August 7, 2016

Restraint of Trade – Employment Contracts

RESTRAINT OF TRADE

Restraint of trade clauses in employment contracts are critical to protecting legitimate business interests of an employer after an employee is terminated.

For many businesses, the enforceability of a restraint of trade clause in an employment contract is extremely significant, particularly where an employee moves to a competitor or starts their own business. Restraint of trade clauses are enforceable to the extent that the restraint is reasonably necessary to protect the legitimate business interests of the employer, and this is assessed on a case by case basis.

Valid Employment Contract

In order to enforce a restraint of trade clause, the employment contract itself must be valid and enforceable. It is not unusual for the scope of an employee’s role to change throughout the course of their employment with an employer. A failure to ensure that the employment contract accurately reflects the relationship between the employer and the employee at the time of termination can result in repudiation of the contract, as seen in Fishlock v The Campaign Palace Pty Ltd [2013] NSWSC 531 (the Fishlock case).

The Fishlock Case

In the Fishlock case, the NSW Supreme Court found that an advertising agency was unable to enforce an otherwise valid restraint of trade clause against a former employee, Mr Fishlock.

During Mr Fishlock’s employment at The Campaign Palace, the employer unilaterally changed Mr Fishlock’s duties and responsibilities. The Court held that as a result of the change in duties and responsibilities, The Campaign Palace had repudiated Mr Fishlock’s employment contract (and consequently the restraint of trade clause). Accordingly, The Campaign Palace was unable to enforce the employment contract, including the restraint of trade clause.

Employers must regularly review the employment contracts of their employees, and ensure that where there is any substantial change in an employee’s duties and responsibilities that these are recorded in writing in a new or amended employment contract.

Reasonable Restraint

Restraint of trade clauses are prima facie void as they are contrary to public policy, however they will be upheld by the Court where the restraint is reasonable, and protects a legitimate interest of the employer’s business.

In assessing whether a restraint of trade clause is fair and reasonable, the Court may have regard to a number of factors including:

  • the employer’s interests capable of protection
  • the nature of the work, and the employee’s seniority in the employer’s business, including whether the position involved exposure to confidential information
  • the benefit to the employer and the employee of agreeing to the restraint
  • the scope and duration of the restraint, including the time and area included in the restraint
  • whether the restraint of trade provides no more than is adequate to protect the employer’s legitimate business interest

Where a restraint of trade purports to do more than is reasonable to protect an employer’s legitimate business interest the Court is likely to find that the clause is void and unenforceable. In New South Wales however, the Restraints of Trade Act 1976 allows the Court to read down an otherwise unreasonable clause so that it is reasonable and enforceable.

Often cascading restraint of trade clauses are included in employment contracts. Cascading restraint clauses provide alternative restraints in circumstances where a restraint is held to be unreasonable and unenforceable. The unreasonable restraint can then be severed and the employer can enforce the remaining restraints.

For Employers

To ensure that your legitimate business interests are protected and that any restraint of trade clauses are effective and enforceable, it is important that:

  • your employees’ employment contract is valid and effective, and that it is reviewed regularly and updated to reflect the employee’s current role
  • the restraint of trade clause in the employment contract is reasonable – the period of the restraint should be commensurate with the employee’s position
  • the restraint of trade clause in the employment contract does no more than is reasonable to protect your legitimate business interests