of trade

Restraints of trade usually operate to prevent employees from taking certain actions when the leave employment, such as stealing clients, working for competitors or poaching staff.

The benefit of a properly drafted restraint of trade clause in an employment contract can be the difference between the life or death of a business: if your employees left your business and told all your clients they were starting an identical business next door, would your business survive?

Restraint of trade clauses in employment contracts

The area of law which deals with restraint of trade in employment contracts is complex. Given that a restraint of trade imposes a restriction on a person’s freedom – for example, by preventing them from getting a job with a competitor – courts will often examine the wording of such clauses in minute detail. It is therefore essential that the clauses are properly drafted.

A clause which is ambiguous as to, say, the period which the restraint lasts, or the geographic area in which an employee is prevented from competing, is unlikely to be enforced by a court (on the basis that it is “void for uncertainty”).

Courts will also not enforce unreasonable restraints, for example if they are stated to last for an overly long period of time, operate over too wide a geographic area, or do not protect a legitimate interest of the business. It is important to remember that (in law) there is generally nothing wrong with a former employee setting up in competition with your business – it is where the employee wishes to exploit the relationship with clients he/she developed during employment that a court might be prepared to intervene. It is therefore, important that restraint of trade clauses take account of the role your employee plays in your business – it is unlikely that you will be able to validly restrain a former employee from contacting your clients if they had no contact with your clients whilst working for you.

At EI Legal we are experts in drafting restraint of trade clauses that will fit the needs of your business and will have the maximum chance of being enforced by a court if required. We regularly advise employers on the validity of their existing restraint of trade clauses. Please contact our offices if you need assistance in this area.

Restraint of trade remedies

There are various restraint of trade remedies available to an employer where an employee or former employee breaches a restraint of trade clause in their employment contract.

The primary remedy is to obtain an injunction from the court which will order the former employee from doing certain things. This might include an order that they stop performing work for a particular client or do not take up employment with a particular entity.

Injunctions can also be obtained against third-parties (such as one preventing a competitor from employing one of your departing employees).

Other remedies include actions in damages / compensation and what’s called an “account of profits” which means that you might be awarded any profits earned by the employee as a result of breaching the restraint of trade clause e.g. money they earned from performing work for one of your clients.

Although it is true than an unreasonable restraint of trade will not be enforced, courts will – and frequently do – enforce restraints. If you are faced with a situation where an employee or former employee is acting against your business, please contact our office for a confidential discussion about the options open to you.

If your contracts of employment do not contain restraints of trade there may still be options available to you to curb the actions of a former employee. An action for breach of confidence is possible even where no contract exists. There are also provisions in the Corporations Act 2001 (Cth) which allow for an employer to restrain the activities of former employees – for example section 183 which prohibits persons from using information they obtained during employment for their own advantage or to cause detriment to the company.

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If you require any assistance regarding this matter, please contact us.

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