If you are an employer, you may be considering including a post-employment restraint of trade clause in your employment agreements. The restraints that you may be looking to impose on an employee can vary. However, the clauses generally prescribe that an employee cannot:
- use their former employer’s confidential information and trade secrets;
- work for a competitor for a period of time after they leave the business; and
- solicit clients, staff and customers from their former employer.
In this article, some of the core principles on restraint of trade clauses are set out in case you want to include one in an employment contract.
What is a Restraint of Trade?
A restraint clause in an employment agreement typically applies when an employee leaves the business. You can enforce a restraint clause to the extent that it is ‘reasonably necessary’ to protect your legitimate business interests. Howeverm whether a provision is ‘reasonably necessary’ will depend on its wording and the facts of a particular situation.
The two main types of restraint clauses are:
- non-competition: this clause prevents a former worker from competing against the company; or
- non-solicitation: this clause prevents a worker from actively soliciting former clients to follow them to the new business.
What is Reasonable Between the Parties?
For a restraint of trade clause to be enforced, it must be reasonable in the circumstances. If the court finds that the restraint goes beyond providing your business with adequate protection, it will not enforce the clause. However, if the clause affords no more than adequate protection, the court will then go on to consider whether the restraint is harmful to the public interest.
Therefore, the party seeking to enforce the restraint (usually the employer) must establish that it is reasonable between the parties.
What Will a Court Consider?
The court will consider the particular facts in each case when determining whether a restraint is reasonable. However, it will also consider the following factors:
|Negotiation process||In particular, comments made when negotiating the restraint clause.|
|Parties’ bargaining position||Was there an imbalance in power between the employer and employee at the time the parties agreed to the restraint? Did the employee have the opportunity to obtain legal advice?|
|Nature of the employer’s business and characteristics of the employee||For example, if the employee is in close contact with the employer’s customers, it is more likely that the restraint will be reasonable.|
|Remuneration and Compensation||Did the employee receive any remuneration or compensation for the restraint?|
|Duration of the restraint||The longer the time, the less likely it will be to be reasonable.|
|Geographical restraint area||
If the restraint covers a large geographical area, the court is unlikely to hold it to be reasonable. Quite often, employers now try and incorporate a cascading clause in their agreement to avoid duration and geographical issues. A cascading clause provides alternate time periods and geographical areas that allow the court to ‘read down’ the clause until they consider it is reasonable.
For example, the geographical area may start as Australia, then New South Wales, then a particular town in New South Wales.
In 2016, the Victorian Supreme Court had to consider whether a restraint of trade clause was reasonable. In the matter of Just Group Ltd v Peck , the employer wanted to enforce a restraint clause to prevent the company’s Chief Financial Officer from working with their competitor. The clause in the employment contract sought to prevent the employee from commencing work for two years.
The Court decided that the restraints were not reasonable because the:
- restraint went further than necessary to protect Just Group Ltd’s legitimate business interests;
- restraint sought to prevent the employee from working at other businesses who were not in competition with Just Group Ltd; and
- duration of the restraint was too long as the clause applied to both Australia and New Zealand for two years after her employment terminated.
An employer can only enforce a restraint of trade clause to the extent that it is reasonably necessary to protect their business interests. However, whether a clause is reasonably necessary will depend on the particular facts of the case. If you have any questions or need assistance reviewing your employment agreement, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.
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