Restraint of Trade: Finding the Balance between too much and not Enough

April 13, 2019

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Some say competition is a good thing, but it is not always the case. In an increasingly competitive marketplace across all businesses, employers are looking ahead to protect the business through the application of restraint of trade clauses in employment contracts. Restraint of trade clauses (or non-compete clauses, as they are also commonly referred), usually form part of a contract of employment when commencing employment, but can also be included in deed of release documents (where applicable).

Restraint of trade clauses are utilised by the employer to protect the relationships established with their clients and maintain their position with competitors in circumstances where an employee’s employment ends. Restraint clauses will usually restrict an employee’s ability to seek employment with a client or competitor of the employer after their employment ends, as well as preventing the employee from ‘poaching’ current employees of the employer for a period of time commencing from the end of their employment.

There can be issues that arise in relation to restraint clauses, but typically only at the end of the employment relationship. Arguably, both the employer and employee should be aware of the circumstances and reality of the inclusion of such terms in the contract before it is signed, prior to the commencement of employment. Understandably, the issues concerning restraint of trade clauses do not arise until the end of the employment relationship when an employee’s employment ends with the employer.

Restraint of trade clauses can only be enforced to protect an employer’s legitimate business interests. If a restraint of trade clause attempts to go beyond that, in the event that legal proceedings are commenced to enforce a restraint clause, it will only be enforceable, if found to be valid.

In New South Wales, the Restraint of Trade Act 1976 (NSW) states that restraint clauses are only valid “to the extent to which it is not against public policy”. However, there is no such legislation in Victoria. Rather, the principle of restraint of trade are guided by common law and what the Courts have previously decided.
In determining whether a restraint clause is enforceable in legal proceedings, the Court will consider a number of factors, including:

  • Was the clause reasonable when the employee agreed;
  • Whether the period of time the restraint covers is reasonable;
  • Whether the geographical limit of trade is reasonable;
  • Does the restraint go beyond protecting the employer’s legitimate business interests?

It is important to note that the employer will bear the onus of proving that the scope of the restraint is reasonable.

One way in which an employer may draft a restraint clause in a contract of employment is the inclusion of what is described as cascading restraint clause. This provides a number of possibilities, usually geographical location and periods of time, that may be enforced if legal proceedings are commenced against the employee for breach of the restraint of trade terms. Cascading clauses provides the court with a number of combinations of each of the possible scenarios (in relation to time and geographical location) to enforce the restraint. Cascading clauses should only be included in the contract of employment with caution. It provides a less strict interpretation of the restraint clause and potentially creates ambiguity with the employee as to their obligations post-employment.
Restraint of trade clauses can be useful in protecting the viability of a business once an employee’s employment ends. It is also important that employees understand their post-employment restraints and what effect this may have on them obtaining employment immediately after their employment ends.

For further information on restraint of trade and to obtain specialised employment legal advice, please email or contact our firm on (03) 9642 0435.

Disclaimer: This article contains information of a general nature and should not be relied upon or taken to be legal advice. You should speak with a lawyer about your situation before applying any of this information.