As an employer, you may think your interests are covered by having a uniform employment agreement governing all employees’ services. Unfortunately, this is not always the case, particularly as it relates to restraints of trade clauses. In determining the enforceability of a restraint clause, the Court will examine many subjective factors on a case-by-case basis. These factors will vary between employees. It is therefore essential that you customise your restraint clauses for every employee. This article will take you through what a restraint of trade clause is and why you should never rely on a pro-forma restraint of trade clause.
Restraint of Trade Clauses
A restraint of trade is a common clause included in employment contracts. Often, they aim to prevent employees from:
- soliciting any of your clients, employees or suppliers;
- working for a competing business; or
- interfering with your relationships with clients, employees or suppliers.
Restraint clauses are usually drafted to operate within the limitations of a specific period and geographical area. The law is more likely to treat a restraint of trade clause as enforceable if it is tailored. This is because widely-drafted restraint of trade clauses often unreasonably restrict the employee’s rights. Therefore, using a pro-forma restraint of trade clause is unlikely to be enforceable.
Practical Considerations
You should bear several important considerations in mind when drafting a restraint of trade clause for your employees. These include:
Restrained Activities
The restrained activities should not be too broad. Restraining an employee from working for a competitor ‘in any capacity’ would ultimately prevent your employees from working in any position for any competitor company. The court is likely to consider this unreasonable and render it unenforceable.
This is particularly the case where an employee works in a more niche industry. For example, a CEO is likely to have fewer positions than a secretary. At the same time, a company has a greater interest in restraining a CEO because it has more to lose if the CEO moves to a competitor. You must therefore carefully articulate the extent of restrained activities when drafting the clause.
Restraint Time
Generally speaking, the more senior the position, the longer the restraint can be. Therefore, it is inappropriate to rely on a pro-forma restraint clause for all employees regardless of their seniority.
While it is commonplace to have cascading provisions, such provisions should be changed on a case-by-case basis. The law treats a cascading clause here as a restraint clause with successively reduced restraint periods. The nature of such clauses makes it easier for the court to enforce them. This is because any unreasonable provisions can be struck out, leaving the remaining clauses in effect.
Restraint Area
A court is likely to treat a restraint that stops someone from working in their field across the whole of Australia as unreasonable. You should therefore think about the area in which your business operates and what is reasonable in light of your business operations.
Further, using a cascading clause with successively reduced restraint areas is one way to increase the enforceability of your restraint clauses. You may also wish to increase the restraint area in accordance with the employee’s seniority. For example, a managerial position may have a larger geographical restraint than other employees.
Bargaining Power of the Parties to the Contract
While many employees sign what they are given at the commencement of their employment, this is not always the best approach. You may consider negotiating the terms with a specific employee because a court is more likely to treat a negotiated contract as enforceable. You should document the bargaining process carefully, which will provide sufficient evidence that you reasonably negotiated the terms of the contract with each employee.
Consideration
Finally, you should ensure you draft the restraint clause so that the court is clear on the issue of consideration, which is an important component of all contracts. The clause should state that the employee entered into it freely and in consideration of the other terms of the agreement.
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Key Takeaways
In determining the enforceability of a restraint clause, the court will examine many subjective factors on a case-by-case basis. As a result, you should never rely on a pro-forma restraint of trade clause in your employment contracts. Instead, when drafting restraint clauses, you should carefully consider:
- restrained activities;
- restraint time;
- restraint area;
- bargaining power of the parties to the contract; and
- consideration.
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Frequently Asked Questions
Restraint of trade clauses are provisions in agreements that aim to prevent employees from working for a competing business or soliciting any of your clients, contractors or employees once their employment ends with you.
In determining the enforceability of a restraint clause, the Court will examine many subjective factors on a case-by-case basis. As a result, you should never rely on a pro-forma restraint of trade clause in your employment contracts. Instead, you should carefully consider each employee’s specific circumstances and prepare a restraint of trade clause based on that.
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