The restraint of trade clause came about because many employers are worried that their employees will leave their business to work for a competitor, or start up a rival business and take their employees, clients and suppliers with them.

Understanding Restraints

A restraint clause is only effective once an employee leaves the business. An employer can enforce a restraint to an extent that is reasonably necessary to protect the legitimate interests of the business. Whether the extent of the restraint is reasonable will depend on each particular situation.

The facts that support the enforceability of the restraint are:

  • The position held by the employee;
  • Did the employee have access to confidential business information, i.e business plans and financial information, client, customers and supplier lists; and
  • Has the employee developed connections with clients, customers and suppliers?

The justification for the restraint of an employee against taking up employment with a competitor is not to protect the employer from competition. Its justification is that such a restraint is necessary to protect the employer from either a deliberate or an unwitting disclosure of confidential information.

When signing an employment contract you should ensure that the restraint is reasonable. With this in mind, a restraint will only be enforceable if it is targeted to the protection of your employer’s confidential information or trade secrets. The length of the restraint should depend upon the extent to which the employee has had access to such confidential information, and the importance of that confidential information to the employer’s business.

If you are an executive employee, you should be mindful of the fact that your contract can include both a restraint of trade clause and a gardening leave clause. This can operate to extend the period during which they will not be able to take work for or set up a competitor.

If your contract does not reflect what you believe has been agreed with your employer please contact us on 02 9331 0266 to discuss.

John Morrissey