Employment Contracts: Restraint of Trade Clauses

Restraint of trade clauses are often included in employment contracts, to restrain employees from certain activities which may threaten the business of the employer. Restraint of trade clauses are difficult to enforce, and may only be enforced to the extent necessary to protect the employer’s legitimate business interests.

The types of actions that employers often seek to restrain include:

  • using confidential information or documents of the employer;
  • soliciting or “poaching” clients or other employees of the employer;
  • starting a business which is in direct competition with the employer; and
  • commencing employment with a competitor of the employer.

In New South Wales, the Restraints of Trade Act 1976 (NSW) governs the validity of restraint of trade clauses. In the Australian Capital Territory, this is governed by common law (case law).

Restraint of trade clauses must be reasonable in protecting the employer’s interests, which is assessed with reference to the particular circumstances on a case-by-case basis. Often restraint of trade clauses are drafted as “cascading clauses”, which allows the clause to be written down in the event that the maximum is not considered reasonable. Consideration as to whether a clause is deemed reasonable includes an assessment of the following:

  • Is the geographical area too broad? Does the clause extend beyond the employer’s legitimate business catchment?
  • Is the time restriction excessive?
  • Is the type of conduct restrained reasonable?
  • Does the clause unnecessarily restrict the employee from being able to make a living?

In some circumstances, restraint of trade clauses will be considered to be reasonable and enforceable. This is particularly the case where the business of the employer involves confidential information, or where the employee has actively sought to “poach” clients of the employer.

In the event that there is an enforceable restraint of trade clause which has been breached by a former employee, the employer should take action early in order to protect its interests. This may involve:

  • writing to the former employee to instruct them to immediately cease all conduct inconsistent with their obligations under the restraint of trade clause;
  • applying to the Court for an injunction in order to prevent the former employee from taking any further action; and/or
  • commence legal proceedings in Court to recover damages.

If you are an employee or an employer with questions about restraints of trade, please contact Griffin Legal for more information and advice specific to your circumstances.

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