The law surrounding restraint of trade clauses can be complex. Are you aware of your rights and obligations as an employee and employer? The experts at AV Lawyers share their insights on what is considered enforceable and reasonable.
The law surrounding restraints is complex. It should not be assumed that they are easily enforced, even when restraint clauses are included in signed contracts.
What is a Restraint of Trade clause?
Included in many employment agreements, a Restraint of Trade clause contains a set of requirements for the employee that typically apply once they cease employment with the business. New South Wales includes particular rules to be applied when dealing with restraint of trade clauses, and these can be found in the Restraints of Trade Act 1976. Apart from these specific rules, the principles applying to this area of law have evolved over many years under the common law, so that lawyers who work in this area need to have a familiarity with how the court deals with these disputes in practical situations from past cases.
There are a few ways in which a restraint clause can be applied:
This prevents the worker from competing against the company. This could include working for a competitor for a period of time after leaving the business.
This prevents the worker from actively soliciting former employees, clients, patients, suppliers, customers etc. from following them to the new business.
- Confidentiality clause:
This restrains the worker from using the former employer’s IP, confidential information and/or trade secrets.
How is it enforced?
When enforcing a restraint of trade clause, the court will have to consider three factors:
- The public interest in their ability to obtain the skills/services of the worker and freedom of trade
- The interest of the worker to earn a living using their skills, knowledge and experience
- The interests of the employer in protecting their assets and resources
Generally speaking, restraint of trade clauses are only enforced if the employer is protecting a legitimate business interest. A legitimate interest can constitute things such as the protection of trade secrets and goodwill. It does not include the need to minimise/prevent competition and cannot restrict the worker from earning a living by exercising their trade (any more than is necessary).
Once the interests of the employer have been established, the restraints must then be considered “reasonable” for them to be enforced.
What is considered reasonable or unreasonable?
When determining if a restraint of trade clause is reasonable, a number of factors will be considered. These include (but are not limited to):
- The nature of the worker’s role
- The nature of the industry
- The extent to which the worker was involved with customers
- The extent to which the worker had access to confidential information
- The effect of the restraint on the worker’s ability to earn a wage
- The geographic area of the restraint
- The temporal duration of the restraint
- Remuneration and compensation
In many instances, restraint of trade clauses will be considered unreasonable if they are excessive in geographical area, duration and scope. For example, if the restraint covers all of Australia and lasts for five years, the court is unlikely to find it reasonable. However, if the restraint applies to soliciting employees in Sydney for three months, it may be considered reasonable.
If the business is found to have a legitimate interest but the restraint of trade clause is deemed to be unreasonable, courts may choose to enforce some aspects of the clause but not others. For this reason, many employers now include cascading clauses, which provide a range of restraint variations with alternative geographical areas and time periods.
For example, this could look like:
Restraint Area refers to each of the following areas separately:
- 100 kilometres from the suburb of Mosman, NSW, or if this restraint area is not held to be reasonable;
- 70 kilometres from the suburb of Mosman, NSW, or if this restraint area is not held to be reasonable;
- 50 kilometres from the suburb of Mosman, NSW
Contracting out of Restraint of Trade
If you are considering approaching an employee subject to a restraint of trade clause, or are an individual wanting to contract outside of it, it is always advisable to exercise caution. This is especially the case when accepting work from former clients of your employer, or if the businesses are direct competitors.
Furthermore, even if it is not outlined in the employment contract (or if no contract exists), the worker still owes the employer a fiduciary duty to act honestly and in good faith. For instance, there is an expectation that the former employee will not misuse any confidential information obtained during their employment to promote their own interests at the expense of the former employer.
Restraint of Trade contracts can be difficult to enforce, however there have been many cases in which the courts have deemed it reasonable and necessary to protect the interest of a business. If you are considering operating out of this clause or need advice on how to navigate your obligations, get in touch with the team at AV Lawyers today for a free consultation.