Things you need to know about restraint of trade clauses
What factors determine whether or not a restraint of trade covenant is enforceable?
- To be enforceable, the restraint of trade 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 employee.
- 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.
Be sure to address the restraint of trade clauses when negotiating a contract of employment
When negotiating a contract of employment, your initial response to the restraint of trade clauses should be to have them deleted. If this is not possible, you should attempt to narrow the activities, geographical area and timeline to which they apply.
If you have already agreed to a restraint of trade clause, what now?
If it is already too late and you have signed an agreement that contains a restraint of trade clause 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 clause 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.
If you are seeking legal advice on a Restraint of Trade clause, please do not hesitate to contact us.
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.