What is a restraint of trade in an employment agreement?
One of the most important types of clauses found in most employment agreements utilised by Australian businesses are restraint of trade clauses. These are clauses which restrict (or purport to restrict) the employee from certain forms of conduct which may be detrimental to the employer after the employment has ended.
- What is a restraint of trade in an employment agreement?
- What types of behaviour can a restraint of trade restrict?
- Restraint of trade clause and genuine business interests
- Will the restraint of trade be enforecable? Duration, geography and cascading provisions
- How can I create an enforceable restraint of trade clause in my employment agreement?
The proper utilisation of restraints of trade in employment agreements can provide substantial benefits and protections for employers. The law surrounding these clauses, however, is complex. Improperly drafted restraints of trade are often held to be unenforceable by the courts.
For that reason it is important that businesses have an understanding of the basic considerations relating to these clauses and ensure that they are drafted by professionals to reflect the needs of the business. They also need to cover relevant legal requirements, rather than using one-size-fits all precedents which may not be worth the paper they are written on.
What types of behaviour can a restraint of trade restrict?
Theoretically, a restraint of trade provision may restrict an employee from engaging in numerous types of conduct after the employment ends, provided that such conduct protects a legitimate business interest of the employer as discussed below. In practice, the most common types of conduct which employers seek to restrict under restraint of trade provisions are:
- Working for a business (as an employee, director, sole trader or in any other capacity) which is in competition with the employer (non-complete clauses)
- Soliciting the clients of the employer (non-solicitation clauses)
- Recruiting the employees of the employer (non-recruitment clauses)
- Using the employer’s confidential information (confidentiality clauses)
Restraint of trade clause and genuine business interests
The default position at law is that restraint of trade provisions are null and void. The reason for this is that for policy reasons, the courts do not wish to restrain an employee from using their skills and labour to earn a living in their chosen field after they have moved on from service with their employer. This would be both unfair to the individual employee and contrary to the public interest.
The economy relies upon individuals being able to use their skills and labour to start businesses and create economic growth. Individuals must be free to apply such skills, which they may have paid dearly to acquire, to earn an income in the open market.
Accordingly, restraints of trade are by default void for being contrary to public policy. It is only where special circumstances justifying the restraints can be proven by the employer that restraint of trade provisions will be enforceable. In order for such special circumstances to arise, the employer must be able to show that the restraint of trade clause goes no further than is reasonably necessary to protect a legitimate business interest.
This means that employers must consider the nature of the interests they are seeking to protect in utilising the clause. They must also consider an appropriate scope for the operation of the clause to maximise the chance that the clause will be enforceable. Employers cannot simply seek to utilise a blanket clause to insulate themselves from competition in the free market.
The onus is on the party seeking to enforce the clause (inevitably the employer in circumstances where they become aware that a former employee is engaging in conduct to which they object) to show that the clause goes no further than necessary to protect the legitimate business interest. In determining if the clause is reasonable, the court will have regard to the particular circumstances of the case. Plus other general factors which may be considered in every case. These factors include:
- The relative bargaining position of the parties when the employment agreement (including any applicable restraint of trade provision) was entered into. For instance, it may be that the employee had no choice or reasonable prospect of negotiating the agreement. It may also be that the agreement had to be signed instantaneously without the employee having the opportunity to obtain legal advice as to its terms
- Any comments made or correspondence exchanged at the time the restraint of trade clause was negotiated
- Whether any additional amount of compensation was provided to the employee in consideration of the restraint of trade clause
- The nature of the employer’s business and the employee’s role within the business. For instance, it may be that the employee was in frequent direct contact with the clients of the employee, tending towards the justification of a non-solicitation clause. Also, where the employee had little or no direct contact with clients, it would become difficult to justify a non-solicitation clause
- The duration that the restraint of trade provision purports to be operative (discussed below)
- The geographical area within which the restraint of trade provision purports to be operative
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Will the restraint of trade be enforecable? Duration, geography and cascading provisions
As outlined above, in considering whether a restraint of trade provision goes no further than is necessary to protect a legitimate business interest (and whether it may therefore be enforceable), the court will consider the duration and geographical area in which the provision purports to operate.
For instance, it may be reasonable to restrain an employee who deals directly with clients from seeking to solicit clients of the employer for several months following the end of the employment. The employee may have become privy to confidential information as to the detailed imminent needs of the client. They may have also become aware of details of any agreement currently existing between the employee and the client.
Conversely, it would clearly be unreasonable to seek to restrain such an employee from soliciting clients of the employer years later. The confidential information may no longer be relevant, and this would be tantamount to an attempt to limit free competition. For this reason, restraint provisions upheld by the courts tend to be limited to operating within a duration of three months to one year from the end the employment.
Similarly, for a business with one office in Brisbane’s inner west and servicing clients within that area, it may be reasonable to restrain an employee from working for a competitor of the employer or soliciting the employer’s clients (within a reasonable duration) in Brisbane’s inner western suburbs. On the other hand, it would clearly be unreasonable for the same employer to restrict employees from competing with them state-wide or nation-wide.
This would mean that the employee would be unable to derive an income from their services within the city or state in which they live (or even potentially after moving 4,000 kilometres west to Perth!). Accordingly, the courts are disinclined to uphold restraint of trade provisions which are not limited by geography or which purport to operate within an unreasonably wide geographical area.
As a result of the above considerations, it is important that restraint of trade provisions are drafted to incorporate a series of cascading subclauses relating to duration and geographical area. They must be separate and distinct from one another. Such subclauses might define the restraint period to be one year, then six months, then three months, then one month.
The restraint area may be defined as Queensland, then a 100 kilometre radius from a particular suburb, then a 10 kilometre radius from the suburb, followed by a 5 kilometre radius and so on. Each of these subclauses must be separate from each other.
This way, if the court holds that one of the broader duration or geography provisions is unenforceable, they may continue down the series of cascading provisions until they reach a level which is reasonable and enforceable.
This prevents a scenario in which the entire restraint of trade provision (which may have otherwise been entirely reasonable) is held to be void by reason of an overly broad duration or geographical restriction. If the restraint provision is drafted to be effective within ‘Queensland’ and for ‘1 year’ without cascading provisions, and the court finds these duration and geographical restrictions to be unreasonable, the court will not seek to rewrite the provision — they will simply hold that it is unenforceable.
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How can I create an enforceable restraint of trade clause in my employment agreement?
Restraint of trade provisions can be an invaluable means of protecting the legitimate interests of a business as employees move on to seek alternative opportunities. If the relevant clause is not properly drafted, and due consideration is not given to the needs of the business and the employee’s role, there is a strong probability that the employee will not be able to rely upon the clause. Accordingly, it is imperative that all employment agreements, including restraint of trade clauses, are professionally drafted by a solicitor from the outset.
Where an employer believes that a former employee may be in breach, it is important to contact a solicitor as soon as possible for advice. In some circumstances, a properly drafted letter will cause the former employee to cease the offending conduct and may preclude the need for litigation.
In other circumstances, it will be necessary to determine whether the clause is enforceable, and whether the conduct is in contravention of the clause. If so, proceedings to restrain the former employee from continuing to engage in the offending conduct will commence. This may include a claim for monetary damages.
If you have any queries as a result of the content of this article, please do not hesitate to call our office for a consultation regarding restraint of trade clauses or employment agreements.