Are "restraint of trade" clauses in employment contracts enforceable?

A common misconception in the business community is that restraints of trade are completely unenforceable. But if they are really unenforceable, why do lawyers keep inserting them into employment contracts?

Many people are surprised to learn that the restraint of trade in their employment contract can be enforced against them.  Although employee restraints can be difficult to enforce and the Courts have expressed the view that such restraints are inherently void, they can be upheld if the inclusion of the restraint is reasonable, and it is designed to protect the legitimate business interests of the employer.

Restraint clauses usually aim to prevent a former employee from competing with the business and from enticing the employer’s customers (and other employees) away. They are designed to prevent employees with intimate, confidential business information (such as trade secrets and customer information) from taking advantage of the employer’s trade connections for their own (or someone else’s) benefit.

When assessing whether a restraint of trade clause is reasonable in order to protect the employer’s legitimate business interests, the Court will generally look at the following factors:

  • Whether the businesses in question are in competition with one another; 

  • The interests the business is aiming to protect by enforcing the restraint clause and whether those interests warrant protection; 

  • The geographical area and duration of the restraint clause and whether these limits are reasonable in the circumstances; and

  • Whether the employee willingly entered into the restraint clause, and if so, whether the parties had equal bargaining power at the time.

A Court will not re-write an unreasonable restraint clause to make it reasonable. Employers will therefore often utilise what are known as “cascading clauses” when referring to the geographical area and duration covered by the restraint. These clauses operate to provide multiple options that can be severed from the contract if they are deemed unreasonable. In effect, a Court can pick what options from the cascading clause are reasonable in the circumstances and sever the others.

If the entire restraint of trade clause goes further than what is reasonably necessary to protect the employer’s legitimate business interests, the clause will be unenforceable.

If you believe an employee is in breach of their restraint of trade clause, or you have been accused of breaching a restraint of trade clause by a former employer, please contact a member of our employment law team to discuss your options.

John Sneddon, Partner (07) 3307 4504

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