Restraints of Trade – what are they?
Restraint of Trade is a specific term in law that can be inserted into a contract of employment that restricts the employee in question from carrying out certain activities for a period of time once they have ceased working for that employer.
Common examples of this is a restriction from working for a competing business or ‘poaching’ employees or clients.
Why are Restraints of Trade a Good Thing?
Restraints of Trade are commonly used by many Cairns and Queensland businesses today and, when properly drafted, they can be beneficial for employers. The company can protect its interests in terms of customer base and valued employees, as well as avoid its intellectual property and connections being abused by an employee who has left the organisation.
What is the downside?
The downside is that unless the Restraint of Trade is carefully drafted, it may not be enforceable.
Employers that wish to use Restraints of Trade need to be aware that these clauses will be unenforceable unless it can be demonstrated that they are necessary within reasonable terms to protect the commercial interests of the organisation.
It is advisable that employers seek legal assistance when considering what it is precisely that they want to protect. Experienced lawyers will be able to draft the agreement accordingly.
What should be Considered?
If a Restraint of Trade is not drafted correctly, an organisation could end up losing business and/or customers and even have to consider costly and time-consuming legal action.
There are three main things to be examined:
1. Geographical area
This must be shown to apply to the employer’s commercial interest. If the company only operates within a limited geographical area such as Cairns or Queensland, a court is unlikely to agree to a restraint beyond that
2. Time frame
The legal restriction cannot be longer than what is deemed necessary to protect the employer’s interests. The terms will vary depending on the role of each employee, their knowledge of the business and their potential to impact future dealings within the industry and relevant clients and critical parties.
3. Activity Restrained
The restricted activities must be directly linked to the role of the employee and must refer to protecting business interests, e.g. poaching clients in direct competition with the business. However, it is not reasonable for an employer to restrain the employee from working in the same industry, using a ‘blanket’ restraint. These situations are generally reviewed on a case by case basis.
Restraints of Trade can be a helpful tool for employers who want to protect their commercial interests.
Care needs to be taken when considering the terms of the restraint, making sure that it protects the company’s interests but goes no further than necessary.
When preparing Restraint of Trade clauses in employee contracts it is advisable to engage the legal services of experienced lawyers.
Preston Law is one of Queensland’s largest regional law firms and is locally based in Cairns. To find out more about our services, call us today on 07 4052 0700.