Restraint of trade

Restraint of trade clauses are commonly found in employment contracts. Restraint of trade clauses attempt to regulate an employee's conduct while still engaged in the employment relationship and to restrict a former employee's conduct once the employment relationship has ended. These clauses are intended to protect the employer’s business interests. If you are negotiating a new employment contract or if you need legal advice regarding your current contract, Maurice Blackburn are the nationally acknowledged employment law experts.

Employment contracts may be created orally, in writing, or be partly oral and partly written. Employment contracts can also include terms found in other documents, including policies, awards, agreements, and job descriptions. Maurice Blackburn are the experts in employment law and can advise you on all your employment contract rights and obligations.

Signing a new employment contract

Before signing your employment agreement you should make sure that you read and understand the agreement, particularly any restraint of trade clauses. A restraint of trade clause that is upheld may have consequences for your future employment or your ability to start your own business. Maurice Blackburn’s employment contract solicitors have experience in advising clients about the reasonableness and enforceability of such clauses and restrictions, and are ideally placed to assist in contract negotiations.

If you need legal advice or assistance regarding the terms of your employment contract, talk to us today about how we can help.

Is your restraint of trade clause enforceable?

Maurice Blackburn are the experts in employment contract law and restraint of trade matters. In broad terms, restraint of trade clauses are enforceable to the extent “reasonably necessary” to protect the “legitimate business interests” of the employer. The law will, for example, protect your employer’s trade secrets, confidential information, customer connections and staff relationships. However, for example, an employer can’t protect itself against simple competition from former employees. Which means that you are entitled to use any expertise acquired in the service of your former employer in legitimate competition.

It’s worth getting legal advice when negotiating the terms of an employment contract, because restraint of trade provisions can have serious consequences for your future employment and business opportunities.

Talk to Maurice Blackburn today about your employment contract.

Successful cases

Hanna v OAMPS

Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267

This case is an example of a cascading restraint of contract clause where the employment contract contained a number of separate restraints which served to extend the restraint period. The company sought to rely on a 15 month restraint clause where Hanna successfully argued a 12 month period was sufficient. 

 

Ross and Anor v IECTV

Ross and Anor v ICETV [2010] NSWCA 272

In a 2010 court decision, a clause which restrained two senior employees (a Chief Executive and Chief Technology Officer) from competing with the employer's business or soliciting clients for 12 months after their employment ended was deemed valid.

The employees were ordered to pay damages for the loss suffered by the Company flowing from their breach of the restraint of trade clause.

 

Fishlock v The Campaign Palace

Fishlock v The Campaign Palace Pty Ltd [2013] NSWSC 531

Mr Fishlock was the executive creative director of the Campaign Palace where he was responsible for management of creative staff and productivity and management of Sydney and Melbourne creativity divisions of the company.


Mr Fishlock had been working in this role for eight years when he was informed by the employer by email that his responsibilities would be significantly cut, including a loss of overseeing the Sydney and Melbourne divisions.

He brought a claim for damages on the grounds that the employer had repudiated his employment contract. He also sought a declaration from the Court that the restraint of trade clauses in his employment contract were invalid and unenforceable.

The NSW Supreme Court found that the employer had repudiated Mr Fishlock’s employment contract, and as a result, the employer was not entitled enforce the restraint of trade provision in the employment contract.

Mr Fishlock received $268,259.00 in damages in relation to the employer’s repudiation.

Frequently Asked Questions

What are common restraint of trade clauses?

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.

A typical restraint of trade clause will:

  • 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.

Is a restraint of trade enforceable?

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.

What sorts of things do the courts consider?

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.

How are restraints of trade enforced?

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.

Are restraint of trade laws the same across Australia?

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.

Have you been put on 'gardening leave'?

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.

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