What is a Restraint of Trade clause?
Generally speaking, Restraint of Trade clauses aim to restrain a departing worker for a specific period of time from working for a competitor business, establishing their own competitor business, or poaching their previous employer's customers.
Restraint of Trade clauses play an important role in business competition and security. They are particularly prevalent in industries in which good customer relationships are integral to the success of the business, such as professional service firms.
Are they enforceable?
Understandably, Courts are often hesitant to enforce Restraint of Trade clauses, given the significant public benefit of free trade and open markets, as well as the obvious needs of workers to earn an income so as to support themselves and their families.
What this means is that Courts will only enforce a Restraint of Trade clause if it is reasonably necessary to protect the legitimate business interests of the business. In other words, if a business wants to enforce a Restraint of Trade clause against a departing worker in a Court, it must convince the Court that without the clause, the business will likely incur some loss or suffer some detriment. Understandably, this can be difficult.
In the event a Court finds that the Restraint of Trade clause is too onerous or unreasonable, it will usually find the entire clause to be void. To counteract this, Restraint of Trade clauses are now often drafted with a series of 'cascading' provisions. Cascading provisions will cover a variety of restraint periods (for example, 9 months, 6 months or 3 months) and geographic regions (Australia, Victoria or Melbourne). Such cascading provisions allow the Court latitude as to what is a reasonable restraint, given the particular circumstances of the matter.
Of course, the most important (and most difficult) consideration for businesses and workers alike when making and agreeing to such clauses is assessing what is a reasonable restraint.
What is reasonable?
Australian Courts have made a variety of decisions regarding what is reasonable when it comes to Restraint of Trade clauses. For example, in a recent New South Wales decision, a departing Managing Director of a large business was restrained from working for a competitor business for three years, anywhere in Australia. In this instance, the Court's decision seemed to hinge on the fact that the Managing Director had worked with the previous employer for over 20 years in a variety of very senior roles. Accordingly, the Court agreed that his employment with a direct competitor could be detrimental to the previous employer, given his knowledge of its innermost workings.
On the other hand, the Supreme Court of Victoria recently threw out an application to prevent the previous Chief Financial Officer of Solomon Lew's Just Group from taking up the same position with a direct competitor, Cotton On. In this instance, the Court found that the Restraint of Trade clause in the Chief Financial Officer's contract of employment was too broad and therefore unreasonable, as it aimed to prevent the employee from seeking employment with upwards of 50 different businesses, many of which were not even competitors of Just Group. Accordingly, the Court found the entire clause to be void, allowing the worker to commence employment with the competitor business.
What is best for my business?
As the above examples illustrate, what is reasonable will depend on the particular circumstances of the business and the worker, as well as the actual wording of the clause itself.
Putting the necessary care and diligence into the drafting of a Restraint of Trade clause will increase the likelihood that it is found to be enforceable, thereby adding a much needed extra layer of protection to your business.
How Sharrock Pitman Legal can assist?
Given the risk that a Restraint of Trade clause could be found to be unenforceable, it is vitally important that such clauses are professionally drafted, taking into consideration a business's specific needs, as well as the particular circumstances of the worker, their position and skills.
Employers should seek legal advice before providing a departing employee with a Restraint of Trade clause. For further assistance, please feel free to contact one of our Workplace Relations Law team on 1300 205 506 or email employment@sharrockpitman.com.au.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
Liability limited by a scheme approved under Professional Standards Legislation.
Mitchell is the Managing Principal of our law practice.
He is an Accredited Specialist in Commercial Law (accredited by the Law Institute of Victoria). He also deals with areas of Employment Law, Wills & Estate Planning and Probate. For further information, contact Mitchell on his direct line (03) 8561 3318.
