By Nanae Yoshiwara, Senior Associate Argon Law
In today’s competitive business environment, restraint of trade clauses are common inclusions in employment contracts. These clauses aim to protect an employer's legitimate business interests by restricting an employee’s ability to engage in certain activities after leaving the company.
However, due to the inherent imbalance of power between employers and employees, the enforceability of these clauses can be a complex legal issue.
What Is a Restraint of Trade Clause?
A restraint of trade clause is designed to limit an employee’s actions after their employment ends, such as preventing them from working for competitors, soliciting clients, or poaching former colleagues. While these clauses serve an important purpose for employers, they are prima facie void under common law, as they are generally viewed as against public policy.
However, they can still be enforced if an employer proves the restraint is reasonable.
This balance between the protection of business interests and the right of employees to earn a living forms the crux of any legal dispute over the enforceability of these clauses.
Is Your Restraint of Trade Clause Reasonable?
The key legal issue that often arises with restraint of trade clauses, and post-employment restrictions in general, is whether they are reasonable. This is where many disputes occur, as the courts are tasked with determining if the scope of the restraint is justified by the employer's need to protect legitimate business interests.
What are the Types of Restraint of Trade Clauses?
Non-Compete Clauses
These prevent an employee from working for a competitor within a defined geographical area and for a set period or setting up their own competing business.
Non-Solicitation Clauses
These prohibit an employee from poaching clients or employees from their former employer.
Non-Dealing Clauses
These stop former employees from doing business with clients they had contact with during their employment.
Among these, non-compete clauses are often seen as the most restrictive and least enforceable, especially when they broadly limit an employee's ability to work in their field.
Restraint of Trade Clauses for Employees
Employees need to be aware of the potential impact of a restraint of trade clause on their future employment opportunities. Whether the restraint clause is enforceable will depend on its reasonableness. Key factors include the duration, geographic area, and scope of the restraint.
For instance, a clause that restricts an employee from working within a 100 km radius for 12 months may be enforceable if the employer can show that it is necessary to protect client relationships or confidential information.
If you are considering a new employment offer and your current contract contains a restraint of trade clause, it is essential to obtain legal advice. Our lawyers can help you navigate these complexities and determine whether the clause is enforceable or if it has the potential to limit your future career moves.
Restraint of Trade Clauses for Employers
Employers need to carefully draft restraint of trade clauses to avoid legal disputes and ensure that the clause provides adequate protection. The restraint should be no broader than necessary to protect legitimate business interests, such as confidential information, client relationships, or intellectual property.
An employment lawyer can assist employers to conduct a risk assessment prior to finalising restraint of trade clauses for employees which helps to ensure reasonability and avoid disputes in the future.
The Blue Pencil Rule
Under Australian employment law, courts can sever (or “blue pencil”) parts of an overly broad restraint clause, leaving the reasonable parts enforceable. To avoid this uncertainty, it’s critical to draft restraint clauses with cascading provisions, which offer varying degrees of restraint in terms of time, geography, and scope. This ensures that if a broader provision is deemed unenforceable, a narrower, more reasonable one might still stand.
How Can Employers Draft Enforceable Trade Clauses?
At Argon Law, we can assist in drafting clear, enforceable restraint of trade clauses that balance business needs with legal compliance.
Restraint of trade clauses are a crucial aspect of employment contracts, but their enforceability often depends on careful drafting and a clear understanding of the law. Whether you’re an employer seeking to protect your business or an employee concerned about post-employment restrictions, our team is here to help.
Contact us today for tailored advice on your employment contract and ensure your rights and interests are protected or learn more from our expert team on Employment Law.
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