Restraint of Trade Clauses and Their Purpose

Restraint of trade clauses are typically included in an employment contract with the purpose of the employer protecting their business interests. These clauses assist in the protection of areas such as intellectual property, client information, trade secrets and other specialised business knowledge.

This is done by restricting the employee’s freedom to undertake certain activities during or after their employment for a period of time as specified by the contract. Activities that can be restricted include the disclosure of confidential information, gaining employment with and working for competing businesses and preventing the poaching of employees.

Types of Restraint of Trade Clauses:

Restraint of trade clauses come in multiple forms including:

Confidentiality Clauses: Confidentiality clauses act by preventing an employee from sharing, disclosing or utilising information about their former employer or their former employers’ clients, particularly in competition.

Non-poaching restraints: Non-poaching restraints prevent a former employee from influencing an employer’s ongoing employee and/or contractors to leave the business and work in competition.

Non-compete Clauses: A non-compete clause prevents and restricts a former employee from establishing, or gaining employment with, a competing business.

Non-solicitation clauses: Like poaching restraints, non-solicitation clauses restrict a former employee’s ability to solicit clients from their former employer’s business.

Directed Gardening Leave: Gardening leave is leave directed by your employer to be taken during your notice period. This is used by employers to protect confidential business information by restricting an employee’s access to sensitive information in the time leading up to their departure. While the employee is required to be contactable during this period, they will not attend work or perform their usual work duties unless requested to do so by the employer.

Can a Restraint of Trade Clause be enforced?

Whether a restraint of trade clause can be enforced generally depends on the specific circumstances of your case and whether the employer has a legitimate interest in protecting their business and that the restraint is reasonable for both parties.

Legitimate Interest

These clauses are only enforceable if the former employer has a legitimate interest in protecting their business. Reasons such as minimising business competition are not generally considered legitimate however restraints enacted to protect goodwill and trade secrets may suffice. Other circumstances where the Courts have determined an employer to have a legitimate interest include where an employee has access to confidential information which could be used in competition with or to the detriment of the former employer and where the employee poses a legitimate threat of poaching employees and/or clients for their own benefit.

Reasonable

For enforcement to be valid it must then be established that the scope of the restraint is reasonable in nature for both the employer and the employee. This includes consideration of the period in which the restraint applies for, the geographical restrictions of the restraint and the activities prevented. Other factors that may be taken into consideration in determining whether a restraint is reasonable include the extent of activities the employee is restricted from performing and the potential for trade secrets or specialised business knowledge to be applied in a competing business. If it is found that the restraint is not reasonable then the restraint will be considered invalid.

What do the Courts deem as ‘Reasonable’?

As previously mentioned, the Courts determine the threshold of what is reasonable on a case-by-case basis taking into consideration factors including time and geographical range of the restraint. Lord Wilberforce said in Stenhouse Australia Ltd v Phillips [1974] AC 391 that an opinion as to whether the length of a restraint is reasonable “can seldom be precise and can only be formed on a broad and common-sense view”.

In the case of OAMPS Insurance Brokers Ltd v Hanna [2010] NSWCA 781, the Court considered the extent of the period and range of geographic area that was reasonable. Mr. Hanna had worked for OAMPS for 2 decades before resigning and moving to another insurance broker firm. Mr. Hanna was subject to a cascading restraint clause with 9 restraints ranging from 15 months across Australia, down to 12 months in the Sydney metropolitan area.

The Court held Mr. Hanna was restrained from dealing with 17 clients and a period of 12 months was reasonable as it ensured OAMPS Insurance Brokers had the opportunity to renew the insurance policies those clients held.

On this judgment it would appear that a restraint is found to be reasonable where an employer has the opportunity to extend and secure their relationship with a client.

Furthermore, it is necessary to consider the specific circumstances and nature of the employee position in question. Brereton J stated in Cactus Imaging Pty Ltd v Peters (2006) NSWLR that a reasonable period for a reasonably competent replacement employee to show their effectiveness and establish rapport with clients is dependent on the nature of the client’s interaction with that employee.

In summary, for a party to establish that a restraint of trade clause is valid the Court will consider whether the clause is protecting a legitimate interest and that it is reasonably necessary in protecting that interest. Only then will the clause be enforceable.

If you would like assistance in Restraint of Trade Clauses or other employment matters contact one of our experienced employment lawyers at (02) 4929 7002, email us or complete an enquiry form.