Restraint of trade

Are you thinking of leaving your job or have you been offered another? Then you’d be wise to get legal advice on the enforceability of any Restraint of Trade clause in your employment contract.

What are restraint of trade clauses? 

Restraint of trade clauses are provisions found in an employment agreement that operate to restrict a former employee’s conduct once their employment has ended.

Restraint of trade clauses are used by employers in order to protect things such as client relationships, trade secrets and business goodwill by preventing the former employee from using the knowledge and connections gained throughout their employment in a way that will directly compete with their former employer once they leave.

Are they enforceable?

Courts only enforce restraint of trade clauses when an employer can demonstrate that  it has a genuine interest to protect and that the restrictions in the clause are “reasonably” necessary to protect that interest.

This reflects the broad policy concerns around employers having a power to restrict former employees from taking work in their chosen profession and the fact that at common law such clauses are presumed to be void unless the clause is reasonably in the interests of both the parties and the public in general.

In determining whether a clause is reasonable courts will look to the particular interest an employer claims to be protecting by invoking the clause and the way in which the clause is said to protect that interest. Restraint of trade clauses that go beyond what is reasonably necessary to protect the interests of the employer will be unenforceable.

In particular, a court will consider the time period and geographic area of the restraint of trade. The restraint should be no longer and cover no more area than necessary to protect the employer’s interest. Courts are particularly unlikely to enforce a restraint of trade clause that has the practical effect of preventing the former employee from working at all in their chosen field.

Recent Cases on Restraint of Trade

Recent Cases on Restraint of Trade

Just Group Ltd v Peck [2016] VSC 614

This case involved the CFO of the fashion retailer Just Group Ltd leaving to take up a position at its rival, Cotton On. Ms Nicole Peck tendered her resignation from the Just Group on the 2 May last year to take effect on 2 June. She then proceeded to inform the Just Group that she intended to begin employment at Cotton On as of  6 June; Just Group immediately commenced proceedings in the Victorian Supreme Court on the basis that the restraint of trade clauses in her contract prohibited her from doing so.

Justice McDonald held that the clauses were unreasonable due to their broad nature which was excessive in trying to protect the business interests of Just Group.  This was because they attempted to prevent Ms Peck from engaging in any employment, even where the confidential information obtained during the course of her previous employment would be irrelevant to a new employer and listed 50 other companies that she was prohibited from working withg. Furthermore, the restraint periods were deemed excessive in that they ranged from a period of 12 to 24 months, yet Ms Peck’s employment could be terminated with one months’ notice.

Justice McDonald found that there was  no restraint of trade in Ms Peck’s contract that could be held enforceable and she was allowed to take up employment with Cotton On.

Advice for employees

Although it may feel premature to be thinking about leaving a new job before you have even signed the contract, you should be sure to read and understand any restraint of trade clause included in your employment agreement.

If the clause is subsequently found to be enforceable, there may be significant restrictions on your ability to move into a new job or to start your own business when you leave.

Advice for employers

It will often not be enough to include a ‘standard’ restraint of trade clause in your employment agreements. Businesses need to consider the particular interests they wish to protect through a restraint of trade clause and use a clause that is directed to that interest.

Such clauses need to be tailored to the circumstances of your business, the interests you seek to protect and the circumstances of your employees. An employer should be able to argue how the particular restraint they seek to include in an agreement serves to protect.

Employers can also maximise the likelihood that their restraint of trade will be enforceable by using a “cascading” or “ladder restraint” clause which provides a number of alternatives from most onerous to least where each can be severed from the agreement in the event it is found unreasonable with no effect on the rest of the agreement.

At marshalls+dent+wilmoth we provide legal advice  as to any issues you might have with any Restraint of Trade clauses in your employment contract and can assist you in negotiating the best employment contract possible for your next job.

As they say knowledge is power, so get in touch with us today on (03) 9670 5000
For any enquiries, please complete the form below.