Restraint of Trade Clauses: A Complete Guide for Employees
Restraint of Trade Clauses: A Complete Guide for Employees

A Complete Guide For Employees On Restraint Of Trade Clauses

What Are Clauses That Restrict Trade?

Employers frequently insert restraint-of-trade clauses in employment contracts as a strategy to safeguard their commercial interests by limiting an employee’s freedom to engage in specific activities during or after employment.

Typical constraints in employment contracts include the following examples:

  • Confidentiality provisions forbid employees from utilizing or sharing information about their previous employers.
  • Non-compete agreements forbid employees from beginning or continuing work in a profession or trade that would compete with their former employer.
  • Non-solicitation contracts forbid employees from approaching or “enticing away” previous employers’ clients or customers.
  • Non-recruitment provisions forbid an employee from hiring staff from their previous employer.

As we will see, the specific facts of each case will determine how effective and enforceable any such clauses actually are.

Trade Restrictions Are They Enforceable?

Unless the restraint is demonstrated to be reasonable, it is generally accepted that all agreements to restrain commerce are believed to be unenforceable. Therefore, even though you may have freely agreed to post-employment limits in your contract, the default position is that these will be null and void and have no bearing on anything.

This presumption is reversed in Perth, where a trade restraint is only assumed to be legal to the degree that it does not violate public policy. If it is determined that there has been a “manifest failure” by the employer to try to keep the restraint within reasonable limitations, it will be deemed against public policy.

The important thing to remember from these presumptions is that restraints will only be applied insofar as they are reasonable.

When Are Restraints Appropriate?

To establish reasonableness, two components must be proven:

  1. The constraint is being imposed with the employer’s consent, and
  2. The restriction’s reach is limited to what is ostensibly required to safeguard that legitimate interest.

What Exactly Is A Valid Interest?

Commercial interests or goodwill are typical examples of legitimate interests (the intangible assets of a business such as reputation, customer relations, and proprietary technology).

In the following cases, the courts have acknowledged the employer’s rightful interest in imposing a restraint:

  1. where a worker has access to sensitive data and could be able to use it against their former company.
  2. Whenever an employee interacts with the employer’s clients as part of their job and has the potential to leverage such contacts to lure them away.
  3. when a worker has the ability to bring in past employers’ employees as colleagues.

The courts have acknowledged that there is a legitimate interest in each of these cases that may be jeopardized and need to be safeguarded.

When determining whether any of the aforementioned scenarios apply to the employee’s circumstances, their previous position is frequently taken into account. For instance, imposing a restraint on senior employees who have access to trade secrets or have had direct contact with customers may be more appropriate.

But keep in mind that, generally speaking, an employer cannot impose a restraint of trade just to discourage former employees from competing with them or to prevent a valuable person from working for another company.

What Does A Sensible Scope Mean?

The extent of the restriction must not go beyond what is deemed to be reasonably required to safeguard the employer’s legitimate business interests.

There are three main factors that will determine whether a constraint is appropriate in its scope:

  1. The length of the restriction;
  2. The region in which it will apply;
  3. The activities that it is intended to curb.

Each of these factors will need to be weighed according to the unique circumstances of each instance. An employee may get a court order to invalidate or narrow a constraint if it is overly wide. Generally, the courts will limit the scope of the constraint such that the employer may still partially implement the restraint to the amount that it is regarded reasonably required unless there is absolutely no reasonable basis for maintaining one. A constraint is “read down” when done in this manner.

A court might decide, for instance, that a restraint that applies to the entirety of Australia is unreasonably broad since the employer’s firm only operates in Perth. The restraint may then be “read down” by the court to solely apply to Employment lawyers Perth.

Other instances when a constraint was deemed to be excessively wide are as follows:

  • where an impediment precluded employment across the board for the plastics sector. The court decided that it ought to have been restricted to the specific area of the plastics sector where the former employer worked.
  • When an employee was restricted from engaging with a group of clients, not all of whom had enough interaction with the employee to raise the possibility that they would be persuaded to leave.
  • When an employee was barred from working with a list of rival companies, the constraint was only effective in relation to those companies that genuinely competed with the employer.
  • where an employee might be fired after the first six months with just one month’s notice but would be prohibited from working for two years.
  • When the time spent avoiding the employer’s customers was longer than it would have taken a replacement employee of comparable competence to build a rapport with them.

However, in the end, it will depend on the precise circumstances of your case.

How Can Constraint Be Put Into Effect?

If an employer wants to impose a post-employment restraint, they typically ask a court for an injunction as a remedy. This is a formal court order that, if enforced, imposes restraint and forbids the employee from engaging in prohibited actions.

In most cases, an employer will also request an “interim” injunction before a formal trial. While the court considers the actual injunction request, this temporary order is in force. In actuality, rather than going to a full trial, the application for an interim injunction’s conclusion will typically be conclusive and the dispute will be resolved in line with that ruling.

Final Conclusions

Restraint of trade law agreements may severely limit your future freedoms, especially your capacity to work. In light of this, it is crucial that you have legal counsel to make sure that your rights aren’t being excessively curbed.

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