Restraints of trade: non-compete clauses, are they reasonable?
Employers need to have a clear understanding of what’s fair and legal when they include restraint of trade clauses in employment contracts. Andrew Jewell, from legal firm McDonald Murholme, explains more.
Australian employers often use restraint of trade clauses to protect their business interests after an employee leaves their company. They are particularly common in employment contracts for professional and senior/managerial employees.
A typical restraint clause prevents a departing employee from working for a competitor in any capacity for a specified period. Other restrictions may also be included, such as not soliciting a former employer’s clients, customers or staff, and not using a former employer’s confidential information.
The most common restraint of trade clauses are:
- Non-compete clauses.
- Non-solicitation clauses.
- No poaching and recruitment clauses.
- Confidentiality clauses.
A restraint clause can’t be accepted on face value because the courts will uphold it only if it is ‘reasonable’. For example, a court won’t enforce a clause that unfairly interferes with a worker’s right to contribute their own labour. As stated by the High Court of Australia in Buckley v Tutty (1971) 125 CLR 353 at 380: “Unreasonable restraints are unenforceable as it is contrary to public welfare that a person should be unreasonably prevented from earning a living in whichever lawful way he chooses and that the public should be unlawfully deprived of his services.”
When assessing whether a restrictive employment contract is reasonable and valid, the court will take into account the duration of the restraints, the geographic area in which they apply, and the activities of the employee the restraints seek to control.
The courts have some capacity to sever a restraint clause if they find it to be unreasonable. Severance is usually only possible where the clause contains a series of overlapping restraints, known as step or cascading clauses. Use of these often result in the court accepting the least broad scope for the restraint.
Protecting genuine interests
Post-employment restraints are presumed to be invalid and unenforceable unless it can be shown that they are genuinely necessary to protect commercial interests. The onus is on the employer to demonstrate that a clause imposes no greater restraint than is reasonably necessary to protect these interests.
Employers can’t use a restraint clause to protect themselves against the usual processes of competition in a sector or market. Generally, broad restrictions on competition won’t be deemed to be reasonable or enforceable.
Legitimate interests that are commonly recognised as supporting a valid restraint include the employer’s confidential information or trade secrets, customers and clients of the business (business goodwill) and the employer’s staff.
It should be noted that an employee’s knowledge of confidential information and trade secrets is, in the eyes of a court, different from the more general know-how and expertise they use to do their job.
A restraint clause typically upheld by an Australian court is one of between three and 12 months’ duration, restricted to a specific geographical area and reliant on a special need to restrain conduct (e.g. solicitation of clients the employee had contact with).
Restrictive clauses aren’t essential in employment contracts because there is an inherent protection regarding confidential information. That is, if a contract doesn’t have restrictive provisions, an employee can simply take and misuse confidential information.
If an employer needs restrictions beyond that – for example, against the solicitation of clients or employees – carefully worded and reasonable restrictive provisions are required.
This post is intended to provide general information in relation to a legal topic from a qualified legal practitioner external to SEEK. It does not constitute legal advice and should not be relied upon as such. Formal legal advice should be sought in particular matters.