Restraint of Trade
Restraint of trade clauses are commonly found in employment
agreements. These clauses are used by employers in an attempt
to protect the employer's business interests.
Restraint of Trade clauses
Restraint of trade clauses are commonly found in employment
agreements. These clauses are used by employers in an attempt to
protect the employer's business interests.
The effect of a restraint clause being upheld against an
employee is that the employee is restrained from doing certain
things, which may include soliciting the company's clients once
employment has ended or not working for another employer during
employment.
Restraint of trade clauses attempt to regulate an employee's
conduct while still engaged in the employment relationship or a
former employee's conduct once the employment relationship has
ended.
Common Restraint of Trade Provisions
Common restraint of trade clauses may include:
a) a clause which restrains an employee from engaging in work
for a competitor of a former employer in a particular geographic
area and for a particular length of time;
b) A clause which restrains a former employee from disclosing
confidential information after the employment relationship has
ended;
c) A clause restricting an employee from poaching any employee
to work in competition with the employer; and
d) A clause restricting an employee from approaching or
soliciting clients for a period of time and often in a particular
geographic area after the employment relationship has ended.
Before signing your employment agreement, you should make sure
that you read and understand your agreement, particularly any
restraint of trade clauses that are part of your employment
agreement. This is because a restraint of trade clause that
is upheld may have consequences for your future employment or even
your ability to commence your own business.
If you would like assistance with understanding a restraint of
trade clause in your employment agreement, please contact Maurice
Blackburn on 1800 810 856 and ask for an appointment with a lawyer
in the Employment and Industrial Law section.
Gardening leave
In some cases your employer may direct you not to attend the
workplace during the notice period if you have resigned or had your
employment terminated. You might be directed to do little or
no work for that period. This is what is known as 'gardening
leave'. The length of gardening leave is often the same as a
post employment restraint of trade.
During any period of gardening leave you are paid your normal
contractual entitlements you would be paid if you were required to
perform normal duties. Whilst on gardening leave you
remain bound by your contract including any provisions in the
contract regarding other employment.
If your employer directs you not to attend work and places you
on gardening
leave you can contact Maurice Blackburn on 1800 810 856 for
advice on your rights and entitlements.
Is a restraint of trade enforceable?
Restraint of trade clauses will be enforceable to the extent
reasonably necessary to protect the legitimate business interests
of the employer. The legitimate business interests of the
employer refer to protecting the income of the business. The
employer or company seeking to enforce the restraint has the onus
of showing that it goes no further than what is reasonably
necessary to protect the employer or businesses legitimate business
interests. If a court finds that a restraint goes beyond what
is reasonable to protect the legitimate business interests of an
employer, then the restraint of trade clause will not be enforced
against an employee.
Whether a restraint of trade clause is enforceable depends on a
number of factors.In summary, at general law, the courts will
consider:
a) the interests of the employer capable of protection (this
includes a consideration of the nature, locations and goodwill of
the employer's business and the location of the employer's
clients);
b) the nature of the work of the employee being restrained,
including the employee's seniority and the nature of the employee's
role and duties including the level of contact the employee has
with clients;
c) the scope and duration of the restraint (including the time
and area proposed to be covered by the restraint) - in a recent
decision, a clause which restrained, for 12 months after
termination of employment, two senior employees (a Chief Executive
and Chief Technology Officer) from competing with the employer's
business or soliciting clients after their employment ended was
valid and the employees were ordered to pay damages for the loss
suffered by the Company flowing from their breach of the restraint
of trade clause (Ross an Anor v ICETV [2010] NSWCA 272);
d) Benefits to the parties from entering the restraint; and
e) the bargaining position of the parties.
In New South Wales, the Restraints of Trade Act 1976 (NSW)
applies to allow the court to read down a restraint of trade clause
so that it is reasonable. This means that the NSW courts can
modify the restraint of trade clause in a contract to what a court
believes is a reasonable restraint.
Recently there has been a trend where employers seek to include
cascading restraint of trade clauses in contracts. Cascading
clauses contain a series of restraints that overlap. By doing
this any restraints that are held to be unreasonable and
unenforceable can be severed and the employer can enforce the
remaining restraints. Recently, a cascading restraint of
contract clause, which contained nine separate restraints, was
upheld with the New South Wales Court of Appeal finding that the
minimum restraint period of 12 months throughout Australia was
reasonable to protect the employer's legitimate business interests
(Hanna v Oamps Insurance Brokers Ltd [2010] NSWCA 267).
If your employer seeks to enforce or threatens to enforce a
restraint of trade you can contact Maurice Blackburn Lawyers for
advice on 1800 810 856.
How are restraints of trade enforced?
The first step that employers often take when they are
considering enforcing a restraint of trade against an employee is
to issue a letter of demand to the employee. Sometimes, the
employer chooses to copy this letter of demand to the employee's
new employer.
If an employer believes there is imminent harm to its business
from the breach of a restraint of trade, the employer may lodge an
application in the Supreme Court seeking an interlocutory
injunction, pending a full trial of the matter. To be
successful in obtaining an interlocutory injunction against an
employee, the employer must show that there are reasonable
prospects for success against the employee (that is, that there is
a serious question to be tried) and that the balance of convenience
favours the granting of an injunction. Recent case law in the
Western Australia Supreme Court highlighted that the most important
consideration in interlocutory relief for a purported breach of a
restraint is that there is a risk of imminent harm to the company.
The fact that a company may have lost business as a result of
a purported breach of an employee's contractual restraint may not
be sufficient for interlocutory relief to be granted as the loss
has already occurred. The employer would need to show some
risk of future losses.
If an injunction is granted, the court will list the matter for
a full trial. At a full trial, the criteria mentioned above
will be considered and, if the restraint is found to be
enforceable, the court will assess the damages flowing from any
breach of the restraint by an employee.
If you are issued with either a letter of demand or a court
application to enforce a restraint, you can contact Maurice
Blackburn on 1800 810 856 to request assistance.