RESTRAINTS OF TRADE – ARE THEY WORTH IT?

Restraint of trade clauses in employment contracts have become increasingly common and sought after by employers seeking to protect themselves from competition and loss when key employees leave.

However, unless carefully constructed they can be very difficult to enforce and may only prove to be a deterrent to the employee.

Public policy is such that trade should not the restrained. The general rule is that on the face of it any restraint of trade provision is void. Effect can only be given to a restraint of trade if it can be proved to be reasonable and in the interests of the parties and the public. The restriction may be considered reasonable if it is for a period no longer than necessary and related to a geographic area no larger than necessary to protect the interest of the employer.

Interests you are entitled to protect include:

• confidential information
• trade secrets and manufacturing processes
• customer lists and contact details
• established customer and employee connections
• unique branding

At common law parties to a contract are able to form a contract on terms that they are both agreeable to, however this does not mean they then have an absolute right to make any agreement and have that agreement enforced. The court will not uphold a contract which deprives a person of the ability to make an income because it is not in the public interest to do so.

The Process

Having a restraint of trade clause in an employment contract can be a deterrent to employees. However, in the case where an employee leaves to work for a competitor or to set up in competition to your business; you will need to go to court to enforce the restraint. Initially an injunction is sought to stop the ex-employee’s conduct. The onus then falls on the employer to prove that the restraint is reasonable in duration; geographic area; and the activities which the former employee is restricted from performing. The court will also consider if it is in the public interest to enforce the restraint.

In Queensland, if the Court finds a restraint of trade clause to be excessive it can ‘cross out’ part of the clause if doing so will make the balance of the clause reasonable and therefore enforceable. However, if this cannot be achieved, then the whole clause will declared void.

MAIN IMPLICATIONS FOR EMPLOYERS

• If anything, a restraint of trade provision may deter a former employee from engaging in conduct that may be damaging to your business. However, it is not enforceable unless a Court enforces it;
• To increase the chances of a restraint provision being enforceable it needs to clearly define the activities being restrained and specify the shortest period of time and smallest geographical area necessary to protect the business from being damaged.
• If a court considers a restraint provision to be unreasonable - and cannot make it reasonable by deleting parts of the provision - it will declare the whole clause void. In Queensland, the court does not have the power to rewrite the clause to make it reasonable.

If you have any questions in relation to this Employment Update, please contact Aitken Legal.