One of the most common questions we get asked by our business and corporate clients relates to employment law and relationships with their employees in regard to restraint of trade clauses and their enforceability.
What is a restraint of trade clause?
Whilst we are discussing employment contracts in this article it should be noted restraint clauses are also found in business sale contracts.
Whilst the legal principles might be the same, they are often viewed more strictly when seeking restraints in business contracts rather than employment contracts.
Simply put a restraint of trade clause is used by a business/employer to protect their confidential information, goodwill, intellectual property and business interests.
There are various types of restraint clauses including:
- Non-compete
- Non-disclosure
- Non-interference
- Non-poach
- Non-solicitation
How does the law approach a restraint of trade clause?
These are very blunt instruments and the common law requires the party who wants to enforce the clause (generally an employer) to justify them.
The employer must prove that at the time of entering into the contract there were clearly circumstances that justified the restraint was reasonable.
In effect the employer must have a legitimate interest to impose the restraint and the scope of the restraint is no broader than to protect that interest.
Whilst courts have recognised restraints in circumstances where an employee has in their possession of confidential information which can be used detrimentally against the employer, enticing customers and clients away from the employer as well as other employees, it is not easy to enforce a restraint.
Courts consider all the circumstances in each case including but not limited to such things as:
- The duration and geographical limits which are to be restrained
- The seniority of the person to be restrained and business and industry connections they have
- How much intellectual and confidential information they have been exposed to
- Their connection to clients and their influence over them
- Are they remunerated during the restraint period.
How do you enforce a restraint clause?
Courts can:
- Grant an injunction enforce the restraint and prevent the employee from undertaking those activities that were identified in the restraint
- Grant an ‘interim’ injunction prior to a full trial, protecting the employer’s interest, which remains in force whilst the court is deliberating on the actual claim
- Make and order at a trial for damages for breach of contract and for the loss suffered as a result of the breach.
The most common course of action is when an employer will try to obtain an injunction against the former employee to restrain them initially.
It is very rare that an employer will take a matter to a final hearing unless there are significant matters at risk.
How does an employer protect itself?
In 2023 the Treasurer announced a competition review to improve competition across the Australian economy.
The review is to look at amongst other things the use of non-compete and related clauses in employment contracts.
This could lead to a range of options including the banning of such clauses other than for highly paid employees, restraints on the types of clauses that could be used and options for payment during the payment of the restraint period.
Whilst Restraint clauses are difficult to enforce employers should consider using other tools to protect their business and commercial interests such as longer notice periods, gardening leave, confidential information and intellectual property deeds, pursuing liquidated damages clauses where non-solicitation is breached and the use of paid non-compete periods.
How can FC Lawyers help?
At FC Lawyers, our experienced business and corporate team can assist with advising, drafting and litigating restraint of trade clause related issues across a broad range of industries and professions.
Contact our team today to discuss your options regarding restraint of trade clauses or any other employment and business legal matters you may need assistance with.
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