A Reasonable Restraint or Unnecessarily Restrictive: When are Restraint of Trade Clauses Enforceable?

Employment contracts will often include a restraint of trade clause aimed at protecting the employer’s interest post-employment. Common restraint clauses include:

1. Non-compete clauses, preventing the individual from competing with their former employer for a certain time period (i.e. preventing them from starting their own similar business, or working for a direct competitor);
2. Non-solicitation clauses, preventing the individual from actively soliciting their former employer’s clients for a certain time period;
3. Non-recruitment clauses, preventing the individual from actively recruiting their former employer’s employees for a certain period of time; and
4. Confidentiality clauses, preventing the individual from disclosing or utilising their former employer’s information.

Restraint Clauses Generally

Courts in Australia appear apprehensive of restraints upon a person’s ability to earn a living or to restrict competition. Accordingly, there is an assumption that restraint of trade clauses are unenforceable, prima facie. To rebut this presumption, it needs to be demonstrated that the restraints sort to be enforced are reasonable in the circumstances.

Legitimate Business Interest

Addressing the threshold ‘reasonable’ in terms of restraints ultimately involves the consideration of two elements:

1. That the employer has a legitimate business interest in imposing the restraint; and
2. The scope of the restraint is no wider than is reasonably necessary to protect that legitimate interest.

‘Legitimate business interest’ has been clarified as a namely proprietary interest, such as customer relations and confidential information, rather than allowing employers to use restraint of trade as an overly restrictive shield from competition.[1]

Situations in which the Courts have recognised that the employer has a legitimate interest in imposing a restraint include:

1. Where an employee has access to confidential information and may be able to use it to the detriment of their former employer;
2. Where an employee has contact with the employer’s customers as part of their role and may potentially be able to use those connections to entice customers away; and
3. Where an employee is in a position to recruit colleagues from their former employer.

In these situations, the Courts have recognised that there is a legitimate interest which could be threatened, and therefore requires protection.

In addition to these specified instances, the following relevant factors are recognised as weighing in on the Court’s determination of the restraint’s reasonableness:

1. The nature of the employer’s business and whether confidential information obtained was specialised knowledge not ordinarily obtain in the course of employment;
2. A comparison between the former and current position of the employee (more similar the roles, the more likely the restraint is protecting a legitimate business interest); and
3. The composition and value of the client/customer base.

However, a fear of losing business is not alone sufficient to enforce a post-contractual restraint. The scope of the restraint will also play a role in determining the overall reasonableness of the restraint; the restraint must not extend further than is reasonably necessary to protect the employer’s legitimate business interests. Accordingly, whether a restraint is reasonable in its scope will depend on three key considerations:

1. The duration of the restraint;
2. The geographical area in which it is to have effects; and
3. The activities that it purports to control.

In the instance that a restraint is considered unreasonably wide, an employee may apply for a court order invalidating or narrowing the restraint (i.e. a court may find that a national restraint is too wide because the employer’s business only operates in Queensland).

Enforcing a Restraint Clause

In instances where an employer believes an ex-employee is in breach of their post-employment restraint clause, they may be able to apply to the Court for an injunction. An injunction is a formal court order which is able to enforce the restraint and consequently prevent the employee from undertaking those activities identified in the restraint.

Generally, an employer can also apply for an ‘interim’ injunction prior to a full trial. This is a temporary injunction, if granted, protects the employer’s interest, and takes effect whilst the court is deliberating on the actual claim for injunction.

Alternatively, or in addition to an injunction, an employer may seek damages for breach of contract for loss suffered as a result of the restraint breach.

Concluding Remarks

Based on the Court’s reluctance to place restraint on an employee’s ability to earn a living or restrict genuine business competition, restraints are presumed unenforceable. To rebut this presumption, the employer must demonstrate that they have a legitimate business interest in imposing a restraint and that the restrain is no wider than necessary.

So how do employers go about protecting their interest? It is recommended that Employers engage in regular review of their restraint clauses to ensure efficiency and maximise potential enforceability.And from the Employee’s perspective? If you work in a role which focuses on building solid client/customer relationships, and you employer’s business depend on those relationships (i.e. professional services) you may need to carefully consider the impact of restraint clauses on your future career moves.

Saines Legal is a full-service employment law firm available to provide tailored advice and guidance in relation to any workplace issues. We have also developed a small business retainer package designed to provide complete employment support at a fixed weekly fee, affording our small business clients complete peace of mind regarding workplace legal obligations and insurance against the costs of any unexpected issues. Do not hesitate to contact us via info@saineslegal.com.au or (07) 3324 1055, to organise a consultation.

Disclaimer

The contents of this article are general in nature and is for information purposes only. The content of this article does not constitute legal advice and should not be used as such. Should you require assistance with a specific legal matter, it is recommended that you seek appropriate advice.

Authors Emma Marshall (Lawyer) and Nigel Saines (Principal).

[1] As per Gillard J in Hartley’s Ltd v Martin [2002] VSC 301