Restraint of Trade Clauses: Are They Reasonable?

Employment contracts commonly include a restraint of trade clause to restrict employees working in their employer’s industry if they decide to quit. Below, we unpack a recent case in Western Australia’s Supreme Court to better understand what the court considers when determining whether a restraint of trade clause is reasonable.

Up Close: Emeco International Pty Ltd v O’Shea [No 2] [2012] WASC 348

In Emeco International Pty Ltd v O’Shea [No 2],  the court considered whether Emeco International Pty Ltd could enforce their restraint of trade clause and prevent Mr. O’Shea from working for a competitor directly after leaving his employment. 

Legal Issues the Court Considered

Justice Edelman looked at when a restraint of trade would be reasonable to protect the employer’s legitimate interests. In his judgment, he determined that the interests Emeco needed to establish to justify the restraints were its customer connections and confidential information. The court also required reasonable restraints in relation to Mr. O’Shea. That is, Mr. O’Shea could still earn an income in his chosen profession. 

Justice Edelman determined that it was reasonable to expect Mr. O’Shea to obtain substantial personal knowledge and influence over a majority of Emeco’s client base. Factors the court looked to included: 

• Mr. O’Shea’s seniority; and 
• Emeco’s specialised industry (dry equipment hire).  

Was the Restraint of Trade Too Broad?

The court considered the following factors determined whether a restraint of trade was reasonable in Mr. O’Shea’s circumstances: 

• The seniority of his position;
• The nature of his position as one of the ‘faces’ of the company;
• His small team;
• His significant remuneration;
• The nature of the industry as narrow and highly competitive;
• The nature of the relationship between him and his clients, where it was long-standing, and there was a high degree of trust;
• Some of the client contracts were to expire during the period of the proposed restraint of the employee;
• He would be in a position to heavily influence these clients as to where they would bring their business;
• The geographic scope was reasonable as the business commenced operations in WA over 30 years ago, and WA was a core part of its business;
• Emeco expected him to possess a significant amount of confidential information; and
• At the time of the contract, it was reasonable for Emeco to expect that Mr. O’Shea would be able to obtain alternative employment in a similar role, but in a different industry based on his career background.

Key Takeaways 

In this case, the Court held that the restraint of trade clause preventing Mr. O’Shea from working for a competitor was reasonable. The court will look at the following factors when determining whether an employer can enforce a non-compete clause against an employee:

• The employee’s position in the company; 
• The employee’s access to information about the company’s operations including pricing structure and client lists; and
• The duration and geographical reach of the restraint.

Questions? Get in touch with LegalVision’s employment lawyers on 1300 544 755.