and unenforceable.
Continue reading this article below the formHow Should I Address the Restraint of Trade Clause?
If you are hiring a new employee, you should check whether your employee has any restrictions that prevail following the termination of their previous employment.
If they do, consider whether this will affect their ability to work for you and provide the services that you require. Additionally, consider whether this will put you at risk of a dispute with the new employee’s former employer. Depending on how the previous employer drafted the restraint of trade clause, specific wording in the clause may prohibit the employee from commencing their employment with you or engaging in the specific tasks you have employed them to perform for a certain time.
For example, suppose you own a communications software company operating in Western Australia. Laura, a software engineer, quits her job. Her previous employer, a financial software company operating only in NSW, attempts to use restraint to disallow Laura from providing software development services to any other software company within Australia for 12 months. Your legal team advises you, however, that the court may find the ex-employers restraint too broad and that you may likely be able to engage Laura to provide software development services to you.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Key Takeaways
When you are hiring a new employee, it is important to enquire whether the potential hiree may be bound by any obligations to their former employer. Consider whether such obligations affect their ability to complete the tasks you require. Additionally, note that the restraint of trade may potentially lead to a dispute between you and the previous employer. The emergence of such complications could significantly impact your operations. Thus, you must seek legal advice if your potential employee is bound by restraint of trade obligations.
If you require assistance with hiring a new employee or reviewing a restraint of trade clause, our experienced employment lawyers can assist as part of LegalVision’s 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
A restraint of trade clause is a common provision included in an employment agreement that aims to prevent employees of a business from working for a business directly competing with the employer’s business, soliciting any individuals or entities (including clients, suppliers, other employees or contractors) that the employer may have had a commercial relationship with, or interfering with such commercial relationships.
Yes. The most common types include non-compete clauses and non-solicitation clauses.
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