A short answer: Restraint of trade clauses are enforceable to the extent that the restraint is reasonably necessary to protect the legitimate business interests of the employer. This is assessed on a case by case basis.
What is a Restraint of Trade Clause in an Employment Contract?
A restraint of trade in an employment contract is a clause designed to restrict an employee’s ability to carry on trade in the future with persons other than the employer in a manner an employee might choose (see Petrofina (Great Britain) Ltd v Martin [1966] Ch 146, 180).
Restraint of trade clauses in employment contracts protect legitimate business interests of an employer. For many businesses, a restraint of trade clause in an employment contract is an important contract feature, particularly where an employee moves to a competitor or starts their own business.
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
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.
As a result, 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 to ensure that where there is any substantial change in an employee’s duties and responsibilities, these are recorded in writing in a new or amended employment contract.
Reasonable Restraint
Restraint of trade clauses are presumed invalid 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 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.
Restraint of Trade: A Note 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
