Restraints of Trade - A Summary
A restraint of trade is a clause in an employee's employment agreement that prevents or restricts an employee from:
- working for a competiting business; and / or
- operating their own competing business,
within a certain geographical area, and within a certain time frame, after the employee's employment ends for any reason.
However, for a restraint of trade to be legally valid and enforceable by an employer, it must be clear in defining what the former employee is unable to do according to the restraint, and it must also be reasonable in that it goes no further than protecting the legitimate business interests of the employer. Generally, legitimate business interests justifying restraints are:
- the employee's knowledge of your business secrets or confidential information; and/or
- the influence / connection that the employee may have over people who are important to your business (e.g. employees, suppliers, and clients or those who refer business).
For example, the following restraints would most likely be invalid and unenforceable:
- a restraint that prevents a former employee from working for any similar business in all of Australia, even though the business only operates in NSW; and
- a restraint that prevents a junior 19 year old receptionist from working in any other receptionist position.
In order to ensure that a restraint of trade has the best chance of being held to be valid by a court, such clause should be drafted in a way that:
- has cascading restrained areas and time periods, starting from broader areas / time periods, and cascading to more narrow areas / periods; and
- states that if a court deems a restraint to be unreasonably broad and unenforceable, that restraint will fall away, leaving the next broadest restraint, to operate.
For example, if the restrained time period is 12 months, and that time period is held to be unreasonable, it is reduced to 9 months.
You should ensure that the restraint goes only so far as to protect your legitimate business interests, and no further than that. It may be necessary to allow a former employee to work for a competing business, but to then restrict them from providing a particular service that your business also provides to the public.
You should always obtain advice when seeking to implement a restraint of trade in an employment agreement, particularly for more senior employees who have the potential ability to affect your business after their employment ends.
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