Restraint of Trade Clauses


You’ve given notice and are about to start your dream job.  But can your existing employer enforce the restraint of trade clause in your employment agreement and prevent you from working with their direct competitor?
Most post employment restraints of trade are void or unenforceable unless the restraint can be justified as being reasonable. 

The general factors to consider when assessing the reasonableness of a particular restraint of trade clause include:
      (a)      the nature of the “protectable” interest that is the subject of the agreement;
      (b)       the duration, extent and geographical area encompassed by the restraint; and
      (c)      the relative bargaining power of the parties at the time of entering into the agreement and whether, as a result, it would be unconscionable to enforce the restraint. 

Generally, to be enforceable, a restraint of trade clause must satisfy the following criteria:
      (a)      the restraint must be designed as a means of protecting a valid “protectable” interest of the employer, such as confidential information, trade secrets or the goodwill of the business;

      (b)       the employee restrained by the clause must have a sufficient level of seniority, responsibility and contact with clients, and have a significant enough degree of knowledge of trade secrets and confidential information, that it would be reasonable to infer that the employee$rsquo;s use of that information outside the employer’s business would be detrimental to the employer; and
      (c)      the restraint must go no further than is necessary to protect the employer’s legitimate interests and operate for a period that is no longer than is necessary to achieve this purpose.

For example, take the case of Mr Smith.  Mr Smith’s employment contract contained a restraint clause that prevented him from working in any competing business for a period 6 months from the date of termination.  The Court ultimately found that this restraint was reasonable and it protected the legitimate interest of Mr Smith’s employer because:

      (a)      Mr Smith held a senior role with his employer as general manager and was at the core of his employers business;
      (b)       Mr Smith was aware of important strategic and operational confidential information which was of significant value to his employer; and
      (c)      His employer operated in a highly competitive market.

As Mr Smith was senior employee whose strategic and operational knowledge went to the core of his employer’s business the restraint served to protect the valid “protectable” interest of the employer.
For further information in relation to post employment restraint clauses, contact us on 8296 6222