Employment Lawyers for Australian Executives

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+61 3 9653 9123

16th June 2022

Call 1300 789 302

16th June 2022

  • Fast Facts
  •     How to avoid the 10 most common mistakes made by executives
  •     Employment Contracts
  •     Redundancy Entitlements
  •     Bonus Plans
  •     Wrongful Termination and the Law of Contract
  •     Restraint of Trade Covenants
  •     Deductibility of Legal Expenses
  •     The Fair Work Act 2009 – Unfair Dismissal and Implications for Executives
  • Emergency Checklists
  •     10 things you need to know if you are facing possible wrongful termination
  •     10 Basic rules to follow if you are confronted with a disciplinary meeting
  • Expatriates - Employment Law Issues
  •     Australian employment law and the Fair Work Act 2009
  •     Negotiating an Expatriate Employment Agreement
  • Employment Contract Review

Restraint of Trade Covenants

Why you should take restraint of trade covenants seriously

  • Many contracts of employment will impose obligations on an employee preventing that person from being employed by a competitor company long after the employment relationship has ceased.
  • Executives often assume that these restraint of trade covenants are unenforceable and can be ignored. This is not the case.
  • It is true that the common law frowns on restraints that prevent a person from earning his/her living. However, if the circumstances justify the restraint, the courts will uphold it.

What factors determine whether or not a restraint of trade covenant is enforceable?

  • To be enforceable, the restraint must protect a “legitimate interest” of the employer and the extent of the restriction must be no wider than is strictly necessary to protect it. In other words, it must be reasonable.
  • If the restraint meets this test, it will be upheld, irrespective of the adverse consequences for the executive.
  • The “reasonableness” will be assessed in terms of the activities which the employee is being required to refrain from, the geographical reach and the timeline.

Negotiating a contract of employment

  • When negotiating a contract of employment, your initial response to the restraint of trade covenant should be to have it deleted. If this is not possible, you should attempt to narrow the activities, geographical area and timeline to which it applies.

back... more on Negotiating Restraint of Trade Covenants

If you have already agreed to a restraint of trade covenant clause, what then?

If it is already too late and you have signed an agreement that contains a restraint of trade covenant and are considering a career change, the question is, what do you do now?

  1. The clause will need to be looked at very carefully, because these types of clauses are often poorly drafted or drawn too widely and it is possible that your proposed future activities are not, in fact, caught by the clause.
  2. In addition, there is case law in Australia that suggests that, if an employer is in breach of its obligations under its own employment agreement, which would justify an employee bringing that contract to an end, that employer is unable to rely on the post-employment restraints. In these circumstances, consideration can be given to bringing the contract of employment to an end, based on the breaches of the employer of its own contract. This would need prior legal advice, but you should be mindful that this possibility may be open to you.
  3. Another approach that can work is simply to be open with either the current or former employer and renegotiate the restraint of trade covenant. This could be particularly effective where the restraint clause is arguably defective and neither party wishes to be embroiled in litigation.
  4. In circumstances where renegotiation is not possible or has been rejected by the employer or the risks of litigation are too great, you may have to consider temporary work in a non-competitive industry or line of work while you wait out the restraint period.
  5. To ignore the potential problems created by a restraint of trade covenant will simply result in receiving a letter of demand from the employer’s solicitors. It is for this reason that you need to take early advice on your options.