"It's The Law' - Restraint of Trade

‘It’s The Law’ – restraint of trade clauses in employment contracts

When you are running a business, it is a good idea to consider how your business would be affected if a key employee moves on and how best to protect yourself from the negative impact the departure would have. But how do you do that, and, if you are an employee, what does that mean for you?

Businesses can protect their interests by including restraint of trade clauses in employee contracts. For employees, this means knowing from the outset, what the conditions are if they move on and ensuring that the employment agreement they enter into is fair.

Restraint of trade commonly clauses include confidentiality and non-compete clauses. A confidentiality clause prevents an employee from disclosing or using the business’s information in another business, while a non-compete prevents an employee from entering or starting a similar profession or trade in competition with the business, as their former employer.

The effectiveness of these clauses depends on the individual circumstances. In considering whether to enforce the restraint of trade clause, the courts will weigh up a number of competing interests. This includes the employer’s interests in protecting confidential information, customer connections and other legitimate business interests, plus the employee’s ability to earn a living using their skills, experience and know how, along with the public interest in freedom of trade and competition.

Many restraint clauses are void due to the unreasonable nature or scope of the clause. To be upheld, the clauses must be shown to protect an employer’s legitimate interest, that it does so reasonably and that  the enforcement of the clause wouldn’t be contrary to the public interest. This assessment will be based on the situation when the contract was entered into, including the activities restrained, duration and geographical area covered by the clause.

For example, if a clause seeks to stifle competition, it typically will not be enforced. Rather, the business needs to be able to identify a specific business interest which reasonably requires the protection of the restraint clause.

Other important considerations include an employee’s skill and experience; whether information is, in fact, confidential, and whether the parties were on an equal footing in negotiating the provisions. What is considered reasonable will vary according to the circumstance.

There is one other way a restraint of trade or post-employment restraint could be considered by the court. It may be found that the clause seeks to protect a legitimate interest, but the terms are too broad. In this instance, a court may seek to save part of the clause by severing invalid parts. This ruling can only occur if the court can remove the invalid parts, leaving a clause that is self-contained and enforceable.

The process of enforcing a restraint of trade can involve initiating urgent court proceedings to obtain an injunction (a type of court order) prohibiting the employee from undertaking the activity identified in the restraint.

As a business owner seeking to protect your interests, restraint clauses can offer some protection. However, the wording of the clauses and their scope is important. Seeking legal advice can help ensure they could be upheld in court.

If you are an employee, consider the clauses included in your employment contract. They could mean serious restriction of your future occupational opportunities. On this basis, you may wish to seek independent legal advice prior to signing.

Patrick Smith is the principal of O’Brien & Smith Lawyers. This article is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. Neither Patrick nor O’Brien & Smith Lawyers accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your lawyer.