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When you leave a workplace, you may find that a ‘restraint of trade’ clause in your employment contract limits your employment prospects. Restraint of trade clauses prevent former employees from working for competitors of their previous workplace. Businesses often use these clauses to protect their business interests and trade secrets. Restraint of trade clauses are often ‘cascading clauses’, which means that if a court decides that the first tier of the clause is unenforceable, a lower tier will apply. To decide when the clause becomes enforceable, a court will try to balance the employer’s legitimate and reasonable business interests with your rights to seek employment.

This article explains:

  • how to identify a restraint of trade clause; 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 you from working for a competitor when your employment ends. Typically, these clauses operate for a particular period. As well as preventing you from joining another business, a restraint of trade clause may also seek to prohibit you from starting your own competing business. 

How Do I Recognise a Restraint of Trade Clause?

A restraint of trade clause is usually a cascading clause. These clauses ‘cascade’ through several options for the court to enforce. Below is an example of a cascading clause.

“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

In the following geographical area:

  • Australia; or if that is deemed unenforceable
  • New South Wales; or if that is deemed unenforceable
  • Pyrmont. 

When determining what is reasonable to protect your previous workplace’s legitimate business interests, the court will consider factors such as the:

  • length of time; and
  • geographical area set out in the clause.

The court will not enforce a restraint of trade clause that is too long or too geographically wide. The cascading clause format means that if one of the conditions is unenforceable, the following condition will apply. 

For example, the court could decide that 12 months is too long to protect a legitimate business interest. The following lesser time period would then apply. In the example above, this would be six months. The court might also decide that all of Australia is too broad. The next line, New South Wales, would then apply. The former employee would be unable to work for a competitor within the area of New South Wales for 6 months

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 your rights to seek employment freely.

In a recent case, an employee signed an employment contract containing a restraint of trade clause. The clause said that the employee could not work with competing businesses for a specified period following termination of his employment. The employee resigned and soon after began working for a competitor. He said the clause was unenforceable because the cascading format meant that it was uncertain. 

The court decided the cascading clause was not uncertain, however. This was because each statement was clear and separable from the others. The restraint of trade was intended to protect the company’s interests by preventing the employee from taking his knowledge and client base to a direct competitor. The court upheld the restrictions.

Key Takeaways 

Restraint of trade clauses are included in employment contracts to protect business interests. It is up to a court to decide whether they are drafted reasonably. When considering a clause, the could will balance the employer’s legitimate and reasonable business interests with the employee’s rights to engage freely in trade or employment. If you have questions about a restraint of trade clause, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.

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