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Restraint of trade clauses in employment contracts

It is common for employment contracts to include restraint of trade clauses. These clauses typically attempt to restrain current and former employees from engaging in business which would damage the employer’s business interests. These business interests usually include confidential information, staff relationships, client connections and trade secrets.

Are these clauses enforceable?

The accepted trend of restraint of trade clauses is that they are invalid unless they can be proved to be reasonable. For a restraint of trade clause to be established as reasonable there are several factors that need to be considered.

The first is whether the restrictions are necessary to protect the employer’s legitimate business interests and the obligation to establish this rests on the employer. Restraint of trade clauses are not designed to protect employers from simple competition from past employees. This allows any expertise you have gained in the course of employment with an employer to be used in competition with that business.

Other factors that would be considered in determining a reasonable restraint of trade clause include the duration of the clause, the geographical size of the area covered, the scope of the work being restricted, etc.  There are no solid rules of what is considered ‘reasonable’ in restraint of trade clauses as the types of cases that come before the Court vary considerably. The test of what is reasonable depends on the circumstances of the employment and nature of the business.

What happens if I breach my restraint of trade clause?

Breaching a restraint of trade clause is primarily a breach of contract. If the court finds that the clause was unreasonable it will be considered invalid and you will not be bound by the clause.

However, if the clause is deemed to have been reasonable and you are found to be in breach, there may be several possible consequences, one of which is an order to pay damages. In Ross and Anor v ICETV [2010] NSWCA 272, two Defendants were ordered to pay damages to their former employers to compensate them for the loss suffered through the Defendant’s breach of their restraint clause.

Some clauses are written in such a way that they provide multiple options for the duration, geographical area, and nature of the conduct to be restricted. These are usually referred to as cascading restraint clauses. The benefit of these for employers is that the Court may find a reasonable level of restraint within the options to enforce – as opposed to a single option clause which is subsequently found invalid and leaving the employer with no protection. The decision in OAMPS Insurance Brokers Ltd v Hanna [2010] NSWCA 781 confirms that these clauses are valid and enforceable if worded appropriately.

For more information on restraint of trade clauses and how they affect your employment contracts contact us on

P 02 6215 9100 or chamberlains@chamberlains.com.au

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