Restraint of trade clauses, or post-employment restraints, play a crucial role in protecting the legitimate interests of the employer.
Serious damage can be done to a business’ profitability if an employee resigns and takes customers or clients with them, or uses the business’ trade secrets in competition with that business.
To protect legitimate business interests, employment contracts should contain protections which operate after the employment ends.
What is the purpose of a restraint of trade clause?
Restraint of trade clauses are included in employment contracts to protect an employer’s trade secrets, confidential information and customer and staff connections, by restricting an employee’s activities after they have left the employment.
Restraint of trade clauses can theoretically prevent an employee from:
- soliciting the employer’s clients or contacting customers to entice them away from the employer;
- setting up a competing business with the employer’s business or working in a competitive business; and
- poaching employees of the business.
Are there any pitfalls to consider when including a restraint of trade clause in an employee’s contract?
Yes. In fact, a restraint of trade clause will be void unless it is found to be reasonably necessary to protect the legitimate interests of the employer.
These legitimate interests will generally relate to the employer’s confidential information, trade secrets and customer connections.
When determining whether restraint clauses are reasonable, the Courts will consider the following:
- The negotiation process, and in particular comments made by the employer or the employee when negotiating restraint of trade clauses;
- The respective bargaining positions of the employer and the employee;
- The nature of the employer’s business and the characteristics of the employee. The closer the employee is to the employer’s customers, the more likely the restraint will be reasonable;
- Whether the employer gave the employee anything in exchange for the employee agreeing to the restraint of trade; and
- The duration and geographical area of the restraint. The longer the time and wider the area, the less likely it will be reasonable. This can often be resolved by cascading clauses relating to the length of time and area in which the employee is restrained.
It is important that the parties to the contract each have an opportunity to negotiate the terms of a restraint of trade clause. In addition, employees should be encouraged to seek legal advice about the length and the effect of the restraint.
What are the legal remedies available if a former employee breaches a restraint of trade clause?
The usual remedy sought by employers faced with a former employee’s breach of a restraint clause is to seek an injunction to restrain an employee or former employee from acting in a way, or continuing to act in a way, that breaches a term of the former employment contract.
For example, an injunction may prevent a former employee from working for a competitor for a certain period of time or from using or disclosing information that is confidential to the former employer and its business.
Some tips for business owners
When drafting restraint clauses in employment contracts, it is important to ensure that:
- the period and area of restraint is appropriate to the employee’s position and access to confidential information;
- the prohibited activities are similar to the employee’s current activities; and
- contracts are reviewed regularly and updated to reflect changes in the employee’s role.
Conclusion
Having an enforceable and valid restraint in employment contracts is crucial if an employer hopes to rely on it to enforce a former employee’s post-employment obligations.
This issue needs to be considered by employers when the employment contract is drafted because a court will consider the reasonableness of the restraint as at the time the contract was entered into.