When Will a Restraint of Trade Clause Be Enforceable?

Historically, employers have chosen to include restraint of trade clauses in their standard employment agreements as a means of protecting the organisation and its product or service offering from (former) employees who may:

• share trade secrets or other confidential information acquired in their previous role at their new role;
• use information gained in their previous role to start their own, similar business;
• start working for a competing business shortly after finishing up with their current employer; and/or
• try to use their access to client lists or other databases to poach work.

Restraint of trade clauses will typically cover one of two forms of restraint but may include elements of both; they are non-competition and non-solicitation.

Non-competition clauses prevent the worker from engaging in work which competes against their former employer while non-solicitation clauses prevent a former employee from actively poaching their former clients.

In most cases, former employers do not want to enforce restraint of trade clauses and employees can usually commence new roles without any issues with or resistance from their former employer. Sometimes, however, it is necessary to enforce a restraint of trade clause and it is possible to do so if the situation is deemed ‘reasonably necessary’ in order to protect the employer against conduct that may be to the detriment of its business.

Why would a court consider it to be ‘reasonably necessary’ to enforce a restraint of trade clause?

Sometimes employers and employees will agree on the enforceability of a restraint of trade clause themselves. Occasions, where this may arise, include the employer paying the employee ‘gardening leave’ prior to commencing their new role, which effectively stops the employee from starting with a new organisation and discontinues their access to confidential information.

At other times, the employer and employee may not agree on the fairness of the restraint of trade clause, which means proceedings are likely to commence and a court will be required to consider if enforcing the clause is reasonably necessary.

The factors which may be considered include:

• the timing of the agreement and whether it would have been reasonable when the agreement was entered into;
• the location of the employee’s new employer or business and the likelihood of the former employer’s business being adversely affected by any competing business;
• the nature of the information being protected and whether it is still as relevant as the time the agreement was entered into (e.g. if a product the employee had confidential information on has since launched to market); and
• the scope of the clause and whether the activity it restricts the employee from engaging in is too unspecific, ambiguous or broad.

It would be unreasonable not to expect an employee to draw on their previous experience when they start a new job, but what is reasonable is for the worker’s former employer to want to restrict them from:

• using any knowledge gained while employed by their previous organisation to directly benefit their next employer, such as by working on a very similar project or product;
• keeping in contact with clients/customers and staff members with the intention of bringing them across to the new organisation;
• going to work for a direct competitor very soon after resigning from their previous role and/or;
• starting a new, competing business.

Is there an enforceable restraint of trade clause in your contract?

If you have noticed a restraint of trade clause in your employment contract, you may wonder if it is enforceable.

The first thing to consider is whether the clause is reasonable. For example, the level of seniority of the employee, their access to confidential information, their capacity to use this information to damage their former employer’s business interests and the flow-on effects of that damage.

Generally speaking, standard and ambiguous restraint of trade clauses are not looked upon kindly by the court and employers would be prudent to draft these clauses carefully by specifying the exact type of business interest they are trying to protect or the conduct they are seeking to avoid. Hence, the employee understands exactly how they would be in breach of the clause.

If you have concerns about how a restraint of trade clause may affect your next career move, or you are an employer who wants to enforce the restraint of trade clause of a departing employee, our experienced employment lawyers can assist.