News and Insights

Restraint of trade clauses, also referred to as restrictive covenants or non-compete covenants (Restraint Clauses), are commonplace in employment contracts, particularly at the senior and/or executive level as these employees typically have intimate knowledge of a business’s practices, trade secrets, client and supplier lists as well as having access to confidential information.

Restraint Clauses place a restriction upon an employee’s freedom to work for other businesses for a specified period of time and within a specified geographical area so as to mitigate the risk of an employee utilising their intimate knowledge of the employer’s trade practices, secrets and confidential information for the benefit of a business competitor. Generally, Restraint Clauses survive termination of the contract of employment and may include restrictions as to the following:

• engaging in a business or working for a business which competes with the employer’s business;
• soliciting, enticing or encouraging other employees to leave their engagement with the employer;
• interfering with the relationship between the employer and its employees, clients/customers or suppliers (i.e ‘poaching’ customers or suppliers); and
• disclosing confidential information relating to the employer’s business.

Whilst Restraint Clauses are ubiquitous in employment agreements across a broad range of industries, an employer seeking to enforce such a Restraint Clause can sometimes face difficulty in doing so given the fundamental principle that Restraint Clauses are void on the basis that they against public policy because they restrict an individual from utilising their skills, knowledge and experience to make a living.

Notwithstanding this fundamental principle, case law has developed over the years such that Restraint Clauses may be valid and justified in circumstances where an employer can demonstrate that the Restraint Clause is reasonably necessary to protect the employer’s legitimate business interests.  This means that an employer cannot seek to enforce a Restraint Clause to simply protect their business against mere competition by a former employee.

In order for a Restraint Clause to be found to be reasonably necessary to protect an employer’s legitimate business interests, an employer must demonstrate that it will suffer real harm to a protectable interest if the employee is permitted to engage in the conduct the subject of the Restraint Clause.

Protectable interests may include protection against:

• damage to the employer’s client relationships;
• breach of the employer’s confidential information including trade secrets, pricing information, financial information and intellectual property rights; and
• Springboard conduct, whereby a former employee uses knowledge gained from working in the employer’s business to the advantage of a competing business/ new employer.

In considering whether a Restraint Clause is reasonable, a Court will take into account the totality of circumstances surrounding the Restraint Clause, including:

• the time period of the restraint;
• the geographical area the restraint applies to;
• how wide the restraint is i.e whether the restricted activities/conduct are clearly specified or in vague, broad terms;
• the interests of the employee;
• the legitimate business interests of the employer; and
• the public interest.

Restraint clauses that do not meet the threshold for reasonableness may be struck out by a Court.  Therefore, it is important that any Restraint Clause in an employment agreement is carefully drafted so as to ensure that there are “cascading” degrees of restraint periods and geographical areas so that a Court can ‘strike out’ the restraint periods and which it considers to be unreasonable and, therefore, unenforceable in the circumstances.

Whilst a Court has the ability to determine whether a particular restraint period or area contained in an employment agreement is unenforceable or enforceable (as the case may be), it does not, however, have the power to re-write an employment agreement so as to include in the contract a Restraint Clause which it would find to be enforceable, this being a contractual matter between the employer and employee when signing the employment agreement.

As such, a well drafted “cascading” Restraint Clause will contain a number of alternative permutations of the same restraint, such that if, for instance, the Court finds that a restraint area of Victoria is too wide, the Restraint Clause will also contain smaller geographical areas within Victoria which the Court may not strike out for unreasonableness (eg within 50km of the business premises or, if that is not enforceable, within 20km of the business premises etc). Likewise, a well drafted “cascading” Restraint Clause will contain alternative restraint periods (eg during the term of employment and 12 months after the end of employment or, if that is not enforceable, 6 months after the end of employment etc).

To protect its business goodwill and legitimate business interests, an employer should ensure that its employment agreements are up to date and carefully drafted to cater for each particular employee’s role and circumstances in the business.

Wisewould Mahony’s Business & Commercial Services team has extensive experience with drafting contracts of employment and providing advice to both employers and employees with respect to Restraint Clauses and disputes resulting from a potential breach of such clauses.