Restraint clauses in Employment Contracts (Part 1)

What is a restraint of trade clause?

Restraint of trade clauses or, as they are sometimes referred to “non compete” clauses, seek to prohibit or restrict an outgoing employee from doing something, normally, working for a competitor of the former employer and/or contacting former clients/employees of the employer.

The restraint of trade area may cover a city, a state, the country or even the region. The restraint period is commonly expressed to be for a period of two years, one year, six months or less.

Enforceability of restraint clauses

In order for a restraint of trade clause to be enforceable at law, it needs to be reasonable.

“Reasonableness” will depend on a number of factors, however, the most important consideration is does the restraint of trade clause protect the legitimate business interests of the former employer.

Legitimate business interests

Protecting the legitimate business interests of an employer typically includes consideration of the following:

• Their clients and customers;
• Their trade secrets, confidential information and/or innovative technology;
• The employer’s sensitive financial information;
• Current employees of the company;
• Industry specific issues such as the nature of competition in that industry;
• Factors concerning the employee, such as their specialised skill, whether they are remunerated for the restraint etc;
• The relative difficulty of replacing the employee and other measures to maintain service delivery to customers or clients.

Reasonableness

Does the restraint of trade provision go beyond protecting the reasonable business interests of the employer? If this question is answered in the affirmative, then the restraint of trade clause is vulnerable to being struck down by the Courts as not unenforceable.

Reasonableness factors can include matters such as:

• The duration of time in which the restraint is intended to apply;
• The geographical area where the restraint is intended to apply;
• The industries in which the restraint seeks to enforce;
• The conduct of the employee the restraint seeks to control;
• The legitimate business interests of the employer as described above.

Are your restraints enforceable?

Does the wording of the restraint of trade seemingly seek to completely stop an outgoing employee from working in their chosen profession? If so, it is likely this restraint of trade clause may be unenforceable.

If the substantive reason for the restraint is the employer does not want that employee to work in competition with them and there is no legitimate business interest beyond this, then such a restraint clause will be vulnerable.  On the other hand, it may well be reasonable for an employer to restrain employees from taking clients or contacting clients when they leave and start working for the new employer, for a period of time.  

Care is required in the drafting of such restraint clauses, in negotiating them and in deciding whether to agree to them. Too often businesses use pro forma employment letters with boilerplate restraint clauses that are not applicable to the specific employment relationship, have not been thought through, and will likely be unreasonable.  Just as often, employees thoughtlessly sign such clauses and agree to them. 

Restraints of trade in today’s workplaces

Employment contracts and their restraints of trade should be tailored in consideration of the employee’s position, their access to employer confidential information, their level of responsibility and autonomy, the degree of trust and access to commercially valuable information and clients, and so forth. Consideration also needs to be given to tailoring restraint clauses when employees are promoted or move positions and are presented with new contract terms.

For example, an employer should not seek to restraint a cleaner as part of their employment contract. Although this person may well have indirect access to limited sensitive information, it is unlikely this person working for the competition will create a risk to the legitimate business interests of the former employer.

Recently Deputy President Colman of the Fair Work Commission in the case of Andrew Goddard v Richtek Melbourne (] Pty Ltd [2024] FWC 979 [27]) expressed the common sentiments of the Courts when considering unreasonable restraint clauses: “One wonders why such restraint of trade provisions are so commonly found in the contracts of ordinary workers and whether they really protect any legitimate business interest of the employer, or merely serve to fetter the ability of workers to ply their trade, and to reduce competition for labour and services.”

The future of restraints of trade?

Restraint of trade provisions are at present the focus of potential law reform with the formal public consultation process running from 4 April 2024 until 31 May 2024.

Have your say on restraint of trade provisions here: https://treasury.gov.au/consultation/c2024-514668

Restraint of trade provisions as we know them may undergo significant change. Some of those changes might include a complete prohibition, restricted or specific use or something in between.

Should you wish to discuss restraint of trade and how they may affect your business, or any other employment law queries you have, please contact the HHG Legal Group.

The information provided in this article is a general guide and does not constitute legal advice. It is based on our research and experience at the time of publication. Please consult our knowledgeable legal team for any specific advice relevant to your circumstances.