Restraint of Trade in Employment Contracts

A restraint of trade clause is generally inserted into an employment contract by the employer in an attempt to protect their business interests and goodwill.

Restraint of trade may have unfavourable consequences on your potential future employment or even on your ability to start your own business—this is why it’s important you understand all of the clauses in your contract. If you have any questions, don’t hesitate to get into contact with one of our employment lawyers.

What is restraint of trade in Australia?

Restraints of trade are clauses in employment contracts/agreements that can restrict employees from working for competitors (for a period of time), disclosing confidential information and poaching other employees. It can also prevent you from starting a competing business or approaching/assisting your old clients for a period of time.

What is the purpose of a restraint of trade?

The purpose of a restriction of trade clause is to protect a business’ interests, including intellectual property, employees, trade secrets and client information.

How long is a restraint of trade?

A restriction of trade can be between three and twelve months. However, there are cases in which it may be extended.

Can a company prevent you from working for a competitor?

Yes, a restriction of trade clause may prevent you from working for a competitor for a specific period of time in a particular geographic area. However, there are a number of factors that will determine if this restriction is enforceable or not.

Types of restraints of trade in employment contracts

Your employment agreement may have a few common restrictions of trade clauses in it. These include:

• Confidentiality clauses, which prevent an employee or ex-employee from using or disclosing confidential information obtained in the course of the employee’s employment.
  • Non-solicitation clauses, i.e. non-solicitation of clients restraint clauses, which prevent an ex-employee from seeking the custom of the employer’s clients or customers.
  • Non-solicitation of suppliers restraint clauses, which prevent an ex-employee from engaging the services of the employer’s suppliers
• Anti-compete restraint clauses, which restrict an ex-employee from establishing or working for a competing business.
• Non-poaching restraint clauses, which prevent an ex-employee from influencing the employer’s current employees or contractors to leave the employer’s business.
• Clauses that allow the employer to direct an employee to take gardening leave.

Learn more: 

• Poaching employees from other companies
• What is gardening leave?

Are restraint of trade clauses enforceable in Australia?

Restriction of trade clauses are enforceable up to a certain extent. In order for them to be enforced, they must protect the employer’s legitimate business interest (i.e. a trade secret) or the reputation of the business.

Minimising the competition is generally not enough to create a legitimate interest. This is why the employer needs to ensure that the enforcement of the restraint of trade clauses on the employee does not go further beyond the legitimate business interest of the employer.

The Court might not enforce the post employment restraint clauses on the employee if the Court finds that the employer has gone beyond its legitimate business interest.

10 factors the court considers before enforcing restraint of trade clauses

The Court considers a number of factors before enforcing the restriction of trade clauses on the employee, including:

• The employer’s interests and their protection capabilities, which include:
  • Geographic locations of the employer and their business
  • Goodwill in the market and;
  • The geographic locations of their clients.
• Nature of work the employee is restrained from, which includes:
  • The position, job roles and duties of the employee and;
  • The level of interactions with the clients.
• Scope and period of the restraint of trade clauses on the employee, which also includes the geographic area the employer is proposing to be covered by the clauses.
• Benefits to the employees from entering into employment agreements having restraint of trade clauses in it; and
• The added advantage of negotiating powers the employees get by entering into such agreements.

At times, employment contracts may contain a series of restrictions of trade clauses, which may overlap with each other. In these cases, any clause that is found unreasonable and unenforceable can be severed and the employer can enforce the remaining clauses on the employees.

Speak to Owen Hodge

If you are an employee or an employer and would like to know more about post employment restraints, please don’t hesitate to contact our experienced employment contract lawyers. You can also turn to our expert lawyers if you believe that your employment contract has unfair restraint of trade clauses in it or there has been a breach of employment contract.

Related employment law information:

• Termination of employment
• Executive employment agreements

Related blog posts:

• How Well Do Employment Contracts Hold Up In Court?
• Don’t Forget to Include These in Your Employment Contract
• How Employers Can Protect Themselves Through Employee Contracts