What you Need to Know About Restraint of Trade Clauses

What you Need to Know About Restraint of Trade Clauses

Restraint of trade clauses are often found in employment agreements and shareholder agreements. Their purpose is to protect business interests such as client information, intellectual property, employees and trade secrets. However, the extent to which a business can restrict an employee’s or a former director’s activities through such a clause is often contentious and can result in disputes.

What is a Restraint of Trade?

A restraint of trade clause in an employment contract applies when an employee leaves the organisation. Such restraint clauses can be enforced, but only to the extent that is ‘reasonably necessary’ to protect the legitimate interests of the business. Whether a provision is enforceable will therefore depend on the wording of the clause and the context of each case.

Restraint of trade clauses can be characterised as one of the following:

  • Non-competition: to prevent a former employee from competing against the company.
  • Non-solicitation: to prevent them from approaching the employer’s clients.
  • Non recruitment: to prevent the former employee from recruiting other employees from the company.
  • Confidentiality: to protect confidential information and trade secrets.

What is Reasonable Between the Parties?

If a restraint of trade clause is contentious, a court must determine what is reasonable in the context of the facts of your particular case. If the restraint clause goes beyond protecting the business’ legitimate interests to the former employee’s detriment, then a court will not enforce the clause. However, if the clause is reasonable to both parties, it is likely to be enforced.

What will a Court Consider when resolving a dispute?

In NSW, the Restraints of Trade Act 1976 governs the law surrounding restraints of trade. A court will consider a variety of factors in its determination of whether the restraint of trade clause is reasonable. Some of these factors include the:

  • Negotiation and whether parties were able to negotiate any terms.
  • Respective bargaining position of parties and whether parties were able to obtain legal advice.
  • Nature of the business and the characteristics of the role of the employee.
  • Remuneration and compensation for the restraint of trade.
  • Duration and geographical area of the restraint.

If you are an employer, what can you do to protect your business?

To ensure that your business interests are protected in the event that one of your employees leave, it is vital that the restraint of trade clauses are effective and enforceable. Employment contracts should be reviewed regularly to ensure the changing nature of the employee’s current role and the changing nature of the business. The time period of the restraint, as well as the geographical area, must be reasonable to commensurate with the employee’s position. The clauses must be drafted properly and carefully so that, in the event that certain parts of the clause are found to be unenforceable, then the clause could be severed and the employer can rely on the balance of the clause when enforcing the restraint of trade. If you believe that your employment agreement does not adequately cover your legitimate business interests, you should seek legal advice from a competent employment lawyer.

Contact Us

An employer can only enforce a restraint of trade clause to the extent that it is reasonably necessary to protect their business interests. However, whether a clause is reasonably necessary will depend on the particular facts of the case, and in any dispute, it is best to seek professional legal advice. If you would like to discuss your employment law matter with a legal professional please contact us on (02) 9963 9800 or via our contact form.

COVID-19: Employers. What are your options?

COVID-19: Employers. What are your options?

Working from home has become the predominant way businesses function given the recent effects of COVID-19 closing many workplaces. But what happens to the employees of a business where the essence of the work requires employee attendance and working from home is not feasible, for example in retail or hospitality? In this article, we explore what legal options employers have during this challenging time.

Standing Down

Normally, an employer can direct its employees to take annual leave during slow business seasons such as Christmas and New Year. What about in circumstances that are beyond the employer’s control and the business has to close?

Under the Fair Work Act 2009, an employer may ‘stand down’ an employee without pay during a period in certain circumstances if that employee cannot ‘usefully be employed’. An example of certain circumstances include industrial action, breakdown of machinery or a cause for which the employer cannot reasonably be held responsible.

A stand down happens when an employer sends employees home if there is no useful work for them to do due to the nature of the business and for reasons beyond an employer’s control. Whether an employee can be ‘usefully employed’ is a question to be determined on fact by having concern to the circumstances that warrant the stand down. For example, a retail company may stand down a worker due to a natural disaster as they are unable to be ‘usefully employed’ during this period of time.

Under this provision in the Act, an employer is not required to pay the employee during the stand down period. Full-time and part-time employees will still accrue annual and sick leave.

The repercussions of a stand down can be difficult for employees as they may be deprived of income for a long period of time. It is important that employers review provisions regarding stand down in modern awards, enterprise agreement or employment contracts to make sure that they comply with the relevant provisions.

What if you can still operate but are struggling with the cash flow?

Most employers would consider redundancy. However, you may consider agreeing with your employees to:

  • temporarily reduce their salary;
  • send employees on part paid leave; or
  • send employees on leave without pay
    so that employees can keep their jobs and businesses stay afloat.

Further information

It is important to be fully aware of your obligations and options as an employer during these difficult times. Likewise, employees should be fully briefed on their rights under their employment contracts when they face employment uncertainty. If you would like further information, please do not hesitate to contact one of our experienced employment law solicitors on 9963 9800 or via email at [email protected].

More information about COVID-19 can be found here: www.health.gov.au