Employee Restraint of Trade Clause

Is an employee restraint of trade clause legally enforceable? Can you restrict employees during and after their employment with your business?

What is Restraint of Trade Clause?

A restraint of trade clause is commonly included by employers in employment contracts to prohibit an employee from engaging in specific conduct during and after their employment. The motive behind such a provision is to provide employers with a way to protect their own business’ interests. However, the law has prohibited restraint of trade clauses from being enforceable on the basis that imposing a restriction on one’s ability to use their skill and experience in another place of employment would be against public policy. Nonetheless, through common law we can see examples of circumstances where the judiciary has held the restraint of trade clause to be enforceable.

Who has the Onus of Proof?

Generally, the onus of proof lies with the plaintiff to show that considering the nature of the employer’s business and the employee’s role within that business, that the restraint clause was reasonable. However the onus is on the employee to demonstrate that a restraint of such kind was unreasonable on the grounds of public interest and as a matter of public policy.

Construction of a Restraint Clause

Queensland does not have specific legislation regarding the application of restraint of trade clauses, accordingly, the common law serves as precedent towards distinguishing whether a clause is likely to be rendered valid or invalid. The principle from Nordenfelt v Maxim Nordenfelt Guns & Ammunition [1894] AC 535, provides that a clause may be reasonable if in the relevant circumstances it was in the interests of both parties, if the primary objective of the covenant was to protect the employer’s business interests and the clause was not contrary to public interest. As such, the wording and construction of the clause, relative to the time the contract was formed is fundamental. The elements of a restraint of clause which determine its enforceability include the:

• duration the employee is expected to be restrained;
• location and surrounding proximity of the employer’s business;
• type of conduct which is restrained;
• role the employee had in their employment;
• public interest; and
• bargaining power of the employer and employee.

Type of Restraint

It is common for restraint trade clauses to be drafted with a number of levels, on factors such as location, time, distance, and on the nature of activities that are restrained. The objective is that each element is to function as an individual provision, so that if one part of the clause is deemed inequitable or unjust, the employer can use a separate tier to restrain the employee’s conduct. Take for example, a case related to the insurance industry, OAMPS Insurance Brokers Ltd v Hanna [2010] NSWSC 781 (OAMPS), where Mr Hanna had been a long-term serving employee at OAMPS for approximately 20 years. After leaving OAMPS, Mr Hanna began working for another insurance broker. Pursuant to a schedule in Mr Hanna’s employment contract, he was subject to a restraint clause which had 9 separate restraints which had a cascading effect on factors including, location and duration. The clause covered the locations of Australia and Sydney, prohibiting employment in similar work for ’15 months across Australia’, or alternatively, ’12 months in metropolitan Sydney’. Mr Hanna’s contention was that the clause was void because it was uncertain and not substantive enough to qualify as a clause drafted with the intention of protecting OAMPS legitimate interests. This view was rejected in the Court of Appeal, where it was held that in the circumstances, it was reasonable for OAMPS to exercise the restraint of 12 months, for this guaranteed that Mr Hanna could not pursue his former OAMPS clients into entering an insurance policy in his new place of work, thus enabling OAMPS to hold onto its established clientele. This case exemplifies that the duration of restraint following termination must be appropriate, and is likely to be considered as reasonable where its objective is to prevent a former employee, or another party from gaining an unfair advantage

Keep Employment Contracts Up-to-date

The importance of ensuring employment contracts are kept up-to-date was reflected in Fishlock v The Campaign Palace Pty Ltd [2013] NSWSC 531, as in this case, the employee’s primary activities had significantly changed since Mr Paul Fishlock had fist commenced his employment, however the employer failed to change the contract. As such, the Court held that the contract was invalid, and the restraint clause that formed part of the original contract was consequently unenforceable.

Ultimately, a restraint of trade clause aims to prevent former employees from taking knowledge acquired in their employment or clients into a rivalry business. The reality of the commercial world, is that even where a former employee has true intentions to act in good faith by maintaining any information acquired in a previous place of work, there is a genuine risk that the employee may take that information elsewhere, which would be detrimental to the former employee but beneficial to a competitor. Whether a clause is enforceable will depend upon the individual circumstances and will rest with the restraint of clause is ‘reasonable’ to protecting the previous employee’s business interests. A clause that is too harsh or unjust will be deemed inequitable and void.

TAKE HOME MESSAGE

For Employees

1. Read your employment contract comprehensively as a restraint of trade clause has the potential to influence the employment opportunities that you can take in the future; and

2. The longer you work for an employer, the greater likelihood of a restraint being enforced, since it is reasonable to infer that because of your employment you have obtained substantial knowledge of the inside of the business, which an employer would not like to be taken elsewhere.

For Employers

1.If you are thinking about including a restraint of trade clause, ensure that the restraint period mirrors the position held and the activities undertaken by the employee whilst in their employment;

2.Ensure that the clause is not too harsh, unjust or oppressive on the employee’s ability to find future work;

3.Regularly check your employee’s contracts to ensure that they reflect the role that the employee holds within your business; and

4.Seek legal advice to see whether your restraint of clause is reasonable, is not contrary to public interest and if it adequately protects your business interests.

The team at Cube Workplace Solutions has extensive experience in advising both employees and employers about restraint of trade clauses. If you are an employee or an employer and are unsure about how to draft a potential restraint of trade clause or how an existing restraint of trade clause affects you or your business, contact our team today on 1300 122 823 to discuss your matter with a member of our professional team.