How Do Restraint of Trade Clauses Work?

Restraint of trade clauses are clauses in an employment contract that effectively restrict a party’s ability to undertake certain activities during or after employment. These clauses are usually adopted by employers seeking to protect their interests from their employees. There are several types of restraint trade clauses such as: 

• Confidentiality clauses prohibiting an employee from using their employer’s confidential information, 
• Non-compete clauses preventing an employee from becoming involved with a competitor of the employer, 
• Non-solicitation clauses which prevent an employer from soliciting clients to leave the employer and, 
• Non-recruitment clauses which prohibit an employee from recruiting past employees of the employer in a future business of the employee. 

Restraint of trade clauses must be reasonably necessary to protect the legitimate interests of the employer and whether a clause satisfies this essential requirement is dependent on public policy and the individual circumstances of a case. 

What is Reasonable? 

For a clause to be reasonable an employer must have a legitimate interest for including a restraint of trade clause in the contract. It cannot be more than an adequate protection of their interests. The courts will look at reasonability at the time the contract was entered into by the parties and in light of public policy and the case’s individual factors.

Considerations for the Court: 

A court may consider the following factors: 

• Whether the clause may be harmful to public interest, 
• The length of time the clause will operate (if it is for an unspecified amount of time such as ‘forever’, it is likely that it will be deemed as unreasonable), 
• Whether or not the employee will receive or received compensation for complying with the restraint, 
• The negotiation process and whether there was an imbalance of power between the parties or, 
• The geographic operation of the clause (a clause will less likely be held reasonable if it is broad). 

This is not an exhaustive list and will vary case to case.

A restraint of trade clause is presumed void and the responsibility will be on the employer to assert that it is reasonable. The court’s aim in approaching a restraint of trade clause is to ultimately balance the employer’s legitimate interests with the employee’s right to obtain employment freely. Any term that is held to be unreasonable will be deemed invalid by the court, or valid to the extent that it is reasonable and not infringing upon public policy. 

Significance

Therefore, restraint of trade clauses are a method for employer’s to ensure that their business interests are protected. However, they must ensure that Restraint of Trade clauses are reasonably necessary to protect these interests and do not harm public policy.  Whether a clause is reasonable will vary from case to case as it depends on the facts of the case. 

If you need assistance with a restraint of trade clause get in touch with us via the contact form or by calling 1300 337 997.