As an employer, you might want to put ‘restraint of trade’ clauses in your employment contract. This prevents former employees from working for a business competitor. In addition, these clauses may also protect your businesses’ interests and trade secrets. However, including a restraint of trade clause in your contract does not necessarily mean it is legally enforceable. To decide when the clause becomes enforceable, a court will try to balance your legitimate and reasonable business interests with your employee’s right to seek employment. This article will explain what a restraint of trade clause is and how a court is likely to decide whether to enforce one.
What is a Restraint of Trade Clause?
A restraint of trade clause seeks to restrict employees from working for a competitor when their employment ends. Typically, these clauses operate for a particular period. As well as preventing the employee from joining another business. A restraint of trade clause may also seek to prohibit them from starting their own competing business.
A restraint of trade clause is usually a cascading clause. These clauses ‘cascade’ through several options for the court to enforce. An example of a cascading clause is “This employee must not engage with any competitor of the company after termination of their employment for:
- 12 months, or if that is deemed unenforceable;
- 6 months, or if that is deemed unenforceable;
- 3 months.
The restraint will apply to the following geographical areas:
- Australia, or if that is deemed unenforceable;
- New South Wales, or if that is deemed unenforceable;
- Pyrmont, a city in Sydney.”
When determining what is reasonable to protect a business’s legitimate interests, the court will consider factors such as the following:
- length of time;
- scope of business that is restricted; and
- geographical area set out in the clause.
The court will not enforce a restraint of trade clause that is too long, broad or geographically wide. The cascading clause format means that if one of the conditions is unenforceable, the following condition may still apply.
How Does the Court Approach Restraint of Trade Clauses?
When interpreting restraint of trade clauses, the court will seek to balance the employer’s legitimate and reasonable business interests with the employee’s rights to seek employment freely. A legitimate and reasonable business interest varies from company to company but can include protecting:
- trade secrets;
- confidential information;
- business goodwill; or
- client lists.
Minimising competition alone does not constitute a legitimate interest.
A court will assess whether the restraint of trade clause goes beyond what is necessary to protect business interests and if so, then the clause is unreasonable. If an employee thinks the clause is unreasonable and restricts more than necessary regarding the time frame and the geographical area that it restricts, then there is room for contesting. However, it is up to the court to decide whether the clause is reasonable.
As an employer, understand your essential employment obligations with this free LegalVision factsheet.
Key Takeaways
Restraint of trade clauses in employment contracts aims to protect business interests. Typically, these clauses will prevent a former employee from working for a competitor or within a geographical area for a specified timeframe. Notably, an employee can contest a restraint of trade clause if it is unreasonable and too restrictive. However, a court must decide whether they are drafted reasonably. When considering a restraint of trade clause, the court will balance the employer’s legitimate and reasonable business interests with the employee’s rights to engage freely in trade or employment.
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