Australian employers are increasing using a post-employment restraint of trade clause in their employment agreements to try and protect their business interests (for example, customer relationships). The restraints an employer looks to impose on an employee can vary, but as a general rule they include at least one of the following:
- an employee cannot use their former employer’s confidential information and trade secrets,
- an employee cannot work for a competitor for a period after they leave your business, and
- an employee cannot solicit clients, staff and customers from their former employer.
On face value, a restraint of trade clause is void. As an employer, the onus is on you to persuade the court that the clause is reasonable, and therefore valid and enforceable. In NSW, courts also have considerable scope to ‘read down’ (i.e modify) such clauses under the Restraint of Trade Act 1976.
In this article, we set out some of the core principles an employer seeking a restraint should know of and where you should focus attention when drafting a restraint.
What is a Restraint of Trade?
A restraint clause in an employment agreement typically applies when an employee leaves the business. An employer can enforce a restraint to the extent that it is reasonably necessary to protect their legitimate interests. Whether a provision is reasonably necessary will depend on its wording and the facts of a particular situation.
The two main types of restraint clauses are:
- Non-competition: this clause prevents a former worker from competing against the company that employed him or her.
- Non-solicitation: this clause aims to prevent a worker from actively soliciting former clients to follow them to the new business or role.
Generally, a court views a non-solicitation clause more favourably as it does not seek to limit an individual’s right to work. It’s also easier to see how this clause reasonably protects a company’s legitimate business interests.
An enforceable restraint of trade clause will give the employer no more protection than is reasonable under the circumstances. When determining reasonableness, the parties’ intention may be relevant (e.g. any express statements in the agreement). If the court finds that the restraint goes beyond providing adequate protection, it will deem that the clause is unenforceable. However, if the clause affords no more than adequate protection, the court will then go on to consider whether the restraint is harmful to the public interest.
The party seeking to enforce the restraint (usually the employer) must establish that it is reasonable between the parties.
The court will consider the particular facts in each case when determining whether a restraint is reasonable, along with the following factors:
- Negotiation process: In particular, comments made when negotiating the restraint clause.
- Parties’ bargaining position: Was there an imbalance in power between the employer and employee at the time the parties agreed to the restraint? Did the employee have the opportunity to obtain legal advice?
- Nature of the employer’s business and characteristics of the employee: For example, if the employee is in close contact with the employer’s customers, then it is more likely that the restraint will be reasonable.
- Remuneration and Compensation: Did the employee receive any remuneration or compensation for the restraint?
- Duration of the restraint: The longer the time, the less likely it will be to be reasonable.
- Geographical restraint area: If the restraint covers a large geographical area, the court is unlikely to hold it to be reasonable. Quite often employers now try and incorporate a cascading clause in their agreement to avoid duration and geographical issues. A cascading clause provides alternate time periods and geographical areas that allow the court to ‘read down’ the clause until they consider it is reasonable. For example, the geographical area may start as Australia, then New South Wales, then a particular region of New South Wales.
Does the Restraint Go Further Than is Necessary to Protect the Employer’s Interests?
In 2016, the Victorian Supreme Court was asked to consider whether a restraint clause was reasonable. In the matter of Just Group Ltd v Peck  VSC 375, the employer wanted to enforce a restraint clause to prevent the company’s Chief Financial Officer from working with their competitor. The clause in the employment contract sought to prevent the employee from commencing work for two years.
The Court decided that the restraints were not reasonable for the following reasons:
- The restraint went further than necessary to protect Just Group Ltd’s legitimate business interests.
- The restraint sought to prevent the employee from working at other businesses who were not in competition with Just Group Ltd.
- The duration of the restraint was too long as the clause applied to both Australia and New Zealand for two years after her employment terminated.
An employer can only enforce a restraint of trade clause to the extent that it is reasonably necessary to protect their legitimate business interests.