Photo by Robert Kneschke
How enforceable is a restraint of trade?
Updated: 12 October 2022
How enforceable is a restraint of trade? Many believe it is not worth the paper it is written on. But this is not strictly true. Whether it is enforceable or not depends on how well-written and reasonable the clauses are in an employment contract. We'll go through what may be reasonable below.
What are restraint of trade clauses?
When there is a restraint of trade clause in an employment contract or agreement it applies while working for the organisation and when an employee leaves.
The purpose of the clause is to protect legitimate business interests. However, only when it is reasonably necessary is it possible to enforce restraint of trade. And, whether it is reasonably necessary or not depends on the wording of the clause and each individual situation, we'll look at some of the common restraints below.
Common restraint of trade clauses
The following are the most common restraint of trade clauses:
- Non-compete. Non-compete clauses prevent a former employee from competing with the employer’s business, for a prescribed period of time, whether it is directly or indirectly.
- Non-solicitation. Non-solicitation clauses prevent a former worker from asking or accepting work from the previous employer’s clients for a set amount of time such as 12 months, for example.
- Non-poaching. Non-poaching clauses prevent former employees from poaching the employer’s employees for a specific period of time.
- Non-disclosure. A non-disclosure clause is a confidentiality clause that prevents employees, during employment and afterwards, from using or disclosing trade secrets or confidential information they learned while working for the business.
While these sound like reasonable restraints, they may not be for every business, we'll look at this idea of reasonably necessary next.
What does reasonably necessary mean?
Judging reasonably necessary is based on the circumstances of the business when entering into the contract, not the circumstances at the time of a breach of a restraint of trade clause.
When a Court considers whether the restraint clause is reasonable or not, it will consider the specific circumstances. For example:
- What the restraint of trade clause seeks to protect.
- Length of time (6 months, 12 months, 2 years) in the clause.
- Whether it is in the public interest.
- The employer’s legitimate business interests.
- How wide the geographical area is that it applies to (NSW, Australia and New Zealand).
- How it affects the employee.
- How broad the restraint is often asked.
When restraints are enforceable
I am often asked, “Can I enforce my restraint of trade clause?” In general terms, it is enforceable if you can show the clause is reasonably necessary to protect your legitimate business interests. If it is not, then it will not be enforceable.
A restraint is unlikely to be enforceable if it goes beyond what's reasonable. For example, if an employer has a business that operates in Sydney but they have a restraint for an employee, stopping them from working interstate e.g. Victoria or Western Australia, despite having no business presence there.
Courts are going to take into consider a number of factors in deciding what's enforceable, we'll look at that next.
What the Court takes into consideration
Above we looked at the idea of reasonably necessary, to decide whether a restraint of trade clause is enforceable or not, the Court will consider several factors, for example:
- Competition: If the restraint clause is attempting to simply block competition.
- Business interests: If it is reasonable to protect the employer’s business interests.
- Livelihood: How the restraint clause will affect the employee’s ability to earn a living.
- Power: Whether there was an imbalance of power between the employer and employee when discussing the restraint of trade clause.
- Reasonable: If it is reasonable from the perspective of both the employer and employee.
- Legal advice: Whether the employee had the opportunity to get independent legal advice before signing the contract.
Cascading restraint of trade clauses
Courts can sever restraint of trade clauses when they find them unreasonable. So it is important that your restraint of trade clause has a cascading subset of clauses that offer different time, subject matter and distance variables. When your lawyer drafts these up with reasonable justifiable options, the Court can sever one if it decides it is necessary without affecting the others.
Below is an example of a cascading clause for a restraint period to offer different time variables:
The restraint will apply during the employment period and after the termination date as follows:
- 12 months, and if that is unenforceable;
- 6 months, and if that is unenforceable;
- 3 months.
Below are the key takeaways for restraints of trade:
- The most common restraint of trade clauses are non-compete, non-solicitation, non-poaching and non-disclosure
- They must be reasonably necessary
- You can only use them to protect legitimate business interests; and
- It is a good idea to use cascading clauses.
Leave your questions of comments below, or contact me to set up an appointment.
As always I wish you every success in your ventures.