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Most employers are familiar with clauses which restrict an employee’s ability to compete with or solicit the employer’s clients, suppliers or staff (both during employment and post-termination). These are known as restraint of trade clauses. Although these clauses are not always enforceable, it is worthwhile including them in your agreement with employees. This article explains: 

  • what a restraint of trade is;
  • when they are enforceable; and 
  • what to consider when drafting them.

What Is a Restraint of Trade?

A restraint of trade is a clause which aims to prevent employees from:

  • working for a competing business;
  • soliciting any of the employer’s clients, suppliers, employees or contractors; or
  • interfering with the employer’s relationships with its clients, suppliers, employees or contractors.

Restraint Areas and Restraint Period

Restraints are generally drafted to operate within a restraint area and for a restraint period.

For example, a physiotherapist may not be permitted to provide physiotherapy services in competition with their former employer within the same suburb as the former employer’s practice. However, they may be permitted to do so in the next suburb. 

Generally, you should draft restraint of trade clauses as cascading clauses with successively reduced restraint areas and restraint periods. A cascading clause assists with the enforceability of the restraint, because it allows the court to strike out any unreasonable clauses. This leaves the remaining alternatives to be enforceable without rendering the entire clause void. 

Example of a Cascading Restraint:

Restraint Period means, from the date of termination of your employment:

    (a) 18 months; 

    (b) 12 months; or

    (c) 6 months.

   Restraint Area means:

    (a) Australia;

(b) The State or Territory in which you are employed at the date of termination of your employment; or

(c) The metropolitan area of the capital city in which you are employed at the date of termination of your employment.

Are Restraint of Trade Clauses Enforceable?

Restraints may be enforceable. However, whether a court chooses to enforce a restraint will depend on the: 

  • wording of the restraint; and
  • particular circumstances, including the employee’s position and salary, the conduct of the employee and the damage to the employer. 

As a matter of public policy, courts do not wish to restrict employees’ ability to earn a living. However, they may do so if you can establish that, at the time it was put in place, the restraint was reasonable. A restraint will be enforceable to the extent it is ‘reasonably necessary’ to protect your legitimate business interests. Whether a clause is reasonably necessary will always turn on the particular clause and the circumstances. However, the Court will consider whether the:

  • employer has a ‘legitimate interest’ to protect; and
  • restraint is a reasonable protection of that interest.

The courts will not enforce a restraint where its purpose is to protect a party simply from competition or prevent a valuable ex-employee finding employment with another company. However, it will uphold a restraint where either:

  • the employee has access to confidential information and they may be in a position to use that knowledge to the other party’s detriment; or
  • the employee’s work involves personal contact with your customers, and they could use that relationship to entice customers away from your business.

In addition, the legal question of enforceability is only relevant if the issue goes to court. You may decide not to pursue the issue in court if: 

  • the breach creates no commercial loss; or
  • you have insufficient resources to go to court.

How Should You Draft the Restraint of Trade Clause?

The enforceability of restraint of trade clauses relies heavily on the wording. Accordingly, it is important to get the drafting right. Even if you do not intend to take the matter to court, it can put pressure on the employee to comply. When drafting a restraint, you should:

  • draft the restraints broadly so they apply to a range of possible future scenarios;
  • define the key terms, such as what constitutes a competing business (you may choose to include a list of specific competing businesses);
  • consider what constitutes a reasonable restraint area and restraint period;
  • obtain the employee’s acknowledgement of the reasonableness of the restraints; and
  • ensure the restraint applies both during the employment and beyond the termination of the agreement.

What Other Related Terms Should You Include in Your Employment Agreement?

You should also consider including the following related terms to assist with the enforceability of restraints.

Confidentiality

A confidentiality clause:

  • prohibits employees from disclosing confidential information; and
  • requires employees to use the information only for the employer’s benefit.

Where an employee works for a competing business or seeks to poach existing clients, they may also use confidential information.

For example, they may use your price list to undercut your services when poaching clients.

Intellectual Property

An intellectual property clause requires that the employee discloses and assigns all intellectual property to you, the employer. Intellectual property includes works the employee created in connection with their employment, such as:

  • a marketing or business plan; and
  • software code.

For example, you may wish to reiterate that the code developed cannot be then used by the new employer through the employee.

Conflicts of Interest

You may also like to add terms that prohibit conduct that creates an actual or potential conflict of interest as well as an obligation to notify the employer of this kind of conduct. 

Key Takeaways

Restraints can are a crucial part of most employment agreements: they could prevent an employee from poaching your clients or working for a competitor and disclosing your confidential information. Although important, restraints are often either omitted or drafted in a way which renders them unenforceable even before assessing their application to the facts. If you need help drafting or reviewing your restraints, contact LegalVision’s employment lawyers on 1300 544 755 or fill out the form on this page.

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