Can Restraint of Trade Clauses be Enforced?

The start of a new year can often lead to the departure of employees and the hiring of new employees. With the coming and going of employees, employers need to ensure they protect their business interests and goodwill. A restraint of trade clause (“restraint”) offers such protection. Usually found in employment contracts or enterprise agreements, the main purpose of a restraint is to protect the employer’s legitimate business interests and goodwill. A restraint will also attempt to prevent an employee from using knowledge gained, and contacts and relationships developed during the employment relationship, to their advantage and the business’s disadvantage, once the employment relationship ends.

I’m often asked whether a restraint is really “worth the paper it’s written on”. The answer is yes, but the key is to ensure your restraint is drafted correctly in the first place and that it is a reasonable restraint, and thereby enforceable. Here’s a snap shot of some key points to keep in mind in relation to restraints.

What is considered a reasonable restraint?

The law considers restraints to be inherently unreasonable, on grounds of public policy. The rationale behind that is that it is in the public interest for people to be free to pursue any lawful employment they choose, and therefore, because people need to be free to earn a livelihood, restraints need to be reasonable, so as not to contradict public interest and policy.

The key to a reasonable restraint is to ensure that it affords no more than adequate protection to the employer’s business interests and does not unreasonably restrain the employee from pursuing any lawful trade or employment. Factors which indicate whether a post-employment restraint is reasonable may include;

• the length of time for which the restraint applies;
• the scope of the geographical area to which the restraint applies;
• the range of activities to which the restraint applies; and
• the scope of work available in the specific industry to which the restraint applies.

The 3 general rules when enforcing a restraint of trade clause:

1. Confidential Information

If an employee gains access to your confidential information as part of their employment with you, you can enforce a restraint to prevent them from using that information after they leave your employment. Otherwise, this would give the employee or their new employer an unfair head start in competing in the market place.

2. An employee’s connection with your clients or suppliers

If an employee develops a connection with your clients and/or suppliers as part of their employment, which is inevitable in some roles where there is a high degree of relationship building with the clients and/or suppliers, you can enforce a restraint to prevent the employee from using that connection or influence over customers to solicit those clients or their business away from you. This type of restraint is often referred to as a non-solicitation clause.

3. An employee’s connection with your employees

If an employee develops a connection with your employees in the course of their employment, you can enforce a restraint to prevent them from using that influence to divert the employees away from your business.

How can you improve the enforceability of restraint clauses?

Because restraints are considered to be inherently unreasonable, the Courts are reluctant to enforce them, so where a restraint is considered by the Court to be unreasonable, that restraint will be struck out by the Court, and rendered unenforceable. That is because the Court will not itself substitute restraint provisions that is considers to be reasonable, in the place of those it has just struck down, with the result that the ex-employee will be free to utilise the employer’s confidential information, or contact the employer’s clients or other employees.

The way to improve the enforceability of a restraint, and thereby minimise the risk of it being struck out, is by using a “cascading clause”. A cascading clause is a restraint that provides for a number of different restraints with different scopes, for example:

Restraining an employee for:

a) 3 months after termination of employment;
b) 6 months after termination of employment;
c) 12 months after termination of employment.

One can also restrain the employee for cascading areas:

a) Within certain postal code areas;
b) Within the greater Perth metro area;
c) Within the State of WA.

Effectively there are a number of restraints in the above clause operating simultaneously. If one of the restraints is considered unreasonable or unenforceable by the Court, it can be severed from the other restraints which remain operative and enforceable. The Court is given a number of alternatives and period/area combinations it can deem reasonable, and choose from, whereas if there was only one of each, and one or both were considered to be unreasonable, the restraint would be struck out as unreasonable, and fail altogether. It is therefore strongly recommended that restraints are drafted in this manner to ensure their enforceability and therefore, continued protection for an employer’s business.

To find out more, call Julie Grant from Capital Legal on 08 9364 5444, email Julie@capital-legal.com.au or speak with your Resonate Consultant.

The post Can Restraint of Trade Clauses be Enforced? appeared first on Resonate Business Consulting.