Restraint of Trade Clauses in Employment Contracts

Senior TGB workplace lawyer Andrew Clare outlines some of the key concerns in relation to restraint on trade clauses in employment contracts.

In my experience there has been an increase in employers exercising their rights to enforce restrain clauses in employment contracts over the past 5 – 6 years.  This could be attributed to the downturn in the economy as when things are good employers tend to be less concerned about departing employees potentially damaging their business by breaching restraint clauses in relation to the solicitation of clients and customers.  That is, they may be more prepared to tolerate breaches of restraint clauses when business is good and the loss of customers or clients will not be as detrimental as might otherwise be the case.  However in a downturn, employers tend to be more prepared to enforce their rights in relation to restraint clauses as the loss of clients or customers can have a more significant effect on their business.

Enforcing a restraint clause:

Restraint clauses in employment contracts have been notoriously difficult to enforce.  A restraint clause starts out as void (ie bad). The onus is on an employer to prove that their restraint clause should be upheld.  This is due to public policy considerations in that it is seen as a bad thing to prevent people from using their skills and knowledge (by restraining them) to contribute to the community as a whole. The well-established test as to whether a restraint clause is enforceable is that it must be reasonable in all the circumstances to protect the legitimate business interests of the employer.

What is considered reasonable will very much depend on the particular circumstances.  For example a salesperson that has significant contact with clients or customers will be more likely to be subject to an enforceable restraint than say an employee who works in an administrative role. This is because they would have the opportunity to build up a strong relationship with customers or clients and therefore potentially have greater influence over them.  Also the nature of the business may affect the enforceability of a restraint clause.

When are restraint clauses important?

Employers in considering whether or not to include a restraint clause in their contracts of employment need to consider what they are attempting to achieve.  One size does not necessarily fit all.  For example, a senior manager type employee with significant contact with and influence over customers and clients will probably require a more significant restraint than other employees.  Employers need to also carefully consider what business interests they are attempting to protect.  A classic trap for employers is that they attempt to have restraints which are excessive either as to the period of the restraint or the area.  If a restraint is found to be excessive it will not be enforceable even if a Court considers that a lesser restraint would be enforceable. Ultimately, a Court will not “fix up” a restraint clause (note however that New South Wales has specific legislation in relation to restraint clauses which allows, in some circumstances for Courts to amend a restraint clause to make it enforceable).

What is the function of a ‘step clause’?

As a result of restraint clauses being notoriously difficult to enforce lawyers have devised “step” clauses, that is where there are a number of alternatives in relation to, for example, periods of restraint (e.g., 12 months, 6 months or 3 months) and areas (e.g., the World, Australia, South Australia).  However, step clauses can also have their problems if they have too many permutations.  Further they can obviously lead to disputes between an employer and employee post-employment. An employer will usually maintain that the greater restraint will be enforceable whereas an employee will usually maintain that only the lesser restraint is enforceable.

Concluding advice:

I therefore encourage my employer clients to think carefully about their restraints and if possible select one period and/or area which would be seen as clearly reasonable in the circumstances to protect their legitimate business interests.

For further information or assistance in relation to restraint clauses or any other workplace law issue, contact your nearest TGB office.