A common issue which arises between an employer and employee (often former employee) is the enforceability of restraint of trade clauses in employment agreements.

What is a Restraint of Trade?

A restraint of trade in an employment agreement between an employer and an employee is a term which restricts / prevents an employee from working for a competitor (including themselves), or in their area of expertise or field. There are generally two types of restraints. One is a non-compete and the other, non-solicitation.

The purpose of a non-compete provision is to protect the previous employer’s business being affected as a result of an employee working for a competitor. A non-solicitation restriction often allows an employee to work for a competitor but restricts the employee from contacting clients of the former employer and getting them to become clients of the new employer. Sometimes a non-solicitation clause may also restrict the employee from getting former co-workers to join the new employer.

Restraint of trade provisions are tricky to enforce, and often the subject of disputes between employers and employees.

Enforcing Restraints of Trade

Generally, restraint of trade provisions will be enforceable if they are reasonable. Having terms that include restrictions in relation to a wide geographical area, and a long period of restraint will generally carry risks of being challenged and disputed. They have the potential to be found to be unenforceable.

The factors that are considered when assessing enforceability include the following:

• Whether there is any legitimate proprietary interest capable of being protected. These include things such as information about clients and relationships with them, information about negotiated agreements with suppliers, or generally confidential information;
• Whether the period of restraint is reasonable; and
• If the geographical area covered by the restraint is reasonable, bearing in mind what would be relevant to the employer.

A mere non-compete clause will not be enough.

Current Trends & Protections

Employers are increasingly becoming stricter about enforcing restraint of trade provisions. There is more of an appetite to litigate any breaches of restraint of trade provisions by former employees. Employees on the other hand are also taking a firm approach to challenging enforceability. This is very likely due to the tough economic conditions in recent times.

Employers are encouraged to obtain legal advice when drafting employment agreements for new employees, to ensure any restraint of trade provisions are drafted in a manner that will ensure they are enforceable. Restraint of trade provisions can also be introduced as a varied term in employment agreements with existing employees, provided it is done following consultation in good faith. Seek advice on how this should be done first, before embarking on any changes.

Employees too should seek advice on any restraint of trade provisions in their employment agreements before agreeing to these.

Legal advice should also be sought regarding enforceability. Employees should do this before agreeing to any new work arrangement which carries the risk of potentially being in breach of a restraint of trade provision. Employers should do this sooner rather than later so that they understand their rights, any issues which arise, and take enforcement steps correctly as relevant to the circumstances.

At the date of this article there is an Employment Relations (Restraint of Trade) Amendment Bill in Parliament which proposes to set the criteria for when a restraint of trade provision will be of no effect. In essence, it proposes that a restraint of trade clause will have no effect unless the employee’s weekly earnings exceed the threshold weekly rate (3x the minimum wage), a proprietary interest is being protected and particulars are provided in the employment agreement, the employer pays the employee an amount equal to half of the employee’s weekly earnings for each week that the restraint of trade remains in effect, and the duration of the restraint is limited to 6 months.

Whether or not the proposed amendments become law remains to be seen.