Restraint of trade
FAQs - your questions answered
Restraint of Trade clauses commonly form part of the express terms of an employment contract.
Employers often seek to include cascading restraint of trade clauses in contracts. Cascading clauses contain a series of restraints that overlap. By doing this, any restraints that are held by a Court to be unreasonable and unenforceable can be severed and the employer can enforce the remaining restraints.
- Restrain an employee from engaging in work for a competitor of a former employer in a particular geographic area and for a specific length of time
- Restrain a former employee from disclosing confidential information after the employment relationship has ended
- Restrict an employee from poaching or enticing any employee to work in competition with the employer, and
- Restrict an employee from approaching or soliciting clients for a period of time and often in a particular geographic area after the employment relationship has ended.
Restraint of trade clauses will be enforceable to the extent “reasonably necessary” to protect the “legitimate business interests” of the employer. The legitimate business interests of the employer refer to protecting the income and reputation of the employer’s business. The employer or company seeking to enforce the restraint must show that the clause goes no further than what is reasonably necessary to protect the employer’s legitimate business interests.
If a court finds that a restraint goes beyond what is reasonable to protect the legitimate business interests of an employer, then the restraint of trade clause will not be enforced.
Whether a restraint of trade clause is enforceable depends on a number of factors and the courts will consider:
- the interests of the employer capable of protection including a consideration of the nature, locations and goodwill of the employer's business and the location of the employer's clients
- the nature of the work of the employee being restrained, including the employee's seniority and the nature of the employee's role and duties including the level of contact the employee has with clients
- the scope and duration of the restraint, including the time and area proposed to be covered by the restraint
- benefits to the parties from entering the restraint, and
- the bargaining position of the parties.
The first step that employers often take when they are considering enforcing a restraint of trade clause or relying on a common law doctrine against an employee is to issue a letter of demand to the employee. Sometimes, in the post employment context, the employer chooses to copy this letter of demand to the employee's new employer.
If an employer believes there is imminent harm to its business from the breach of a restraint of trade, the employer may lodge an application in court seeking an interlocutory injunction, pending a full trial of the matter. To be successful in obtaining an interlocutory injunction against an employee, the employer must show that there are reasonable prospects for success against the employee (that is, that there is a serious question to be tried) and that the balance of convenience favours the granting of an injunction.
If an injunction is granted, the court will schedule the matter for a full trial. At a full trial, the criteria mentioned above will be considered and, if the restraint is found to be enforceable, the court will assess the damages flowing from any breach of the restraint by an employee.
Some states have legislation on restraint of trade. For example, in NSW, the Restraints of Trade Act 1976 allows the court to read down a restraint of trade clause so that it is reasonable. This means that the NSW courts can modify the restraint of trade clause in a contract to what a court believes is a reasonable restraint.
In some cases your employer may direct you not to attend the workplace during the notice period if you have resigned or had your employment terminated. You might be directed to do little or no work for that period. This is known as 'gardening leave'. The length of this leave is often the same as a post-employment restraint of trade.
During any period of gardening leave you are entitled to be paid your normal contractual entitlements. While on gardening leave you remain bound by your contract including any provisions in the contract regarding other employment.