Restraint of Trade – What It Is and How It Can Affect You

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Home > Blog > Restraint of Trade – What It Is and How It Can Affect You

If you have recently received a new employment contract and have come across a restraint of trade clause, you may be wondering what it is. Generally speaking, an employer will include this clause in the employment agreement as a way of protecting themselves against employees who, when they leave the business might:

  • use confidential information and/or trade secrets they have gained on the job at their next place of employment or in their own business venture;
  • commence working for a competitor a short time after they leave their current employer; and/or
  • attempt to poach clients, staff and/or customers away from that employer.

There are two main types of restraint clauses that you may have seen in your agreement:

  • non-competition, which prevents a former worker from competing against their former employer; and
  • non-solicitation, which prevents a former employee from actively trying to bring their former clients across to their new business.

A restraint of trade clause in an employment contract is only designed to come into effect when an employee leaves a business, however, it is not always enforceable and may only be enforced if it is deemed ‘reasonably necessary’ to protect the employer’s legitimate business interests.

What is meant by the term ‘reasonable’?

Whether enforcing the clause is ‘reasonably necessary’ will be determined by the court on a case-by-case basis, but some or all of the following factors may be considered in the determination:

  • What was considered reasonable at the time the agreement (and therefore, the restraint) was entered into by the employee?
  • Geography – a court is unlikely to enforce a restraint clause if the employee’s former business is unlikely to be adversely affected due to the geographical location of the new one;
  • Timing – a court is unlikely to enforce a restraint clause if the period of restraint to protect the value of confidential information is unreasonably longer than necessary; and
  • Specific and legitimate business interests – a court is unlikely to enforce a restraint clause if it excludes the employee from engaging in other activities outside of the scope of the legitimate business interests that the employer is seeking to protect.

Does your contract have an enforceable restraint of trade clause?

Your contract may very well include a restraint of trade clause, but is it enforceable?

The court frowns upon standard, broad or ‘catch-all’ restraint clauses being used in contracts, deeds or agreements and employers are urged to exercise special care when drafting restraint clauses if they want to strengthen their chances of them being enforced at a later time.

It would be difficult for a business to argue that they are trying to protect a legitimate business interest if the clause does not actually define what that interest is, so unless the restraint clause specifically defines the interest it is trying to protect and the employee is given the opportunity to understand exactly what it is restrained from doing, it is unlikely that the clause will be enforceable.

What can this mean for your career?

If you are entrusted with any confidential information or have close relationships with your employer’s clients your employment contract may contain a restraint clause, which your employer would have inserted in the agreement to protect themselves against the ‘theft’ of clients or the use of confidential information should you leave the business.

Most employees will enter a new business bringing with them at least some knowledge and experience of their role and a network of contacts within their industry. It would be unreasonable for a company to suggest they employed someone who lacked any experience in the role into which they were hired.

What a company may reasonably suggest you should be restrained from using once you leave them, is any knowledge gained through the position that may be used to help a future employer succeed, to the former business’ detriment. If this is the case, you may be restricted from:

  • working on projects where confidential information or trade secrets could be used to benefit the next employer;
  • commencing employment with a competitor or starting your own business in the same field; and/or
  • having contact with clients, staff and/or customers who you were introduced to in your former role.

If you believe that your employment contract may contain a restraint of trade clause and you are concerned about how this could affect your future job prospects you should seek the advice of an employment lawyer.

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