Restraint of trade clauses – are they worth the paper they are written on?

26 Jun Restraint of trade clauses – are they worth the paper they are written on?

Many employers try and prevent former employees from joining competitors by including non-competition and non-solicitation terms in their contract of employment.  From experience, employees sometimes believe that these restraints are anti-competitive and therefore unlawful.  However, this is not the case, and the facts and circumstances of each case will need to be carefully considered.  This article briefly outlines the relevant principles concerning restraint of trade clauses, and some “tips and tricks” for employers.

Post-employment restraints

The starting positions is that post-employment restraints are prima facie unlawful and unreasonable. That is however only the starting position.

In Australia, post-employment restraints can be held to be reasonable and enforceable if they are necessary to protect an employer’s legitimate business interest.  The major business interests of concern are usually:

1. access to confidential information (ie. will the information be confidential for the period of the restraint?); or
2. customer connections (ie. was the employee the face of the business in the eyes of the clients, and will business leave with the employee?).

If an employer can demonstrate one or both of these legitimate business interests, then the post-employment restraint might well be enforceable.

However, enforceability will depend upon whether the period of the restraint and the geographic scope of the restraint is reasonable.  The longer the period and the greater the geographic scope, the lesser the prospects of the restraint being enforceable.

Each case is different

There are many cases in which employers have been able to enforce restraints, and many where they have not been. When seeking to enforce a restraint, legal advice should be obtained to determine whether, on the basis of the evidence, there are reasonable prospects of enforcing the restraints or whether the employer will simply be incurring unnecessary legal costs by litigating.

The drafting of post-employment restraints is crucial. Certainly, in states other than New South Wales where a stricter approach is taken, if the restraint is not drafted carefully, an employer may be unable to convince the court that the restraint should be enforced, even before the evidence is considered.

For example, in the recent decision of SAI Global Property Division Pty Ltd (ACN 089 586 872) v Jones & Ors [2018] NSWSC 438 SAI Global were unable to enforce a 6 month non-competition restraint on the basis of the evidence.  However, in Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111, the Full Court of the Federal Court agreed that, on the evidence before it (ie. Mr Pearson was the face of the business he wished to compete with), a 2 year non-competition restraint was enforceable.  Again, the facts of each case will be different and a “cookie-cutter” approach to both drafting post‑employment restraints and seeking to enforce them should be avoided.

By Abraham Ash, Partner and Heloise Ormandy, Solicitor, Clayton Utz

Abraham Ash

Abraham has specialised in employment law for over twenty years and has been responsible for running a number of leading work health and safety, employment and restraint cases. He regularly appears for major corporate clients in industrial tribunals.

Abraham has extensive experience advising on and appearing  for clients regarding a broad range of contentious and non-contentious workplace relations matters. These matters include employment contract negotiation, restructures, unfair dismissal and adverse action claims, post-employment restraints and confidential information matters, workplace policies, fraud and white collar crime. Abraham’s experience and attention to detail is valued highly by his clients.

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