How to negotiate restraint of trade clauses
Things you need to know when negotiating restraint of trade clauses
When attempting to limit the operation of a restraint clause, there are a number of approaches that could be adopted.
In the context of a non-compete restraint obligation, these would include:
(a) attempting to limit the duration of the restraint;
(b) attempting to limit the geographical reach of the restraint;
(c) narrowing down the definition of “competitive business”;
(d) postponing the commencement of the restraint of trade clause; and
(e) negotiating a restraint of trade payment clause.
With respect to these differing approaches, the following points should be noted:
(a) Attempt to limit duration of the restraint?
A restraint of trade clause in the contract of employment will often have a “cascading” provision in which a number of different time periods may be set out in conjunction with a variety of different geographical areas and it will be left to the court to decide which is reasonable and therefore enforceable.
A period of restraint cannot be indefinite, and to be enforceable must be no wider than is reasonably necessary in order to protect the legitimate interests of the employer. Senior level employees are commonly subject to extended restraint obligations in an endeavour to protect goodwill/customer connections and trade secrets/confidential information.
For a large national or international corporation, it would be an uphill battle to persuade such a company to reduce the duration of the restraint periods. For smaller-sized companies, the situation may be different.
If the particular role for which you are being considered does not involve close personal relationships with customers and clients, there may be an argument that an extended restraint period would not be justified. Can the employer justify why the time period has been chosen?
(b) Attempt to limit geographical reach of the restraint obligation?
With respect to considerations of geography, similar questions can be asked as to whether the restraint is no wider than reasonably necessary to protect the legitimate interests of the employer.
For smaller regional/State-based businesses, it is possible that you may be able to limit the geographical reach of the restraint clause to those States/Territories where most of the business is transacted and exclude the remaining States from the clause.
There is therefore an interplay between clause duration and geography. One often has to assess whether an extended duration for the restraint is being demanded in a geographical area where little or no business is undertaken.
You may be able to make a compelling case that the full duration of the restraint should only apply in that State/Territory where the employer undertakes its most significant business. For State-based/regional business, that would certainly be an entirely reasonable approach. It is at least worth asking the question.
With respect to those employers who operate nationwide, limiting the duration of the restraint and the geographical reach of the non-compete obligation will be difficult.
(c) Narrow down the definition of competitive employer?
Apart from limiting the duration and geographical reach of the restraint of trade obligation, you may be able to limit it further by restricting its operation. This could be achieved by limiting its operation to a certain industry sector rather than an entire industry. For example, an employer may be a wholesale food distributor with only a small number of retail outlets. In these circumstances, you might attempt to limit the definition of “competitive business” to the wholesale market space only.
Alternatively, the clause could be confined to a certain specific list of competitors (“Named Competitors”) – usually the most significant – but otherwise leave you with access to the remaining participants in the industry.
(d) Postpone the commencement of the restraint of trade clause?
Another approach might be to postpone the commencement of the restraint of trade clause.
Most executive contracts of employment contain a clause stipulating that the executive will be a probationary employee for an initial period after the commencement of employment. This will usually be for 3 to 6 months. In that period, the contract can be terminated on 1-2 weeks’ notice to the employee.
If that is the case, then why should a restraint of trade covenant become operative immediately upon signing the contract? In other words, why should you be restrained from joining a competitor for 6 – 12 months after termination when you may have only been employed by the company for a few months, or indeed even a few weeks, at the point of termination?
How can any employer reasonably believe that an executive who – in the probationary period – has had only temporary and fleeting exposure to the customer/supplier base, would be in a position to persuade these same customers to leave the employer and join a competitor?
The reasoned response to such a request is to ask that the operation of the restraint of trade covenant be postponed. That should be at least until you have secured permanent employment with the employer. Once you have survived the probationary period and have become a permanent member of staff, you should at least receive a notice payout that goes some way towards providing an income after termination has occurred and also hopefully to receive a restraint payment (see below).
(e) Attempt to negotiate restraint of trade payment clause
A restraint payment clause seeks to compensate an employee for being locked out of the marketplace for the duration of the restraint. If you have been unsuccessful in limiting the duration and geographical reach of the clause or narrowing down the definition of a competitive business, then a clause of this nature becomes even more important.
This is an issue that is seldom addressed in the minds of many senior employees. On what basis is an employer asking you to remain out of the marketplace once you cease to be an employee?
Some employers may reply that that is the reason why you are receiving a notice payment. However, that payment is only intended to provide income while you search for alternative employment. It is not intended to provide income for the duration of the restraint of trade clause. The solution to the problem is for the employer to make a separate payment to you in exchange for your promise to remain out of the marketplace for the restraint period. That payment should be equivalent to the remuneration you would have received had you continued to work during the restraint period.
If a prospective employer is not prepared to entertain a reduction in the breadth of the restraint of trade obligations and the inclusion of a restraint payment clause, then you are on notice about the potential problems that may lie ahead upon termination of the employment relationship. There are, of course, some employees who have a varied work history and whose skill set enables them to work in many different industry sectors. Employees in this situation are often unconcerned about the impact that such provisions may have on their future employment prospects. Most people, however, are not in that situation.
Risk of legal proceedings when you may be considering a career change
Restraint of trade clauses can therefore be a ticking time bomb which should be dealt with upfront and not ignored for a future time. Accordingly, you are better off trying to resolve potential problems created by the restraint of trade obligations at the beginning of the employment relationship rather than at the end.
Obligations of this nature always have the potential to cause problems, and for most executives, clauses of this nature “come with the territory”. It is, of course, possible to reach a negotiated outcome with one’s employer “on the way out the door”. However, there is no guarantee of this and you certainly cannot assume that your employer will be prepared to waive their rights under the Employment Agreement.
Before accepting any offer of employment from an alternative employer – particularly one who is in the same sector – you need to take early advice on your restraint obligations in your contract of employment.
The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult a lawyer for individual advice regarding your own situation.