What Is a Restraint of Trade Clause?

Restraint of trade clauses are common in employment contracts. They prevent you from competing with your employer’s business, poaching staff or soliciting clients after you’ve left the business.

When Are They Enforced?

Restraint of trade clauses are enforceable to the extent “reasonably necessary” to protect the “legitimate business interests” of the employer. This protects the employer’s trade secrets, confidential information, and customer and staff relationships.

However, courts will not enforce a restraint if there is not a legitimate business interest to protect. Courts are also reluctant to enforce a restraining clause where the effect means the employee cannot perform meaningful work. Sometimes restraints will be trying to cover an area too wide, or the length of time covered is too long. In these situations the clause will be held as invalid.

What the Court will Consider

Whether a restraint of trade clause is enforceable depends on a number of factors. Courts will consider the following:

  • Are the interests of the employer capable of protection? The court will consider the nature, location and goodwill of the employer’s business and clients.
  • What is the nature of the work being restrained? This includes the employee’s seniority, the nature of the employee’s role and the level of contact the employee has with clients.
  • What is the scope and duration of the restraint? Furthermore, it includes the time and area covered.
  • Are there benefits to the parties from entering the restraint?
  • What is the bargaining position of the parties?

Restraint of trade clauses in NSW

In NSW the Restraints of Trade Act allows the court to ‘read down’ a restraint of trade clause so that it is reasonable. This means that NSW courts can modify the restraint of trade clause. Consequently they could alter the time period, geographical area, or other factors they think are reasonable.

Example Where a Restraint Clause was Held Valid: Ross and Anor (2010)

In a 2010 court decision, a clause which restrained two senior employees (a Chief Executive and Chief Technology Officer) was deemed valid. It restrained them from competing with their employer’s business and soliciting clients for 12 months after their employment ended.

The court found that while the employees were still working for their employer, they were promoting their own interests and setting up opportunities for themselves in the future, therefore taking opportunities away from their current employer. The time period and scope of the restraint was deemed to be reasonable.

The employees were ordered to pay damages for the loss suffered by the employer. This is because the loss resulted from their breach of the restraint of trade clause in their contracts.

Example Where a Clause was Held Invalid: Just Group Ltd v Peck (2016)

In this case, the employer wanted to prevent the company’s Chief Financial Officer from working for their competitor. The relevant clause in the employment contract sought to prevent her from working for two years.

The Court held that the restraints were not reasonable. This is because they were trying to prevent the CFO from working at businesses who were not in competition with them. Furthermore, the duration of the restraint was too long and reached too far. It was for both Australia and New Zealand, and for two years after her employment ended.

Legal Advice on Restraint of Trade

It is important both employers and employees consider the impact of restraints of trade clauses. If you would like to discuss the impact of these clauses with one of our solicitors, please contact us on 9963 9800 or at law@etheringtons.com.au.