Restraint Of Trade Clauses: 5 Things To Be Aware Of
How to make sure your business's Restraint of Trade clause is enforceable
Restraint of trade clauses have become a common way that employers can protect their business when hiring new staff, and upon the termination of employment. Ordinarily these are clauses that are included in employment contracts and come into effect when employment is terminated, whether that be by the employer or employee.
Although a restraint of trade clause can be beneficial and provide the necessary protections for your business, it is important to understand that they will only be enforced if certain requirements are met. Here we will discuss the main issues in restraint of trade clauses so you won’t run into any obstacles in the event that you have to enforce one.
They need to be necessary
A restraint of trade clause will only be held to be valid if it can be seen that the clause was necessary to protect the business interests of the employer. If a restraint of trade clause is beyond what is necessary to protect the employer, then it will not be enforced by the Court. A remedy to this is having a cascading clause, which will provide different restrictions on when and where an employee can work post-employment. If a Court find that one clause was not necessary, it is likely another one will be enforced.
They must protect “legitimate business interests”
Similar to being necessary, restraint of trade clauses must have the effect of protecting legitimate business interests. This can include the protection of trade secrets, confidential information, and financial details of the business. If an employee is going to have access to this information, a restraint of trade clause is a helpful way to protect this information, however this can also be achieved by having a Non-Disclosure Agreement (NDA).
Restraint of trade clauses need to be reasonable
Even if you can demonstrate that the restraint of trade clause is necessary to protect your business, they won’t be enforced if they’re unreasonable. An example of an unreasonable restraint would be a clause that’s in effect for 5 years and with a 30 kilometre radius. This may sound ridiculous, but clauses of this type have been seen. Australian courts have historically been seen not to hold up restraint of trade clauses that exceed 12 months, as barring an employee from working for this amount of time is an impingement on an employee’s right to ‘earn a living’. Subsequently, a restraint of trade clause needs to be sufficiently specific that it can be seen as a necessary means of protecting your business.
They aren’t necessarily compatible with public policy
The employer/employee relationship is a constantly shifting balance between the rights of one party over another. A restraint of trade clause effectively prevents an employee from making a living – and it is this consideration which has made them such a contentious topic. If the clause exceeds reasonable geographic boundaries, a reasonable amount of time or is generally too broad, the Court will find in favour of an employee’s right to work. It is with this consideration in mind that the onus is on the employer to prove that the restraint of trade was necessary and reasonable to protect the business in question.
A Court can reconstruct them (or discard them)
If you attempt to enforce a restraint of trade clause or conversely, if a former employee seeks to have one set aside, a Court can not only discard it, but can also reconstruct it. An example of this is where a Court finds the time period to be excessive (say, 18 months) and reduces it to be more reasonable (6 months). This is where cascading clauses can be helpful, but the best way to have an enforceable restraint of trade clause is to have any clause reviewed by an employment lawyer to make sure the provisions are only that which is necessary to protect your business.
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Jackie is the Content Manager at Lawpath and manages the content team. She has a Law/Arts (Politics) degree from Macquarie University and is a solicitor in NSW. She's interested in how technology can help shape the future legal landscape.