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What is restraint of trade and is it enforceable?

Preparing to leave your current job and begin a new role? It’s important to consider how your employment contract could impact your next steps.

If you’re working for a business where you’re privy to company insights such as trade secrets or have access to client information, your employer may have included a restraint of trade clause in your contract.

We explore what this means and whether an employer can stop you from working with a competitor in Australia.

What is restraint of trade?

Restraints of trade typically feature in employment contracts for certain sectors and roles, and are increasingly the subject of legal dispute. These may concern the misuse of confidential information, breach of non-compete and former employees poaching other employees or clients.

Whilst traditionally the courts are reluctant to prevent an employee from being able to earn a living, where an employer can justify that the restraint of trade is legitimate and does not go wider than is reasonably necessary, it may be upheld.

Restraint of trade in employment contracts

Whether you’re moving to a different company or considering starting your own business, realising that you may be constrained by a restraint of trade clause can be alarming as it can cause complications.

Restraints of trade come in different types:

  • “Non-compete” - this may seek to prevent you from working for a competitor or starting a competing business.
  • “Non-poach” or “non-solicitation” - this restraint aims to prevent workers from encouraging former employees or clients to follow them to a new business.

Particular caution should be taken with financial information, client lists, intellectual property and trade secrets, in order to comply with confidential information obligations.

It is important to take advice promptly if you are concerned about the risks of being accused of revealing these to outside parties in order to assess whether this is a breach of restraint of trade and what to do about it.

Restraint of trade in partnership

Restraints of trade also commonly feature in partnership deeds – and are more enforceable against partners. These clauses will vary depending on the nature of the firm’s business, but can for example operate to prevent a departing partner from setting up in business nearby for a certain time.

Is restraint of trade enforceable?

If you’re in an industry that is very small a non-compete clause may seem unfair or unreasonable to you.

Fortunately, the courts do take into consideration whether a non-compete is unreasonable and will not always uphold these. Despite this, it can understandably be daunting to find yourself on the receiving end of a letter of demand.

Some employment contracts contain post-termination restrictions stating that employees cannot work for a client or competitor for a period of time. Others may have geographic restrictions, where the restraint of trade operates in a specific location. Whether these are enforceable or not will depend on the employer being able to demonstrate a legitimate interest to protect, and also that it lasts no longer or extends no wider than is reasonably necessary in the circumstances.

It can provide useful peace of mind to take advice on your plans and how the restraint is drafted, in order to understand how likely it is that the courts would uphold these.

Contract dispute? Shine Lawyers can help.

If your past employer is claiming that you have breached your restraint of trade, it is important to seek legal advice or representation sooner rather than later. This is a complex area of the law.

Whether it’s a contract review prior to employment or negotiations with a disgruntled past employer, our expert employment law team are highly experienced and can discreetly support executives and senior managers in these situations, providing guidance throughout the legal process. It is important to note that this legal service will incur a fee. Contact us today to find out more.

Written by Shine Lawyers. Last modified: March 13, 2020.

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