What is a Restraint of Trade Clause?
A restraint of trade in an employment contract refers to a clause applying typically when an employee leaves a business or company; it applies to post-employment. Essentially, it is an agreement that an employee will not do certain things against their employers’ interests for a period after their employment. As an employer, it is always a good idea to include one of these clauses to protect trade secrets and to help avoid losing business as a result of a rogue ex-employee. On the flip side, as an employee, is vital to be aware of these clauses when signing an employment contract as you may face legal obligations which can be enforced if you do not comply.
There are a variety of restraints that can be imposed upon an employee; however, they generally take one or more of the following three forms:
• A restraint from ‘poaching’ an employee or contractor of the employer
• A restraint from accepting the business of any customer of the employer with whom the employee had dealings
• A restraint from misusing confidential information gained during the provision of the service.
Enforcement of Restraints
Courts are hesitant to enforce post-employment restraint of trade clauses because they, to a degree, inhibit liberties of the employee. The employer must have a “legitimate interest” which it intends to protect with the restraint of trade clause. The most common types of interests in employment contracts include:
• Confidential information and trade secrets
• Customer connection
• Staff connection
That noted, unless they are harsh and unfair, are only agreed to due to a very strong bargaining power by the employer and if the restraints go beyond protecting legitimate interests of the business, the courts generally do consider restraints to be valid. In answering whether the restraint of trade is enforceable or not, the courts will consider the following:
• The negotiation process of the restraint clause
• The nature of the employer’s business and characteristics of the employee
• Remuneration and compensation of the employee for the restraint
• Geographical location or area of the restraint
• Duration of the restraint
What is Confidential Information?
It is well established that an employee’s access to confidential information and trade secrets may sustain the enforceability of a post-employment restraint. As the case of John Fairfax v Birt (2006) detailed however, it can be difficult to ascertain what information is confidential and what information isn’t in the workplace.
Therefore, an employer must be able to precisely identify what confidential information they wish to protect. This not only allows the employees to understand what is considered confidential information but also the Courts.
Whether information is considered confidential is dependent on various factors, including:
• Whether skill and effort were necessary to obtain the information
• Whether the information has been guarded by the employer and is not readily available to employees without considerable effort or risk
• Whether it was plainly made to the employees that such information was regarded by the employer as confidential
• Whether the usages and practices of the industry would support the notion that such information was considered confidential
• Whether the employee in question was permitted to share the information only by reason of their seniority or high responsibility within the organisation
A further requirement is that the information must be capable of being used by the employee post-termination.
Examples of confidential information include:
• The prices charged by an employer to each of their customers
• The profits margin of an employer for each sale of any particular product
• Details of an employer’s marketing and advertising strategies
• An employer’s business’ strategy, tactical plans etc.
A restraint of trade clause in an employment contract can be used to restrict an employee’s ability to take away customers from their previous employer, if the personal relationship between the employee and customer was established during their employment. The receipt of a client’s confidential information is a factor that can be used in favour of establishing a customer connection.
What Happens where Employers have Common Clients?
In many industries it is not unusual for employers to have common clients. Whether the scope of restraint of trade clauses can cover such situations is still unsettled. While some judges have suggested there is a greater need of protection where clients do not have an exclusive supplier, others have seen it unnecessary to restrain contact with clients that were common to both employers.
How does the Restraint of Trade Act operate?
The Restraint of Trade Act states that a restraint of trade clause is valid to the extent to which it is not against public policy. A court is given the power to stop a breach of a restraint of trade clause even though its terms would usually be considered so wide as to be against public policy.
The steps a court takes in resolving disputes where the Act applies include determining:
• whether the alleged breach does or will infringe the terms of the restraint
• whether the restraint of that breach would be against public policy
What Legal Remedies may Result from a Breach of Restraint of Trade?
If an employee or contractor breaches a restraint of trade in their employment agreement there are often legal repercussions they face, some resulting in heavy penalties. Further, if an employee initially does not wish to sign the clause, there are also issues to be faced and compliance to the terms can be enforced.
The extent of the legal remedies available will depend on how large and imposing the restraint of trade is on the employee, and of course, whether or not the party disputing the clause (employee) or disputing the disobedience of the clause (employer) decides to escalate the matter to court. Generally, monetary damages, profits and orders against the other party can be claimed by the successful party.
The Takeaway: Restraint of Trade Clauses Protect your Business
For employers, restraint of trade clauses can be a successful safeguard for their business if a worker-employer relationship dissolves. If you would like to protect your business, please contact our team of experienced lawyers who can draft an employment contract for you, containing a restraint of trade clause.
For professional advice when it comes to restraint of trade or any other business or employment law matters, contact Quinn Lawyers on 02 9223 9166 or submit an online enquiry.