How can employers make restraints of trade enforceable? The court’s decision in the 2016 case set out below suggests that there are three golden rules to follow.
In Just Group Ltd v Peck [2016] VSC 614, McDonald J held that a restraint of trade clause in a senior executive’s contract was void because it was unreasonably broad.
Ms Peck Gets a New Job
Ms Peck was employed as the Chief Financial Officer of Just Group Ltd. Just Group operates businesses like Just Jeans and Jay Jays. Her employment contract had a restraint of trade clause in it.
Five months into her employment with Just Group, she started negotiating with Cotton On Group Services Pty Ltd to become its General Manager of Financial and Treasury Services. Cotton On Group runs businesses like Cotton On, Typo and Supre.
Ms Peck resigned from Just Group and gave notice that she was proposing to commence employment with Cotton On Group. Just Group sought to enforce the restraint of trade clause to prevent Ms Peck from working for Cotton On Group.
Ms Peck Challenges the Restraints of Trade
The restraint prevented Ms Peck from ‘carrying on’, or working for any company carrying on, any activity which was ‘similar to any part of the specialty brand and fashion business’ carried on by Just Group. The court said this clause was too broad.
As McDonald J explained, the wording of the clause suggested that Ms Peck was not allowed to be employed by any fashion retailer in any capacity whatsoever. It would have prohibited Ms Peck from stacking shelves at Sportsgirl as much as it would have prohibited her from being the Chief Financial Officer at Cotton On.
How Should the Clause have Been Drafted?
The clause should have referred specifically to activities with other fashion companies that may give Ms Peck an opportunity to use Just Group’s confidential information. If the clause was drafted this way, it’s likely it would have been valid.
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McDonald J’s decision has three main lessons for employers.
1. Be wary of standard cascading restraint clauses
The law on restraint of trade clauses is continually evolving. In recent times, employers use ‘cascading’ restraint clauses to give them the flexibility to enforce a varying degree of restraint period (i.e. 12, 6 or 3 months) for varying restraint areas. This depends on an employee’s period of service and their level of access to confidential information. For example, a 12 month restraint within Australia may be appropriate for an executive employee who had been with the company for many years and had a high level of access to confidential information. On the other hand, this restraint would be totally inappropriate for a fairly new employee with very little access to confidential information.
However, the decision in Ms Peck’s case suggests that a standard ‘cascading’ clause is not enough by itself. Instead, the clause must also set out what activities are being restrained, which will vary from role to role. This means that it’s more important than ever for employers to draft their contracts well and with careful thought to the role the contract is for.
In Ms Peck’s case, the court decided that the clause in her contract was not tailored to suit her role in the company as CFO. Because of this, it was found to be too broad (and therefore unenforceable). If an employer tries to draft a clause to cover every single employee in the business, it is unsurprising that the court will find the clause to be unreasonably broad in its application to a particular employee.
2. Keep the reason for the restraint of trade in mind
Most restraint of trade clauses aim to stop employers misusing confidential information and ‘knowhow’. For these situations, the restraint should apply only to future employers or businesses that would benefit from such confidential information.
3. Remember that restraints of trade are tested against the contract, not the employee’s actions
The enforceability of a restraint is tested with reference to the meaning of the words used in the employment contract. Obviously, Just Group would not have worried about enforcing the restraint if Ms Peck had decided to get a job working at the checkout at Uniqlo.
However, as McDonald J explained:
‘the reasonableness of a restraint of trade must be tested, not by reference to what the parties have actually done or intend to do, but what the restraint entitles or requires the parties to do’.
If the words used can apply to jobs that shouldn’t be covered by the restraint, the restraints of trade may well be unenforceable. This is the case even if an employer would never invoke the restraint if an employee were to take up such a job. In other words, because the clause could have applied equally to Ms Peck’s employment at a fashion checkout as it did to a role as CFO, it doesn’t matter that Just Group would never have taken action against her for working at a checkout. The clause is too broad, and the restraint unenforceable.
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The information contained in this post is current at the date of editing – 4 April 2025.
