Restraint of Trade Clauses

Restraint of Trade Clauses – Are they worth the paper they are written on?

palace_310x409One of the most frequent questions I get as an employment lawyer is “restraints of trade are not really enforceable are they?” The legal position is that restraints of trade clauses in employment contracts are void, unless reasonable, and operate to protect a legitimate business interest. Historically this was interpreted very narrowly, and most restraint clauses were not enforced by the Courts. However, that is not the case today. My advice to people who now ask me that questions is, be very, very careful if you are subject to a restraint of trade clause and you wish to breach it.

What is a restraint of trade clause?

Employers often wish to have their employees make an express contractual promise not to engage in competitive activities or to use the company’s confidential information after the termination of their employment. Most often, employers do so by requiring their employees to sign employment contracts which contain restraint of trade and confidentiality clauses.

A restraint of trade clause in an employment contract which is an outright claim for protection from competition without anything to justify such a claim will be unenforceable. However, a restraint of trade clause that does no more than protect the employer’s legitimate interests and which is reasonable will be enforced.

The competing interests that the Courts must consider when asked to enforce a restraint of trade clause are:

  • The interests of the employee in being able to earn a living using his or her legitimately obtained skill, experience and knowledge;
  • The public interest in being able to obtain the services of the employee and the freedom of trade;
  • The employer’s interest in protecting confidential information, customer connections, staff and supplier connections, which the employer has expended time, resources and money to develop.

Are restraints really enforceable?

The answer to that is yes. More and more the courts are willing to hold employees to their contractual promises and enforce restraint of trade clauses that are reasonable. So what does the court consider in determining whether to enforce a restraint?

The first question that must be answered, is what is the interest that the employer seeks to protect by having the restraint enforced, and is it a legitimate protectable interest? An employer cannot just seek to stop ex-employees from competing. To do so they must show that if the employee is allowed to compete the employer will suffer real harm to a protectable interest.

So what do the Courts consider are protectable interests?

The most important of these are confidential information and customer connections. More recently, the courts have also recognised the interest the employer has in a stable workforce, and will now enforce clauses preventing poaching of employees.

If an employer can show that it has a legitimate interest to be protected, the court will then consider whether the restraint is reasonable. In order to determine whether a restraint is reasonable, the court will consider the duration of the restraint, and its area of operation. In 2012, the Victorian Courts upheld a 3 year restraint prohibiting a junior accountant from providing services to clients of his former employer, with whom he had dealt. [1] In NSW as a result of the Restraints of Trade Act 1976, the Court does not have to be bound by the contractual clause, but can decide for itself what would be reasonable and amend the clause accordingly.

It is certainly, now far more common that restraint periods of up to 12 months will be enforced, and in certain exceptional cases for periods longer than that.

In a recent case decided in April this year, a court upheld the validity of a restraint of trade clause, restraining a senior executive for a period of 6 months from working for another advertising agency anywhere in Australia. The employee was also ordered to pay his former employer more than half a million dollars for breaching his contractual and fiduciary obligations.[2] The judge said:

“It is, of course, true that the effect of the restraint would be to keep Mr Andrews out of his chosen occupation for a period, but nothing less than that would adequately protect the Company’s legitimate interest in protecting its connection with a major client.” [3]

What should employers do?

Prudent employers should take the following steps to properly protect their business goodwill:

  • Ensure their contracts of employment are up to date and have reasonable confidentiality and restraint of trade clauses;
  • Ensure that the restraint of trade clauses sufficiently protect the company’s legitimate interests and are tailored to suit the individual employee’s circumstances;
  • Conduct exit interviews with employees and remind them of their post employment obligations;
  • Write to high risk departing employees reminding them of their post-employment       contractual obligations;
  • If there is a concern the employee may be breaching his restraint obligations, act quickly to put the employee on notice that the conduct is unacceptable.

[1] Birdanco Nominees Pty Ltd v Money [2012] VSCA 64

[2] Andrews Advertising Pty Ltd v Andrews [2014] NSWSC 318

[3] Ibid at [167 and 169]