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Implementing Effective Restraint of Trade Clauses in Employment Contracts

A restraint of trade clause is a term commonly included in employment contracts. It operates to protect your confidential information, trade secrets, business operations and client relationships. restraint of trade clauses protect business

We use them because losing an ex-employee to a competitor or having an employee set up a competing business could cause significant damage to your business.

Generally speaking, failure to include suitable restraint of trade clauses will mean an ex-employee who seeks to exploit their knowledge of the employer’s business for the benefit of a competitor or themselves will be free to do so.

With this in mind most business owners would agree that the inclusion of such clauses is essential to protecting their legitimate business interests.

There are four types of restraint clauses, including:

  1. Non-compete – restricts direct competition with your business generally within a specific timeframe and/or geographic location;
  2. Non-recruitment – prohibits your employees from inducing other employees to otherwise resign and join them in a competing business;
  3. Confidentiality – prohibits the use of your confidential information by a former employee that would be detrimental to the former employers business; and
  4. Non-solicitation – restricts the former employee from enticing valuable staff or clients away from your business.

Can a restraint of trade clause include post-employment?

Yes, the purpose of restraint of trade clauses is to ensure that your business interests are protected if an employee is hired by or creates a competing business. This should be relevant to each employee’s role. For example, 4 years post-employment may be considered reasonable for an IT specialist of an IT Procurement company.[1] Alternatively a period of 3-6 months may be deemed reasonable for a client relationship manager.

Legal enforceability

Restraint of trade clauses are prohibited under law, except under ‘special’ circumstances involving a ‘legitimate interest’. This is because it is illegal to impede on an employee’s right to pursue gainful employment or to restrict competition.[2] However, restraint of trade clauses are valid when used to protect a legitimate interest (e.g. to protect sensitive information, goodwill or trade secrets).[3] The clause must also be drafted to afford adequate protection in a ‘reasonable and necessary’ manner.[4]

Definition of ’reasonable and necessary’

An employer must take care not to impose protections outside what is considered necessary to protect their interests. Consideration of what is ‘reasonable’ will depend on the facts of each case, but may include:

  • Type of industry;
  • Role of the employee;
  • Type of sensitive commercial information;
  • Length of time restraint of trade clause applies;
  • Comparison between former and current positions of the employee;
  • Type of customer base.

There needs to be a strong connection between industry and role to establish reasonableness. For example, just because a competitor hires an ex-employee does not give rise to a finding that the clause is valid as the new position may have a different scope or geographic reach.

Drafting an effective restraint of trade clause

It is recommended that a restraint of trade clause be included in employment contracts to protects your intellectual property and goodwill. However, the clause must be sufficiently narrow in application. Some tips to consider when drafting a restraint of trade clause include:Confidentiality Agreement Template employees

  • Identify in the restraint clause what type of information is considered sensitive. Is it client files, databases, intimate product knowledge or business methods?
  • Ensure the clause specifies the restraint activities (e.g. performance of the same role at a competing organisation or operating a business in the same geographic location). Your restraint clause cannot generally restrict competition, but it could restrict competition in an identical industry and/or geographic location.[5]
  • What length of time or ‘restraint period’ should be imposed?
  • Ensure your workplace policies and procedures align with the terms and conditions of the employment agreement.
  • Ensure the employment contracts remain enforceable and up-to-date particularly if the nature of the employee’s duties, responsibilities or status has changed over time.
  • Remind your employees of their obligations.

[1] Restraint of Trade Act 1976 (NSW) s 4; Competition and Consumer Act 2010 (Cth).

[2] Southern Cross Computer Systems Pty Ltd v Palmer (No 2) [2017] VSC 460.

[3] Competition and Consumer Act 2010 (Cth).

[4] Restraint of Trade Act 1976 (NSW) s 4;.Southern Cross Computer Systems Pty Ltd v Palmer (No 2) [2017] VSC 460

[5] Adamson v New South Wales Rugby League Ltd (1991) FCR 242.

This article by Elise Nisbet

Elise NisbetElise Nisbet (LLB, GDLP, BCom (Hons)) is a qualified lawyer, working for a Top 50 ASX listed Company. She is an award-winning academic researcher and skilled legal writer with experience in banking and finance, corporate governance, risk management and compliance.

Last updated: 25 june 2019

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