Employment contracts will often include a clause that relates to ‘non-compete’ or ‘restraint of trade’. What this means is that if your employment ends, you may not be able to work for one of their competitors for a particular period. You may also not be able to open up your own related business.
How Do They Work?
A restraint of trade clause is usually structured as a cascading clause. Cascading clauses will often look something like this:
‘The employee must not engage with any competitor of the company after termination of their employment for:
- 12 months; or if that is held to be unenforceable
- Six months; or if that is held to be unenforceable
- Three months.
In the following geographical area:
- Australia; or if that is held to be unenforceable
- New South Wales; or if that is held to be unenforceable
- Surry Hills.
How it then works is that if the court determines 12 months is too long to protect a legitimate business interest, then that clause will be severed from the agreement and the next one in line will apply. In this above example, it will be six months. The court could also consider this to be too long and will then revert to the three-month period.
How Does The Court Interpret a Restraint of Trade Clause?
In OAMPS Insurance Brokers Ltd v Hanna, Hanna, an insurance broker, signed an employment contract with OAMPS. His employment contract contained a restraint of trade clause. The Clause said that following termination of his employment, he would not solicit business with clients of the company for a specified period. Hanna then resigned from his employment and soon after began working with a competitor of OAMPS. He also took some of his clients with him.
OAMPS sought a restraining order to prevent Hanna from continuing to work for the competitor. He claimed that this clause was voidable because it was uncertain in nature. It had a ‘cascading’ structure, and Hanna argued that the uncertainty arose, in part, from the absence of a mechanism for selecting which restraint would operate. The court held that the cascading restraint of trade clause was not uncertain, as each separate statement was clear and severable from the others.
The restraint of trade was intended to protect the company’s interests. It sought to prevent Hanna from taking to another competitor the knowledge and client base he had built up working for them. It protected the company’s business interests and prohibited a competitor immediately profiting from ex-employee’s unique insights into the company’s operations.
When interpreting non-compete clauses, the Court seeks to balance the employer’s legitimate and reasonable business interests with the employee’s rights to engage freely in trade or employment.
Employers need to ensure their restraint of trade or non-compete clause is reasonable. If you are an employee, then you need to keep this clause in the forefront of your mind when entering into your Employment Agreement, and seek legal advice to understand your rights.
LegalVision’s specialist employment lawyers can review and draft Employment Agreements to include effective and responsible restraint of trade clauses. We can also assist employees with understanding how restraint of trade clauses might affect them and in negotiating terms. If you have any questions about your Employment Agreement, please get in touch!