Are Restraints of Trade Enforceable?
We are often asked by both employers and employees whether restraint clauses in employment contracts are binding.
Employers often request them to be inserted into proposed employment contracts in an attempt to protect their businesses. Employees are generally concerned about how the clause may affect their ability to work in the future.
In general, restraint of trade clauses are void as they are against public policy. However, a restraint clause is enforceable if an employer can demonstrate that the restraint is no more than is necessary to protect a “legitimate business interest”.
In order to enforce a restraint clause, the onus is on the employer to persuade the Supreme Court that it has a “legitimate business interest” to protect, and that the protection sought is no more than is reasonably necessary to protect that interest.
The “legitimate business interests” that can be protected include trade secrets, confidential information, client connections, revenue, income and staff. However, these interests will always be balanced against the employee’s entitlement to continue working.
Restraint clauses often contain a “restraint area” and a “restraint period” that are cascading. This is designed to potentially allow a Court to utilise its discretion to determine what restraint is reasonable.
In New South Wales, the Supreme Court has considerable discretion to read down restraint of trade clauses, given the provisions of the Restraints of Trade Act 1976. In circumstances where a Court considers that a restraint clause is too broad - for example by covering a wider geographical area and/or for a longer period of time than is necessary - it can reconstruct the clause.
The duration of the restriction and its geographical extent is critical to enforceability. What a Court will find is reasonable will vary in each case. However, the following factors will be considered:
- the shelf life of confidential information;
- the length of time it will take the employee’s successor to establish a relationship with the clients so that the previous employee’s influence is removed.
Ultimately, whether or not the proposed restraint clause is deemed to be reasonable will depend on the circumstances at the time at which it is agreed by the parties.
If you, your family or friends wish to enquire about a similar circumstance, please email us on our "Ask Us a Question" feature or call (02) 4228 8288 to speak to one of our specialist compensation lawyers.