Restraint of Trade

If you are looking for an employment lawyer in Sydney, or for further information in relation to any employment law needs, please do not hesitate to contact any member of our Employment Law Team.

  • Post-Employment Restraints

    In industries where employees are exposed to commercial secrets and confidential information, or in client driven industries, it is quite common for employment contracts to contain a clause which purports to stop the employee from working in competition with their former employer or dealing with former clients  after the employment relationship has ended.

    These clauses are often referred to as a restraint of trade or a post-employment restraint.

    An example of this sort of clause is where an employee agrees not to work for a competitor for a certain period of time (i.e. 3 to 12 months) after the employment relationship has ended. Other restraint of trade clauses might seek to restrain an employee from working for a competitor within a certain area (ie. within a 10 kilometre radius of the former employer) or prevent an employee from approaching other former colleagues and employees of the former employer to join them in any such enterprise.

    Restraint of trade provisions can also include non-solicitation provisions to prevent a former employee from poaching clients from a former employer.

    Atkinson Vinden has acted in many court disputes relating to the enforceability of these clauses, and we regularly assist employees and companies to interpret, negotiate and litigate these issues.

  • Are restraints of trade enforceable?

    In certain circumstances – yes. The court will look at the individual circumstances, and determine whether in all of those circumstances the restraint clause is reasonable or not. If it is, then the restraint (or a modified version of it) can be enforced, but if not, then it can be ignored and won’t apply.

  • What are the relevant factors to consider?

    The main issues a court will consider when deciding whether or not to enforce a clause of this kind are:

    • whether the clause is necessary to protect a legitimate business interest of the employer, or whether instead it unreasonably seeks to prevent free competition.
    • whether the scope of the restraint is sensibly reflective of the operations of the business, for example whether the geographical area is too broad, or whether the time frame is reasonable or not.
    • whether the practical effect of the clause would be to prevent an employee from providing for their family, i.e whether the burden of the restraint is unreasonably carried by the employee
    • whether there was consideration (payment) for the restraint (particularly relevant in circumstances where the restraint was imposed after the employee was already working with the company)
  • What might a reasonable restraint clause look like?

    The most sensible restraint clauses in employment contracts generally aim to prevent former employees from dealing with former clients or working in direct competition for certain, reasonable periods of time. Such clauses identify the activities that directly relate to the work that the employee did during their employment. For example, a restraint of trade clause in an employment contract that provided that an employee was not to make contact with, or accept instructions from a client of the employer for whom that employee specifically did work for or had a business relationship with, for a period of 12 months after the employment relationship ended, would likely be considered reasonable. most sensible restraint clauses identify the activities that directly relate to the work that employee did during their employment. For example, a restraint that said that the employee was not to make contact with, or accept instructions from a client of the employer for whom that employee specifically did work or had a business relationship for a period of 12 months, would likely be considered reasonable.

  • What is the court process for sorting out these disputes?

    The former employer may file an urgent application in the Supreme Court, seeking an injunction to stop the employee from working for a new employer or restrain the employee from dealing with former clients. The court will need to be shown clear prima facie evidence that there is an enforceable restraint of trade clause, and that the circumstances are such that the clause would be breached by allowing the employment to continue. The former employer must also give to the court an undertaking as to damages. If an urgent injunction is granted, then the court will usually order this only on an interim (short term) basis. The court might, for example, grant an interim injunction for 4 weeks, during which time the parties are to serve more detailed evidence, before a second and more comprehensive court hearing.

    At the second hearing, final orders will be made, which may range from either setting aside the injunction and ordering compensation to the employee on the basis the restraint clause should never have been enforced and was not valid, or an order in favour of the employer confirming the validity of the restraint clause and ordering the employee to pay compensation for losses associated with the breaches of the restraint clause. There will also be costs orders – which can be very significant, especially if the litigation required a number of days at court. Costs can also be ordered against the “new” employer if it has funded the employee’s defence and stood to benefit from the arrangement by having access to certain knowledge and information in the possession of the employee.

  • How do these disputes generally get resolved?

    Whether we are acting for the employer or the employee, we always focus on whether a compromise settlement is possible, such as- can the employee provide an undertaking not to do certain things that are sufficient to protect against the risks that the former employer is worried about? If the employee makes a reasonable offer of compromise, but the former employer continues with litigation, the employer is at risk of an adverse costs order. The reality is that courts are generally sympathetic to employees, especially if an employee had no bargaining power and was basically compelled to sign an employment contract with unreasonable restraint of trade clauses in order to secure employment.

    However, sometimes the commercial stakes are too high for an employer – because a former employee may have possession of highly sensitive commercial information such as business plans, client lists or marketing strategies that need to be quarantined. In those cases, there may be a proper basis to fight the matter all the way, and to try to shut down the risk.

  • How to get help

    If you call us about this sort of situation, we will act quickly, because time is of the essence in these disputes. We will immediately contact the other party to try to negotiate an outcome that prevents the issue escalating to court. If court action is needed, we know the process well and have a panel of experienced barristers available to take urgent action to protect your interests. Call our team today on (02) 9411 4466 for urgent expert advice and representation.

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