Employers will often include a restraint of trade clause in their employment contracts as a way of protecting their interests during the term of employment or after termination. Most disputes involving these clauses commonly arise after termination of employment and the employee has moved on or, attempted to move on.
The core legal principles applicable to restraint clauses operate in essentially the same manner during the employment as they do after termination. In this article, those core principles are explained so that you may be better informed before considering your next job.
What is a Restraint of Trade?
A restraint of trade clause in an employment contract is intended to operate as a provision which seeks to restrain an employee’s capacity to undertake work during or after the termination of the employment.
Interestingly, in accordance with the common law doctrine of restraint of trade, such a clause will be unenforceable at law unless the employer can prove that the restraint was ‘reasonable’ to protect the employer’s legitimate business interests at the time the restraint was agreed.
Reasonableness of restraint
In order to determine whether a restraint clause is ‘reasonable’, the courts will engage in an assessment of the need of the employer to protect their legitimate business interests on the one hand, against the right of the employee to earn a living.
Such an assessment will consider the following main points:
1. Whether the employer has a legitimate protectable interest
A court will not enforce a restraint of trade clause if the clause merely operates to protect the employer from competition from an ex-employee, or to prevent a valuable worker from being employed by someone else. Protection will be granted where it can be established that:
… the employee’s personal knowledge of an influence over the customers of his employer, or such an acquaintance with his employer’s trade secrets as would enable the employee, if competition were allowed, to take advantage of his employer’s trade connection or utilize information confidentially obtained.
Ultimately, it will be a balancing act by the courts as to whether the employer has established the existence of a legitimate protectable interest.
2. Whether the restraint is reasonable in its scope of the protection of that interest
The duration of the restraint, the geographical area in which the restraint is to have effect, and the nature of the activities the restraint seeks to control are all factors which are considered in determining whether the scope of the restraint is reasonable.
In 2009, the New South Wales Court of Appeal held in Miles v Genesys Wealth Advisers Ltd  NSWCA 25 that a clause which sought to restrain a former employee for two and a half years was upheld. The court decided that the restraint was reasonable because:
- The former employee had been an executive;
- the information received by this former employee whilst employed by Genesys was at a high level of confidentiality and it directly equipped a competitor to attack Genesys’s weak points in its relationships with Member Firms and to build upon them; and
- the former employee’s potential to damage Genesys by using the confidential information and by soliciting its Member Firms was very high.
In 2016, the Victorian Supreme Court held in Just Group Ltd v Peck  VSCA 334 that a clause which sought to restrain a former employer for two years from taking up a new position as Chief Financial Officer for another business was not upheld. The Court decided that the restraints were not reasonable because:
- it went well beyond that which was reasonable to protect Just Group’s legitimate interests;
- Just Group had not established that the other businesses the former employee intended on working for were in fact competitors; and
- the restraint periods ranging between 12 months and 24 months applied to both Australia and New Zealand and therefore were considered unreasonable.
All restraint clauses are presumed to be void and unenforceable. However, that presumption may be rebutted if there are special circumstances which demonstrate that the restraint clause is imposed to protect the legitimate interests of the employer, the restraint clause does no more than is reasonably necessary to protect that legitimate interest in its scope and the clause is not unreasonable in the public interest.
Have you got a restraint in your employment contract that you believe is unreasonable? Do you want a restraint clause reviewed before you sign your new employment contract? Feel free to get in touch directly with today’s blog writer, Solicitor in Employment Law, Kathryn Lohman.
The information contained on this site is for general guidance only. No person should act or refrain from acting on the basis of such information. Appropriate professional advice should be sought based upon your particular circumstances. For further information, please do not hesitate to contact Hall Payne Lawyers.