As an employer, you think you have your interests covered by having an appropriately drawn up employment agreement, to which you change the name, title, and salary before issuing to new employees. That document, your ‘master agreement’ if you will, contains a restraint of trade clause with lots of restrained activities and numerous cascading provisions, so it must be enforceable, right?
Unfortunately, that is not always the case, as the restraint clause may be deemed unenforceable if you later attempt to enforce it against a former rogue employee in Court. In determining the enforceability of a restraint clause, the Court will examine many subjective factors on a case-by-case basis. The factors will apply very differently from your secretary to your CEO, as well as the factors that should be borne in mind in customizing the variables of the restraint clause for each and every new employee.
Issues to consider
Here are some of the issues to be considered:
- Restrained activities – the restrained activities should not be too broad. Restraining an employee from working for a competitor ‘in any capacity’ would, in effect, mean your CEO can’t take a job as a cleaner with a competitor. This is likely to be deemed unreasonable, and thus unenforceable if challenged in Court.
- Restraint time – while it is common place to have cascading provisions, those provisions should be changed on a case-by-case basis. Generally, the more senior the position, the longer the restraint can be (though we would never recommend anything over 36 months, even for the most senior member of staff).
- Restraint area – a restraint that, in effect, stops someone from working in their field of expertise for the whole of Australia is likely to be deemed unreasonable. Think about the area, and what is reasonable in light of your business operations.
- Bargaining power of the parties to the contract – while many employees just ‘sign what they are given’ at the commencement of their employment, affording them an opportunity to raise issues or negotiate terms will work in your favor if you subsequently need to enforce a restraint clause.
- Consideration – the restraint clause should state that it is entered into freely by the employee, in consideration of the other terms of the agreement.
When in doubt, or when the breach of such a restraint clause could have some serious ramifications for your business, it may be best to talk to an employment lawyer. Your lawyer will be able to draft a suitable restraint clause for that particular role.