Australian employers and business owners often use restraint of trade clauses to protect their business interests after an employee leaves their company. If you are a business owner or employer  it’s important to have a clear understanding of what’s both reasonable and legal before including restraint of trade clauses in your employment contracts. Conversely if you are an employee that is subject to restraint of trade clauses in your employment contract, this article will help you to understand your obligations under the law.

What are restraints of trade?

Restraint of trade clauses are terms entered into contracts to prevent a person from undertaking certain work, at certain times, in certain places. In the modern context, they are most often used in employment contracts in services industries. In that context, they take the form of prohibitions against enticing away clients, contractors, or other employees of an employer’s business, or prohibitions of employees using information gained in the course of their employment.

Many employers harbour particular concern that an employee, if encouraged and supported in forming close business relationships with clients, may be in a position to leverage those relationships if things turn sour. Restraints cannot wholly protect against this, but they do give employers a period of time after an employee departs in which they will not have to contend with a person armed with intimate knowledge of the employer’s business. Employers can use that time productively to protect themselves.

This article will briefly outline the different kinds of restraint clause commonly used in employment contracts, and their practical application for those seeking to enforce them.

Types of Restraint Clauses

It is convenient to group restraint clauses into four broad categories, although the terms of individual contracts vary widely, and categorisation will not always be easy.

• Confidentiality Clauses: These prevent an employee from disclosing or using their former employer’s confidential information. These clauses are the most commonly found and the easiest to enforce.
• Non-Compete Clauses: These prevent an employee from entering or starting a similar profession or trade in competition with their former employer. These have fallen out of favour, as they are increasingly difficult to enforce without attracting accusations of anti-competitive behaviour.
• Non-Solicitation Clauses: These prevent an employee from soliciting or ‘enticing away’ the clients or customers of their former employer. In white collar professions, where a significant part of the goodwill of the business is its client base, these restraints can be especially valuable.
• Non-Recruitment Clauses: These prevent an employee from recruiting their former employer’s workers.

Enforceability of Restraints

Courts dislike restraint clauses, as they can be abused for anticompetitive purposes. Indeed, Australian courts have consistently held that all agreements to a restraint of trade are presumed to be invalid unless the restraint can be shown to be reasonable.

Restraint clauses must therefore be carefully drafted, to ensure they are tailored to be reasonable in an employer’s particular business context.

Establishing Reasonableness

To establish reasonableness in court, two elements must be proven:

• Legitimate Interest: The employer must have a legitimate interest in imposing the restraint. This includes protecting commercial interests, goodwill, and confidential information.
• Scope of Restraint: The restraint must not be wider than reasonably necessary to protect the legitimate interest.

Examples of Legitimate Interests

• Confidential Information: An employee with access to confidential information may use it to the detriment of their former employer. This protection complements other legal protections of confidential information.
• Customer Connections: An employee who has contact with the employer’s customers may entice them away. In particular, an employee who is able to leverage client relationships in a manner unfair to the employer may fall afoul of this test. Recruitment: An employee in a position to recruit colleagues from their former employer, particularly if the departing employee was in a managerial or human resources position.

Self-protection

If the restraint is upheld, then an employer should not sit on its hands. A restraint will only last as long as is necessary to protect an employer’s legitimate interests (generally less than twelve months). An employer should use this time productively, by establishing new connections with clients deemed to be at-risk, reviewing initiatives to retain employees, and ultimately, improving their service offering.

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This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. PRPIA Pty Ltd (ABN: 17 140 105 077), trading as Partners Wealth Group is an authorised representative and credit representative of Charter Financial Planning Limited, Australian Financial Services Licensee and Australian Credit Licensee.