Restraint of Trade Clauses - Are They Enforceable?

Imagine a scenario...

You have been working for your employer for 5 or so years and you have finally decided that you have acquired the level of skill and confidence required to go out on your own. Suddenly, you’re dreaming big. You’ve made a business plan, researched your target market and you’ve even done some company branding. Then you happen to look at the employment contract that you signed with your employer 5 years ago, and you note that it contains something called a “restraint of trade”.

In no roundabout way, the clause states that you cannot enter into direct competition with your employer for a period of 2 years from the date you ceased your employment with them. Abruptly, your dreams of starting your own business have come crashing down. 

What is a Restraint Of Trade?

A Restraint Of Trade in an employment contract is a clause designed to restrict an employee’s ability to carry on trade in the future with persons other than the employer, in a manner an employee might choose.

Whether or not a Restraint Of Trade clause is enforceable will need to be assessed by the Courts on a case by case basis. However, generally, Restraint Of Trade clauses in employment contracts are unenforceable as they are considered anti-competitive and designed to limit or prevent competition in the market place.

In the scenario above, it would take your employer to commence an action against you to enforce the Restraint Of Trade clause. The employer would need to convince the Courts that the Restraint Of Trade is reasonable.

Assessing Reasonableness  

In assessing whether a Restraint Of Trade clause is fair and reasonable, the Court may have regard to a number of factors including:

  • Whether there was equal bargaining power between the parties when the agreement was signed;
  • Whether the employee received any consideration for the Restraint or whether the employee's salary factored in the Restraint;
  • the nature of the work, and the employee’s seniority in the business, including whether the position involved exposure to confidential information;
  • the benefit to the employer and the employee of agreeing to the Restraint
  • the scope and duration of the Restraint, including the time and area included in the restraint; and
  • whether the Restraint of trade provides no more than is adequate to protect the employer’s legitimate business interest.

Generally, employees are not in a position of equal bargaining power with their employer when they sign an employment contract. It is also rare that employees are offered any amount of fair and reasonable compensation for agreeing to a Restraint Of Trade.

The employee-employer relationship can be contrasted to that of, say, a franchisee-franchisor where the parties enter into an agreement that is designed to increase competition in the marketplace whilst benefiting both parties. In this scenario, a Restraint Of Trade clause may well be enforceable on grounds of reasonableness.

If you have been working as an employee and are thinking about going out on your own, don’t let a Restraint Of Trade get you down. It is important to remember that there is a difference between a Restraint Of Trade clause and a confidentiality clause.

Disclaimer: You should always get legal advice that is tailored to your specific circumstances and the information contained within this blog should be considered as a guide only and not advice.

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