What is a restraint of trade clause?
A restraint of trade clause is generally for after an employee leaves a business. It can be enforced to the extent that when enforcing your business’ interests, it is ‘reasonably necessary’.
When are restraint of trade clauses unreasonable?
It is not uncommon for employers to include a restraint of trade clause in employment contracts. These clauses safeguard an employer’s business interests and aims to protect their commercial interests.
Essentially, it restricts an employee’s capacity to undertake work during or after the termination of their employment. For example, it could include preventing an employee from using their systems, customers and intellectual property once they begin working for a competitor or prevent them from starting up their own competing business.
Disputes regarding restraint of trade clauses often arises after an employee has been terminated or has chosen to move on – these disputes often hold the argument that the former employee finds the clause to be unreasonable.
What are the types of restraint of trade clauses?
- Non-compete clauses: prevents a person from competing with their former employer for a certain time period, which includes starting their own business or working with a competitor.
- Non-solicitation clauses: prevents a person from soliciting their former employer’s clients for a certain time period, which is common in sales roles.
- Non-recruitment clauses: prevents a person from recruiting their former employer’s employees for a certain time period.
- Confidentiality clauses: which prevents a person from using their former employer’s confidential information.
However, a court will not enforce a restraint of trade clause if the clause is only there to protect the employer from competition from an ex-employee, or to prevent a valuable worker from being employed by someone else. Therefore, the employer must be able to show that there is the clause is legitimately required in the interests of their company.
Key areas that are challenged in a restraint of trade clause
Ultimately, the reasonableness of the restraint clause is assessed as at the date the restriction was originally agreed by the parties. This means that the decision is not based on the benefit of hindsight.
There are typically three things that are considered when determining if a restraint of trade is reasonable. This includes:
- the geographical area covered by the restraint clause
- the duration of the restraint
- the nature of the restraint
In general, restraint of trade clauses is commonly void as they are against public policy. However, a court may enforce a restraint clause if an employer can demonstrate that the restraint is necessary to protect a “legitimate business interest”.
Whether court proceedings have been initiated, letters have been exchanged, or whether you are simply need advice on your legal position, we highly recommend that you seek legal advice when it comes to employment disputes. This article is only meant to serve as a brief summary of the topic described and does not constitute legal advice.