Employer demands the enforcement of a restraint of trade clause

30 Jul Employer demands the enforcement of a restraint of trade clause

Background 

Our client was a manager at a well know supplier of electronic products. Our client’s employment contract consisted of a restraint of trade clause. Once our client resigned from her role, her former employer engaged legal representation and issued a cease and desist letter. Our client’s former employer demanded that she must resign immediately from her new position and to comply with the restraint of trade clause.

Client’s problem

Our client engaged our services to respond to the alleged restraint being enforced against her by her former employer and to provide her advice in relation to the enforceability of the restraint.

Our Advice and Action

We reviewed our client’s employment contract and advised her that the restraint of trade clause may not be enforced by the Court, due to the following reasons:

• Restraint went further than necessary to protect the legitimate interests of the business;
• Geographic restraint was unreasonable;
• Duration of the restraint was unreasonable;
• Our client was not a member of an executive team;
• Our client did not receive any remuneration during the restraint period; and
• Our client’s salary was deemed as reasonable.

With respect to the above, we responded to the cease and desist letter and outlined that in our view the restraint of trade clause will not be enforced by the Courts.

Due to the strength of our arguments in our response letter, our client’s former employer decided not to press the restraint of trade clause. Accordingly, we prevented our client’s former employer from litigating the matter due to providing a breakdown of why the restraint of trade will not be enforced by the Court. Accordingly our client did not resign from her new role with her new employer.

Law

Generally a restraint of trade clause is not enforced unless it can be proven to the Court that it is reasonable. Accordingly the onus is on the employer to prove that the restraint of trade is reasonable. The Court may consider the nature of the business, a comparison between the former and current positions of the employee, review of the client/customer base, the duration of the restraint and the loss of business to a competitor, amongst other matters.

If the employment contract is governed by the laws of New South Wales, the Restraint of Trade Act 1976 (“Act”) will also apply. In New South Wales, instead of being presumed to be void and unenforceable unless it is reasonable, a restraint of trade clause is presumed to be valid. In accordance to the Act, the Court can read down the restraint of trade clause to ensure its effect is deemed as reasonable, hence the law is geared to be in favour of employers in comparison to all other states and territories in Australia.

The enforceability of restraint of trade clauses are subject to the particular facts and circumstances of each case. If a restraint of trade clause is enforceable, a former employee must comply or the former employer may be entitled to damages and an injunction preventing a former employee from committing further breaches. 

Should you require assistance with your restraint of trade matter, please give us a
call for a free assessment.  Our contact details are:

Berrigan Doube Lawyers

Melbourne: (03) 9600 2577
Sydney: (02) 9251 6699
Brisbane: (07) 3229 0707