Restraint of Trade in Employment

Today, we look at restraint of trade in the employment context.

Many employees, including senior executive employees, have clauses in their contract of employment which purport to be a restraint of trade. Many people think restraints of trade are unenforceable. That is not the case. The case law is replete with examples of where restraint of trade clauses have been enforced. This is especially so in NSW where the Restraints of Trade Act applies.

Restraint of trade clauses come in many varied forms however the basic premise is often the same. Restraint of trade clauses seek to prevent and restrict a former employee from engaging in certain actions post the termination of employment (and during it as well). The restraint often falls into four categories:

Working for competitors.

Protection of confidential information obtained during the course of employment.

Poaching former clients or working with those clients or soliciting business away from the former employer.  

Poaching ex colleagues of the former employer.

A restraint of trade will often have a time limitation on it. This will be the period by which it is said the restraint of trade will apply. It will often have a geographic limitation (such Sydney or NSW).

Let’s demonstrate this by example. An employment contract might say that for 6 months post the termination of employment, the employee agrees that they will not work for a competitor or approach former clients of their employer with a view to taking away business from the former employer. The term competitor will often be defined so as to limit the effect of the clause. The clause might say it will apply for a cascading period of time ranging from a few months up to a few years. The clause might also say it will only apply in a certain geographic area (which is usually where you worked or had responsibility for during your employment). The limitation on the effect of the clause is important. It is designed to make a restraint of trade more enforceable. Restraint of trades and their enforcement is often dependent upon whether the restraint of trade can be said to be reasonably proportionate and necessary to protect a legitimate business interest.

The Court will often look at a restraint of trade clause and its enforceability this way:  

Whether the person who seeks to enforce the restraint has a legitimate protectable interest and secondly whether the restraint is no more than reasonably necessary for the legitimate protection of that interest.

A restraint of trade clause which simply said that an employee would never ever work for a competitor of their former employer again, forever and wherever, would be unlikely to be enforced.

The myth that restraint of trade clauses are just not enforceable and you do not have to worry about them is no longer the case.

The enforceability of a restraint of trade clause was highlighted recently in the Supreme Court of NSW[1] where two former employees of a business sought to commence employment with what was asserted to be a competitor. This was said to be contrary to a restraint of trade clause in each contract of employment. In a lengthy judgment, the Court was prepared to give judgment enforcing the restraint of trade clause and other ancillary matters arising from the contract of employment.

What this case and countless others demonstrate is that in appropriate circumstances restraints of trade can be enforced. They need to be taken seriously and appropriate advice taken as early as possible. Do not just assume a restrain of trade will have no impact upon you.

AEN Legal are specialists in employment law recognised by the Law Society of NSW. If you have questions about restraint of trade because you want to make your next move or are considering a new contract of employment feel free to get in touch.

[1] 2021 NSWSC 1179 – 17 September 2021