Restraint of Trade Clauses – Are they Worth the Paper they are Written On?

“Is my restraint of trade enforceable?” is a commonly asked question in the employment law space.

The answer is – it all depends on the “reasonableness” (and the drafting of course!).

What is a restraint of trade?

Most employment contracts include a restraint of trade clause which is envisaged to protect the employer’s business interest and good will. Generally, the restraint will apply once an employee departs from their employment and may include restraining the employee from:

• working for a competitor business;
• disclosing confidential information of the business;
• poaching clients of the business;
• enticing other employees to leave the business.

When are restraints of trade enforceable?

The general position is that restraint clauses are void unless the employer can justify that the restraint is reasonably necessary to protect the employer’s legitimate business interests. If the restraint goes beyond protecting the employer’s legitimate business interests, it will be unenforceable.

What is reasonable?

In determining whether a restraint is reasonable, a Court will consider the circumstances surrounding the restraint, including, but not limited to:

• the time period of the restraint;
• the geographical extent of the restraint;
• how wide the restraint is;
• the public interest;
• the interests of the employee;
• the legitimate business interests of the employer.

What do the Courts have to say?

In determining whether a restraint is valid and enforceable, the Court will first have regard to the legislation, which varies from state to state. The Court will then consider the competing interests of the:

• employer, in protecting their business’s good will;
• employee, in being able to obtain employment elsewhere; and
• public interest, in being able to acquire the employee’s services and freedom of trade.

In NSW, the Restraints of Trade Act 1976 (NSW) captures the common law restraint of trade doctrine rendering the imposition of any restriction on a person’s freedom to trade or seek employment unenforceable, unless it can be demonstrated that the restraint is reasonable having regard to the parties’ and the public interest. On account of the Restraints of Trade Act 1976 (NSW), the Courts in NSW can determine what would be reasonable in the circumstances and read down the clause accordingly.

In other jurisdictions which do not have an applicable statutory regime, without a well drafted restraints provision which takes advantage of cascading interpretation clauses, an unreasonable restraint clause will simply be struck out.

Case examples

In Andrews Advertising Pty Ltd v Andrews [2014] NSWSC 318 the Court held that a six-month restraint clause which prohibited an employee from working with other advertising agencies and engaging with clients of the employer Australia wide was valid. Despite the restraint preventing the employee from working in their chosen occupation for a period of six-months, the Court found that “nothing less than that would adequately protect the company’s legitimate interest in protecting its connection with a major client.”

On the other hand, in Commsupport Pty Ltd v Mirow [2018] QDC 134, the Court held that a restraint clause which prevented an employee from acting for or contacting any client of the employer who was a client of the employer in the six-months prior to the employee departing was unenforceable. The Court found that because the restraint was not limited to those clients of the employer with whom the employee had a client relationship with or influence over, the restraint had been drawn too broadly. Ultimately, the Court struck out the restraint stating that “the legitimacy of the interest gives way to the restraint being seen as one merely against competition.”

Key takeaways

To ensure adequate protection of business goodwill, employers should:

• Ensure the restraint of trade clauses in their employment contracts are drafted sufficiently and tailored to protect the businesses legitimate interests;
• Remind departing employees of their employment of their post-employment obligations;
• Act quickly in addressing a concern that a departed employee may be breaching their post-employment obligations.

Contact Chamberlains Law Firm for any questions and concerns regarding Workplace Law.