What is a Restraint of Trade?
A restraint of trade is a contractual term added to an employment contract which limits the employee from performing certain activities after they are no longer working for the employer.
Often these clauses will seek to restrain employees from engaging in certain activities such as working for a competitor business or soliciting away clients of the employer.
The use of restraint of trade clauses in employment agreements is a common practice employed by many businesses.
The potential benefits of utilising such restraints can be significant for employers when such clauses a properly drafted. A restraint of trade clause can protect a business from losing customers to a previous employee, prevent the employee from using the employer’s intellectual property and business connections in order to spring board the employee’s career or new business dealings.
The financial benefits to a business can be enormous.
Unfortunately, a failure to properly consider and draft restraint of trade clauses can result in such provisions in employment agreement agreements being unenforceable.
Restraints of trade can be enforceable against employees in only certain circumstances.
However, employers who are considering using restraints should be conscious of the fact that restraints are generally void at law unless the restraint can be shown to go no further than reasonably necessary to protect a legitimate business interest.
Accordingly, employers should properly consider the nature of the role and the interests they are seeking to protect when drafting of restraint of trade provisions in employment agreements with a view to maximising the prospects of such terms being held to be enforceable. As part of this process, it will often be prudent for an employer to receive legal advice around the drafting of restraint terms in employment agreements.
Unless the Restraint of Trade clause is drafted correctly, a business could find themselves in a position of either losing clients, losing business or having to consider court action (which is frankly expensive and messy).
Three critical issues that employers need to give due consideration to when preparing restraints of trade in employment agreements are:
- The geographical area/s to which the restraint is to apply;
- The period/s across which the restraint is to apply; and
- The activity/s which are sought to be restrained.
- Any geographic restraint term/s included must be shown to be applicable to the employer’s business. If a business’ operations, client base and commercial activity is limited to a particular geographical location than it is unlikely that a court will enforce a restraint that goes beyond that area. For example, a business that practices in Brisbane cannot include a restraint of trade clause that extends to Melbourne.
Period of Time
- Any period of restraint must be no longer than is necessary in order to protect the interests of the business. The term of such restraint will often vary between employees and roles depending upon the nature of role, knowledge of business and potential to influence or impact the employer’s business and clients, customers, suppliers and other keys parties. For example, if a restraint a trade is included to span a period of 5 years for a position of a general business worker, this may be considered an unreasonable length of time to protect the business.
- Restrained activities must be linked to the employee’s performance of their role and referable to the protection of legitimate business interests. For example, it may be reasonable for an employer to seek to restrain an employee from specific activity referable to a legitimate business interest, i.e. soliciting its customers in competition with its business, but unreasonable for an employer to seek to prevent an employee from engaging in any employed activity within the employer’s industry or field by way of a ‘blanket’ restraint clause. Again, although such issues need to be considered on a case by case basis, the legitimacy of the business interest that the employer seeks to protect will generally inform whether an activity sought to be restrained can be legitimately enforced by an employer.
Points to take away
Restraints of trade can be useful mechanisms for employers to implement with a view to protecting their commercial interests.
Employers should remain mindful to ensure that such terms go no further than reasonably necessary to protect their legitimate business interests.
It may be prudent for employers to receive legal advice and assistance when preparing restraint of trade provisions in employment agreements.