Restraints of trade, or non-compete agreements, are frequently used by employers to protect their businesses by preventing former employees from working against them.
These clauses would typically be made up of some variant of the following obligations:
- That the employee must not work in a manner that is competitive with the employer; and
- That the employee must not solicit clients, staff and customers from the employer.
Such obligations would generally be limited in terms of time (ie: they would apply only for a limited time after the end of the employment), and within a certain geographical area.
Are Non-Compete/Restraint clauses enforceable?
As a general rule, Australian courts do not look favourably on restraint of trade or non-compete clauses. It is important to note that the onus is placed upon the Employer to convince the Courts that the relevant clause is enforceable. Typically, the Courts will hold a restraint or non-compete clause to be unenforceable unless the restriction goes no further than is reasonably necessary to protect the legitimate business interests of the Employer.
But what is reasonable?
The Courts will consider multiple factors in determining whether a restraint is reasonable. It is difficult (though not impossible in some circumstances) to impose a blanket restriction on ‘competition’, because the Courts generally do not see it as a legitimate interest of any company to be entitled to suppress competition.
However, it is less difficult to successfully enforce a restraint when the restraint is tied to a specific interest that the Courts are likely to recognise. For example, Courts will generally consider an Employer to have a legitimate interest (even a sense of ‘property’) in its own relationships with its clients and customers. An employee, whilst employed, is essentially given those relationships ‘on trust’ for employers, and Courts will generally recognise a legitimacy in an employer enforcing contractual terms that prevent employees, having been entrusted with various client relationships during their employment, from abusing that trust by soliciting those clients immediately after their departure. In such cases, Courts are likely to uphold a restraint that prevents employees from taking steps of this nature, for approximately as long as it might reasonably take the employer to re-engage with those clients and re-establish relationships with them.
If you are subject to a restraint of trade clause, or if you are looking to impose or enforce one, then it is worth getting some advice to understand whether the restraint is likely to be upheld by a court. If you would like to discuss these issues with our experts, do not hesitate to contact us on 0422 202 457 or email [email protected]