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Restraint of trade clauses in employment contracts

It is becoming increasingly more common for employment contracts to include post employment restraint of trade clauses.  Such clauses operate to protect a business' interests and typically prevent former employees from competing against the business.

At the heart of restraint of trade is a common law test of 'reasonableness' – whether the restraint is reasonably necessary to protect an employer's legitimate business interests. Courts look to the scope of the restriction, its time period and geographical area of operation when determining reasonableness, with courts finding such restrictions must not be wider than necessary. For example, the law will protect an employer's trade secrets, confidential information, customer connections and staff relationships.  However, the courts are unlikely to enforce a restraint clause if it simply protects an employer against mere competition or prevent a former employee from using their skills and know-how gained during their employment towards another venture.

Although most principles are drawn from common law, the Restraint of Trade Act 1976 (NSW) provides a further layer of assessment for matters heard within the New South Wales' jurisdiction. Section 4 of the Act is used to assess whether the restraint is against public policy. If the breach is contrary to public policy and considered invalid, the section allows a court to 'read down' the terms of a restraint clause to modify it (as to the time period or geographical area) until it falls within what is considered reasonable.

Whether or not your restraint of trade clause will be read as valid will ultimately turn on the facts of your case and the business context in which the restraint arises. We recommend seeking legal advice to better understand the operation of your restraint clause in light of the law.

Co Author Emily Davoren

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