If you are an employer seeking to enforce a restraint of trade or an employee seeking to avoid a restraint of trade, then you may like to read on.
Many employment contracts contain what are broadly referred to as restraint of trade clauses. These clauses are typically incorporated into employment contracts to try and restrain an employee from subsequently entering similar employment with a competitor (or setting up in competition on their own account) in a manner which may cause detriment to the former employer after the employment relationship has come to a conclusion. The classic example would be an employee who leaves their employment taking key customers with them and thus causing the former employer financial loss. It is also worth noting that even where there is no express restraint clause within an employment contract, the law ‘implies’ certain restraints, such as not taking confidential information belonging to a former employer to be used in a new role (eg customer lists or intellectual property).
The starting point regarding the enforceability of restraints is that they are unenforceable unless the former employer can establish that it is reasonable and necessary to protect the goodwill of their business. The reasoning for this starting point is that it is in the public interest for people to be largely free to work and earn a living as they choose to do, without necessarily having to spend a large amount of time on the sidelines between jobs or having to relocate.
Restraint clauses will ordinarily set out a combination of a geographical area (typically expressed as a distance from the former employer’s premises) and a period of time (typically expressed in months). For example, a restraint may specify that an employee is restrained from engaging in similar employment for a period of 6 months within a 50km radius. As such, what is a reasonable and necessary restraint will be determined on a case by case basis and there is no blanket rule as to whether a particular restraint will be enforceable or not. For example, a restraint of 50km and 6 months for a hairdresser in a metropolitan area may be entirely unreasonable whereas a restraint of perhaps 5km or 10km for one month may be reasonable. As such, many restraint clauses are drafted in a ‘cascading’ fashion setting our maximum durations and distances and then ‘cascading’ down to minimum durations and distances.
In addition to express restraint of trade clauses, many employment contracts may also contain related clauses, such as ‘non-solicitation’ clauses (which may seek to prevent a former employee from poaching clients or colleagues and so forth) and confidentiality clauses (which may seek to prevent an employee using or discussing confidential information (particularly certain ‘trade secrets’) obtained in the course of their employment). In other words, even if a former employee is not in breach of an express restraint clause, he or she could still potentially be in breach of a related clause which may also attract the attention of the former employer.
Where a restraint is upheld as being valid, breaches of it (or a threatened breach) by a former employee could result in financial consequences. For example, the former employer may obtain an injunction from a Court (possibly with an accompanying costs order against the former employee) and potentially then obtain a Court order for compensation to be paid to the employer (again, possibly with an accompanying costs order against the former employee).
Finally, if you have read this far and think that you may need some practical advice about your individual situation then now is probably the time to get in touch.