What are restraints of trade?
Restraints of trade are often incorporated in employment contracts to protect the employer in various ways. The most common types of employment restraints include:
- Non –disclosure clauses which protects the confidential information of an organisation;
- Non –solicitation clauses to ensure that the organisations’ customer base is not solicited;
- Non-compete clauses which puts a restriction on the employee from competing with the employer post-employment for a specific period of time.
The courts have been reluctant to enforce restraints of trade due to public policy reasons and the potential it can have on an employee’s livelihood. On that basis, the starting point is that restraints of trade are unenforceable. So, are restraints actually useful and should organisations use them more?
If restraints of trade are drafted carefully then they can be an extremely useful tool for employers and in fact be enforced to protect the interests of a business. The starting point for a restraint of trade clause is that it must be reasonable and only used to protect legitimate business interests.
So what factors should you consider?
- TIME – the length of time that the restraint is active must be considered. If the restraint extends for a long period of time it is likely that the restraint will be enforceable.
- RADIUS – restraint clauses often cover a specific radius specifically in relation to non-compete clauses. You need to ensure that the radius only extends to areas that are reasonable.
- ACTIVITIES – Post employment restraints will seek to prevent an ex-employee from joining competitors or soliciting clients. The activities that the restraints cover must be carefully considered to ensure that they are reasonably adapted to the business activities only.
You should also consider factors that are specifically related to the individual employee:
- You should assess the frequency of the former employee’s communication with clients and whether that contact is of any significance.
- You should assess whether the employee forged any connections with customers and whether those connections are of significance.
- In assessing the former employee’s connections you should also determine the length of time it would take for a new employee to forge those connections.
- Whether the former employee had access to confidential information.
- The link between business activity and customer, worker and supplier relationships.
Getting legal advice
Given the notoriously unenforceable nature of restraints your best starting point is to seek legal advice. Get in touch so JFMLAW can review the specific provisions in your employment contracts and ensure that it is enforceable and legitimately adapted to protect your organisations business interest.
John Morrissey has been a practising Sydney solicitor for 30 years, and for the past 20 a sole practitioner and the principal at JFMLAW.
His main focus employment law, advising small to medium-sized firms and their employees of their rights and obligations.
For many years he was a lecturer at UTS to students obtaining Masters in Human Resources Management with a focus on performance management and creating a culture of delivery in workplaces. John has acted for a significant number of employers, not only in developing a performance based culture in the workplace but also solving particular problems that arise relating to unfair dismissal, contract disputes, improper use of intellectual property or other property as well as enforcements of restraints of trade.
John is very happy to speak to any employer who has an issue on a free of charge basis by a phone call. Please feel free to ring John at anytime up to 6pm most days.