Restraint of trade clause

One of the many things that keep business owners awake at night is the prospect of employees leaving and starting up a rival business (or joining a competitor) and potentially taking customers with them.

The best protection for an employer is to include a restraint of trade clause in their employment contracts.

It is important for business owners to regularly review the efficacy of their restraint clauses. This is particularly relevant where there has been a change in the nature of the business because the important date for assessing the reasonableness of the restraint of trade clause is the date that the employment agreement was entered into.

What is a restraint of trade clause?

Restraints of trade are included in employment contracts to protect an employer’s confidential information, customer lists, staff connections and trade secrets by restricting an employee’s activities after they have left employment.

Restraint of trade clauses are enforceable to the extent the restraint is reasonably necessary to protect the legitimate business interests of the employer.  Whether a restraint is reasonably necessary to protect the legitimate business interests of the employer turn on the particular clause and the facts of the case.

Traditionally, courts do not like to impose a restraint upon an employee’s ability to earn a living or to restrict competition. Nonetheless, time and time again Courts have upheld restraint clauses and found in favour of employers.

The onus of establishing that the restraint is reasonably necessary to protect the legitimate business interest falls on the employer. The clause must not impose more than adequate protection and if it goes beyond this then it will be considered unreasonable and unenforceable.

The factors that will usually be considered to determine if the restraint is reasonably necessary to protect the legitimate business interests of the employer are:

• the nature of the business
• the geographical area of the restraint;
• the scope of the activities restrained;
• The length of the restraint provision;
• the degree to which the restraint is necessary to protect goodwill and confidential information;
• customs and practices within a particular industry;
• whether the restraint only applies during the term of the contract or covers a post-termination period.

Tips for drafting restraint clauses in employment contracts

• ensure that the period of restraint is commensurate with the employee’s position description and access to confidential information;
• ensure that any prohibited activities prevented are similar to the employee’s current activities; and
• review employment contracts regularly and ensure they are updated to reflect changes in role.

Validity of employment contracts

A further consideration that needs to be considered to ensure the enforceability of a restraint of trade is the validity of the employment contract containing the restraint.  A restraint of trade clause, no matter how well drafted and reasonable, will only be enforceable if the employment contract that contains the clause still governs the relationship between the employer and former employee at the time the employment relationship was terminated.

In one case an employer was unsuccessful because the employee’s new role was deemed different to the services offered by the former employer. The court found that because only a portion of the old role was being performed in the new role, the employer had failed to identify a legitimate business interest that required protection by the clause and was deemed to have gone beyond what was reasonably necessary to protect its interests.

In contrast, in another case, an employee’s close and intimate knowledge of management and the client’s resulted in a 2 year restraint clause being enforced. Even a close connection with the customer may not be sufficient, what is needed is a strong connection including personal or special.

Employees who work in business development roles (BDM) where they develop a personal relationship with the client and acquire knowledge and understanding of client’s affairs also need to carefully consider the impact of restraint of trade clauses in their employment contracts on future career moves, as employers are entitled to, and often do, impose restraints on such employees, particularly in professional services firms.

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About Mark Harley | Principal

Mark has practiced in commercial law, commercial litigation and insolvency law for almost 10 years. He established the firm in 2014. With degrees in law and information technology, as well as being a director of several companies, Mark speaks the language of business owners and has a first hand understanding of the issues facing his clients.