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Most employers are familiar with clauses that restrict an employee’s ability to compete with or solicit clients, suppliers or staff during employment and post-termination. These clauses are known as restraint of trade clauses. Although not always enforceable, including such a clause in your employment agreements is worthwhile. This article will take you through what a restraint of trade clause is, when they are enforceable and what to consider when drafting them.

Restraint of Trade Clause

A restraint of trade is a clause that 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

You can generally draft restraint clauses to operate within a specified geographical area and for a certain period.  

For example, imagine a physiotherapist quits their job. Under the restraint of trade clause, they are not permitted to provide physiotherapy services in competition with their former employer within the same suburb as their former practice for one year.  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 making the entire clause void. 

The table below outlines an example of a cascading restraint clause:

Time Distance

(a) Six months; or

(b) Four months; or

(c) Two months.

(a) Australia; or

(b) Victoria; or

(c) Melbourne.

Enforceability of Restraint of Trade Clauses

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

  • wording of the restraint; and
  • particular circumstances of the employee. For example, a court will consider the employee’s:
    • position and salary; 
    • their conduct; and 
    • 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 the restraint was reasonable when you drafted the clause. 

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 depend on the particular clause and the circumstances. However, the Court will consider whether the:

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

The courts will not enforce a restraint whose purpose is to protect an employer from competition or prevent a valuable ex-employee from 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 employer’s disadvantage; or
  • employee’s work involves personal contact with your customers, such that 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.

Enforcing a Restraint of Trade Clause

If you find that a former employee has breached their restraint of trade clause, you should send them a letter reminding them of their obligations. The letter should outline the exact breach. For example, specify that the employee is working for a competitor business and request that they sign an undertaking to cease their breach. 

If this letter goes ignored, you may need to consider sending follow up mail. This additional letter might stop your former employee from breaching the restraint of trade clause. Likewise, it also demonstrates to the court that you have taken reasonable matters to prevent the breach. 

If the former employee continues breaching the restraint, you may need to apply to the court for an injunction. This is a court order requiring the employee to stop the breach. To successfully apply for an injunction, you must prove that your business will face irreparable damage unless an injunction is granted. 

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Drafting a Restraint of Trade Clause

The enforceability of restraint of trade clauses relies heavily on its 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 of trade clause, you should:

  • draft the restraints broadly so they can 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.

Other Related Terms to Include in an Employment Agreement

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

1. 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.

2. 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 creates 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.

3. Conflicts of Interest

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

Key Takeaways

Restraint clauses are a crucial part of most employment agreements. They can prevent an employee from poaching your clients or working for a competitor and disclosing your confidential information. When drafting a restraint of trade clause, you should:

  • draft the restraints broadly;
  • define the key terms.
  • consider what is reasonable; and
  • ensure the restraint applies both during the employment and beyond the termination of the agreement.

If you need assistance understanding restraint of trade clauses, our experienced employment lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

What is a restraint of trade clause?

A restraint of trade is a clause commonly included in employment agreements. It 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.

How should I draft a restraint of trade clause?

When drafting a restraint of trade clause, you should draft the restraints broadly, define the key terms, consider what is reasonable and ensure the restraint applies both during the employment and beyond the termination of the agreement.

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