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Restraint of Trade Clauses in Employment Contracts

Many employment contracts include a restraint of trade or anti-competition clause in an attempt to protect an employer’s business interests.  Employers seek to ensure that knowledge their employees gain in the course of their employment is not used to the detriment of their business if and when an employee leaves the company.

It is important to note for both employees and employers that the enforceability of restraint clauses will be affected by whether the restraint of trade clause is reasonably necessary to protect the legitimate business interests of the employer.  The employer bears the onus of proving that the nature and duration of the restraint of trade is reasonable.

What is reasonable will be determined by considering the circumstances surrounding the employment of an individual employee at the time the employment contract was entered into.

What period of restraint is reasonable will depend on the position the employee was accepting and their access to information which could cause the business loss or damage if it were revealed to a competitor.

The enforceability of a restraint clause – including its duration – is likely to be affected by the circumstances surrounding the termination of the employment contract.  In circumstances where the employee does not choose to terminate their employment (including redundancy) it will be more difficult to enforce a restraint of trade clause.

Confidentiality clauses can separately ensure that confidential information is not disclosed to anyone by a former employee and will typically remain enforceable even where a restraint of trade clause fails.

If a former employee is engaging in activities that are causing your business loss or damage you may seek an injunction to enforce the restraint of trade clause.  The loss or damage you suffer is also recoverable.

If you recruit an employee from one of your competitors and are made aware that they may be breaching a restraint clause by accepting an offer of employment in your business, or if you become aware that a current employee may be breaching a restraint of trade obligation to a former employer you could be held liable, or find yourself contesting litigation brought against you by the competitor.  This is because the competitor business will claim that you have interfered in their contractual relationship with the employee.  However this is a complex area and the individual circumstances are always critical in determining what you should and should not do in these circumstances.

It may be helpful in proving that a restraint is reasonable, if the employee is being specifically remunerated or receiving some benefit, for the restraint and the employment contract says so.  There are other ways in which the wording of the employment contract can assist in demonstrating the reasonableness of the restraint and you should always get advice on this, particularly with key senior employees where the restraint has critical value to the business.

Key points are

  • Regularly review employment contracts to ensure the duties an employee is performing are accurately defined.
  • Ensure any proposed period of restraint is commensurate with the employee’s level of seniority and salary.
  • Include a confidentiality clause in addition to any restraint of trade clause.
  • Include a clause that specifically ties some aspect of the remuneration package to the restraint period (ie the employee is being specifically remunerated for the restraint)
  • Do not ignore a notification from another business that you have employed someone in breach of a restraint of trade clause.

If you would like further details in relation to this information, please contact us via email or call (08) 93221966.

*This information serves as a general guide and does not constitute legal advice. It is based on our research and experience at the time of publication. Please consult our knowledgeable Legal Team for any specific inquiries or advice relevant to your circumstances, as the content may not have been updated subsequently.