Are restraints of trade enforceable?

It is not uncommon for employment contracts to contain restraint of trade clauses that seek to prevent the employee from undertaking specific activities during and after their employment contracts are terminated. The most common include:

• no competition clauses;
• non-solicitation clauses;
• no poaching / recruitment clauses; and
• confidentiality clauses.

The law prohibits unreasonable restraints of trade on the grounds of public policy given that it is in the public interest for people to be free to pursue lawful trade and employment. Accordingly, restraint of trade clauses are generally considered to be unenforceable in a legal context.

Whether the restraint of trade is unreasonable will be determined with reference to whether, at the time the contract was entered into, the employer had a legitimate interest to protect and whether the restraint of trade clause affords no more than adequate protection to the employer’s legitimate interest, balanced against the public policy consideration.

Legitimate interest

Courts have held that trade secrets and confidential information are legitimate interests deserving protection.

It is well established that an employer does not have a legitimate interest when simply protecting itself from competition. Restraining an employee from dealing with customers following termination of employment is much more likely to be considered reasonable if that particular employee was involved in cultivating a relationship with those specific customers. However, if the restraint is so broad so as to include customers with whom there was no relationship with the employee, the restraint of trade clause will be unenforceable.

Reasonableness of the restraint

Factors which indicate whether a post-employment restraint is reasonable include:

• time;
• geological area; and
• the specific activities or information restrained.

It is commonplace for employment contracts to contain cascading clauses that reduce in time and geological area such that they can be potentially read down by the court to whichever time and geological area that it deems (if any) to be reasonable to protect the legitimate interest of the employer.

If an employer wrongfully dismisses an employee, the employer loses the benefit of an express restraint of trade clause (with the exception of confidentiality clauses). Similarly, a post-employment restraint of trade clause is unenforceable if the contract ended due to the employer’s breach or repudiation.

Dark Legal has acted for both employees and employers with respect to restraint of trade clauses. We can assist you if you are:

• a current or past employee that is being accused of breaching a restraint of trade;
• an employee seeking advice as to whether the restraint of trade clause in their employment contract is enforceable; and
• employers that are concerned that a past employee is stealing clients or employees, or otherwise using confidential information that they obtained whilst working for your business, in competition with you.