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Restraint of trade

in Business Law by Robert Auricchio on

One of the things that keep business owners awake at night is the prospect of employees leaving and starting up a rival business (or joining a competitor) and potentially taking hard-won customers with them.

The best protection for an employer is to include restraint of trade clauses in their employment contracts. 

It is important for business owners to regularly review the efficacy of their restraint clauses.  This is particularly relevant where there has been a change in the nature of the business because the critical date for assessing the reasonableness of the restraint clause is the date that the contract was made.

Traditionally, courts do not like to impose a restraint upon an employee’s ability to earn a living or to restrict competition. Nonetheless, time and time again Courts have upheld restraint clauses and found in favour of employers.

The ability to restrain former employees is contingent upon the efficacy of the restraint of trade clauses. As a general rule, restraint of trade provisions are void. However, the law allows the use of restraint clauses where it can be proven that there were “special circumstances” which made it necessary to protect the interests of the parties. In assessing what type of protection will be regarded as reasonable, an employer must identify a relevant risk such as the risk of the loss of business to a competitor by the use of a personal connection with clients and information about those clients.

The onus of proving special circumstances is on the employer. The clause must not impose more than adequate protection and if it goes beyond this then it will be considered unreasonable. The relevant factors are:

  • The nature of the business and whether confidential information was obtained that was specialised knowledge not ordinarily obtained in the course of employment;
  • A comparison between the former and current positions of the employee within each company;
  • The composition and value of the of the client/customer base, and
  • The length of the restraint provision and its reasonableness.

Fearing the loss of clientele is not enough to make an application to the court. A clause can be struck down if it is too wide (for example, prohibits employment throughout the whole of the state of Victoria) or you cannot prove that it is designed to protect some legitimate interest such as intellectual property or a unique business product.

A “legitimate interest” is the value of any relationships the employee  develops with clients during the course of employment-such relationships are beneficial to the employer and the benefit is treated as an interest which justifies some reasonable protection upon the cessation of employment. Employers should ensure that the clause is legitimate to protect the company’s interest. If the employee leaves, what position will they be undertaking and what exposure to your clients might they have?

The position may be similar but different in scope and the target market may be different. In one case an employer was unsuccessful because the employee’s new role was deemed different to the services offered by the former employer. The court found that because only 30 % of the old role was being performed in the new role, the employer had failed to identify a legitimate interest that required protection by the clause and was deemed to have gone further than was reasonably necessary to protect its interests.

However, in another case, an employee’s close and intimate knowledge of management and clients resulted in a two year restraint clause being enforced. Even a close connection with the customer may not be sufficient, what is needed is a strong connection including personal or special knowledge “client connection” (which may include confidential information of the client and a significant degree of influence).

Employees who work in business development roles where they develop a personal relationship with the client and acquire knowledge and understanding of client’s affairs need to carefully consider the impact of restraint of trade clauses on their future career moves as employers are entitled to impose restraints on such employees, particularly in professional services firms.

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