Restraints of Trade – what do I need to know?
So what are they?
Restraints of trade clauses are generally found in employment contracts and are used to safeguard relationships between employers and employees about a variety of different matters, but generally to protect the interests of the employer.
The types of restrictions found in employment contracts include the following:
- The non-solicitation of customers or employees of the former employer
- The period of time in which the former employee cannot work for a competitor
- The non-disclosure or use of confidential information or trade secrets obtained by the employee during their employment
- Where the former employee works in terms of the location
What is the general position in relation to restraints of trade?
It is commonly accepted that restraints of trade clauses in an employment contract that impose an obligation on an employee following the ending or termination of that employment are void or unenforceable. It is a matter for the employer to convince the Court that the clause is reasonable. If it is found that the restraint is unreasonable, the Court will have no choice but to strike out the restraint and find it unenforceable at law.
A restraint clause will not be void if it imposes no greater restraint than what is reasonably necessary for the protection of the legitimate business interests of the employer seeking to enforce it. The emphasis will usually be on the employer to prove that the restraint is reasonable and necessary to protect the interests of the employer.
What are common restraint clauses?
The usual restraints of trade found in employment contracts are non-competition and non-solicitation clauses.
Non-competition clauses simply attempt to prevent a former employee from working for a competitor in a particular area for a particular length of time.
Non-solicitation clauses are about preventing an employee from soliciting the former employer’s clients, customers or other employees to following them to their new role or the business.
What can I do as an employer?
An employer can seek an injunction from the Court against the former employee to limit any further breach of the restraint. The employer can also seek an order for damages against the employee or an account of profits together with costs. A useful first step is a cease and desist letter drafted as quickly as evidence of the breach comes to light.
What factors are relevant to reasonableness of the restraint?
The Court will consider a number of different matters to determine whether a restraint is reasonable in the circumstances and therefore enforceable. These include:
- The negotiation process and what was said between the parties regarding the negotiation of the restraint terms
- The period of the restraint (if the period is too long it will not be enforceable)
- The location or area of the restraint (if the area is too wide or large then it is likely to be found unenforceable on the basis that it is unreasonable)
- The characteristics of the employer’s business and whether the employee is in frequent contact with the customers/clients and whether the employee has specialised knowledge
- The certainty of terms of the restraint or otherwise
If you are an employer you should consider the following important steps:
- Ensure that all of your contracts of employment are up to date and have restraint clauses that are reasonably necessary to protect your business interests, taking into consideration when the contracts are entered into and the particular individual employee’s position
- Write to employees who have been recently terminated, particularly those who are at risk to the employer, reminding them of their post-employment obligations which survive termination.
- Take urgent steps to deal with any employees if there is any evidence of the employee breaching the restraint clauses.
- Seek urgent legal advice in relation to contacting that employee and what steps should be considered before seeking relief from a court.
If you require legal assistance in relation the above please do not hesitate to contact McLaughlins Lawyers on (07) 5591 5099 and speak to one of our litigation lawyers today.
If you would like to watch our vlog discussing aspects of restraints of trade and what you need to know click here to watch.
Author: Matt Kollrepp
Director: Ian Kennedy
Date: 2 March 2020