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RESTRAINT OF TRADE CLAUSES IN EMPLOYMENT CONTRACTS

Restraint of Trade

Employers commonly use post-employment restraint of trade clauses (“Restraint of Trade Clauses”) to protect from employees soliciting the employer’s customers and retaining confidential information after having their employment with the Employer terminated.

By and large, there is no difficulty in enforcing such provisions whilst the employment relationship continues. Nevertheless, different considerations apply after the relationship has ceased.

The usual restraints which operate at the expiration of the period of employment include:

  • Restraining a former employee from working for a competitor.
  • Restraining a former employee from “soliciting” the former employer’s clients.
  • Restraining a former employee from “poaching” or “soliciting” the former employer’s employees.

The restrictions generally imposed on a former employee are the following:

  • Geographical limitations on where the former employee may work;
  • A time limitation on employment of a similar nature (possibly in conjunction with a geographical limitation), and/or
  • The non-disclosure to others of certain information and know-how acquired during the employment (possibly in conjunction with geographical and time limitations).

Validity of Restraint of Trade Clauses in Employment Contracts

The common law position with respect to Restraint of Trade Clauses in an employment contract is that such a clause is void or unenforceable unless it imposes no greater restraint than that which is reasonably necessary for the protection of the legitimate interests of the party seeking to uphold it.

In determining whether a restraint is reasonably necessary to protect the employer’s interests, a court will have to consider the following factors:

  • The nature of the “protectable” business interests to protect;
  • The nature and geographical spread of the employer’s operations;
  • The time period of the restraint’s application;
  • The extent of the geographical restraint;
  • The structure of the employer’s client base and the business goodwill;
  • The nature of the employee’s connection with the business;
  • The closeness of the relationship between the employee and the customers,
  • The characteristics of the employee, including his or her seniority, duties and possession of trade secrets and confidential information; and
  • In case of cascade clause, the independence and separation of each restraints.

The court will also compare the employer’s protectable interest with the relevant employee characteristics to evaluate whether the restraint goes beyond what is necessary to safeguard the employer’s protectable interest.

Legislation

In New South Wales, the position regarding the validity of Restraint of Trade Clauses is different from the Common Law’s position. Pursuant to s 4(1) of the Restraints of Trade Act 1976 (NSW) (”RTA”):

“A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.”

Accordingly, a restraint which is unreasonable and unnecessary for the protection of the legitimate interests of the party seeking to uphold it may still be valid under s 4(1) of the RTA.

This is a complex area of law where surrounding circumstances are of the utmost importance. Employees need to carefully consider the Restraint of Trade Clause prior to signing an employment contract and employers need to consider how to best protect their interests.

If you are an employer or an employee and would like to know more about Restraint of Trade Clauses please contact us. The content of this article is not to be taken as legal advice.