Restraint of trade clauses are found in most employment contracts to protect an employer’s business interests and confidential information.

It is a widely held myth that restraint of trade clauses are not enforceable. However, this is not accurate as courts have demonstrated a willingness to enforce post-employment restraints in circumstances where the former employer:

• can justify that the restraint is reasonably necessary to protect its legitimate business interests; and
• has acted quickly to enforce the restraint.

What is a restraint of trade?

Most employment contracts include a restraint of trade clause which are used by employers to protect their business interests, customer connections and confidential information by restricting an employee’s right to undertake certain activities during or after employment.

Generally, the restraint will restrain the employee from:

• starting a competing business or working for a competitor business;
• disclosing the employer’s confidential information; and
• poaching an employer’s clients or assisting a someone else to poach an employer’s clients.

Types of restraints of trade in employment contracts

An employment contract will have one or more of the following restraint of trade clauses:

• non-solicitation clause – prevents a current or former employee from soliciting or poaching clients, customers or suppliers of their employer;
• non-recruitment clause – prevents a current or former employee from recruiting or poaching  employees or contractors of their employer;
• non-compete clause – prevents a current or former employee from establishing or working for a competing business;
• confidentiality clause – prevents a current or former employee from using or disclosing confidential information or trade secrets obtained in the course of the employee’s employment; and
• garden leave clause – allows an employer to direct the employee to take paid leave away from the office during the notice period.

Are restraints of trade enforceable?

As a general principle, restraint of trade clauses are contrary to public policy and unenforceable, unless the employer can establish that the restraint of trade is reasonably necessary to protect the ‘legitimate business interests’ of the employer at the time the employment contract was entered into.

In New South Wales, instead of being presumed to be void and unenforceable on public policy grounds, a restraint of trade clause is presumed to be valid. This reverse presumption is a result of the Restraint of Trade Act 1976 (NSW). This means that a restraint of trade clause is only enforceable to the extent that it protects the legitimate business interests of the employer.

Whether a restraint of trade clause is reasonably necessary will turn on the particular clause and facts of a case. When assessing whether a restraint of trade clause is enforceable, a court will take into account the following factors:

• whether the employer has a legitimate business interest to protect, and that the protection sought is no more than is reasonably necessary to protect that interest;
• the nature of the work of the employee being restrained;
• the geographic scope and duration of the restraint;
• the bargaining position of the respective parties; and
• whether the employee received compensation in return for agreeing to the restraint of trade.

Enforcing restraint of trade clauses

If an employer wishes to enforce a restraint of trade clause, the employer must act quickly to seek an injunction (on an interlocutory basis) to restrain the former employee from breaching the restraint. Any delay in applying for an interlocutory injunction can be detrimental as the court may doubt the urgency and necessity of obtaining the injunction.

To be successful in obtaining an interlocutory injunction against a former employee, the employer must demonstrate that there is a serious question to be tried and that the balance of convenience favours the granting of an injunction.

Monetary damages may also be available where the employer can show damage to its business interests.

Does the restraint contain cascading subclauses?

An employment contract may contain cascading restraint of trade clauses.

Cascading restraint clauses can operate by providing for multiple variables in relation to distance, geography, time periods and the nature and type of conduct to be restricted.

Each variable is treated as a separate clause, severable and independently binding on the employee. This means that where one level of restraint may be deemed by a court to be unenforceable, the employer may still enforce a lower level restraint without the entire restraint clause being struck out.

If drafted properly by an experienced lawyer, cascading restraint of trade clauses may be easier to enforce against a former employee.

Key Takeaways

An employer should include restraint of trade clauses in all employment contracts to protect its business interests, client base and confidential information. An employer can only enforce a restraint of trade clause to the extent that it is reasonably necessary to protect its business interests.

Therefore, it is important that employers ensure that their employment contracts are properly drafted and tailored to protect their businesses legitimate interests. In addition, employers must act quickly to seek an injunction when a former employee has breached their post-employment restraints.

If you require advice in relation to post-employment restraints, call Vault Legal today on 1300 002 212 or email us at info@vaultlegal.com.au.

Key words: employer, employee, employment contract, restraint of trade, non-solicitation and garden leave