Business owners, in an attempt to protect the goodwill of their business will often include ‘Restraint of Trade’ provisions in employment agreements.

The law firm Maurice Blackburn advises that the law will protect an employer’s trade secrets, confidential information, customer connections and staff relationships. However an employer can’t protect itself against simple competition from former employees.

Courts will usually only enforce restraint clauses if they are ‘reasonable’. The provision must be reasonable both in the interests of the parties and in the interests of the public.

In New South Wales, the Restraints of Trade Act, 1974 allows a court to ‘read down’ the terms of a restraint clause to modify it (as to the time period or geographic area etc.) until it is reasonable.

However in other states and territories, the Courts do not have this discretion.
Therefore if a restraint clause is not ‘reasonable’ then a court will usually find the whole clause to be void and unenforceable. This is why you often see restraint clauses with ‘cascading’ provisions which cover a number of alternatives.
For example, the clause may say that the restraint is for 1, 2 or 3 years and cover Brisbane, Queensland or Australia, whichever is reasonable.
This allows a Court to pick whichever scenario is ‘reasonable’ and avoid the whole clause from being held unenforceable.

Robert Auricchio from Slater and Gordon states:

“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.

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.”

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.”

An example restraint clause

The following is an example for a service based industry called “****”.
Please note MACRO Recruitment is not an employment lawyer and suggest that you seek independent advice from an employment law specialist for your own circumstances.

I  undertake and agree, again in consideration of the continuing benefits which I will derive under this Agreement, that the I will not at any time during the period one year from the date of expiry or termination of this Agreement (the “restraint period”):

1.         Solicit or attempt to solicit the business or custom of any client of or any person who during the twelve months preceding termination of this Agreement was a client of ****

2.         solicit or attempt to solicit the business or custom of any person whose business or custom  was cultivating at the time of termination of this Agreement;

3.         perform or cause to be performed in any capacity and by whatever means any business or services that is in competition to **** for any client of  or any person who during the twelve months preceding termination of this Agreement was a client of ****.

4.         Approach directly or indirectly any customer of **** to influence it to cease carrying on business with , or otherwise to entice it away from ****

I acknowledge that the restrictions contained in this clause are: fair and reasonable in regard to the subject matter, area and duration; and reasonably required by **** to protect its business and financial interests.

Should I accept instructions or act on behalf of any client of **** within the restraint period, I shall hold upon trust for the benefit of  the amount of any fee or payment paid by the client to me or any company or person which may employ me.
Once I have received payment from the client I shall notify the finance department of ****  in writing within 7 days.  I shall release this trust amount upon demand within 7 days.

What must you do to ensure a restraint clause can be relied upon?

Jennifer Huby, Partner at Tresscox lawyers advises the following:

“From the numerous cases that have dealt with restraint clauses the requirements for a restraint to be held reasonable are:

Genuine Interest – first, to restrain another person, you must have a genuine and legitimate interest that needs protecting and secondly, the restraint should be limited to protecting that interest;

Time Period – the restraint should not be for a time period that is longer than necessary to protect that interest;

Geographic Area – the restraint should not cover a geographical area that is larger than necessary to protect that interest;

For Employees – take particular care to ensure that the restraint is not so broad as to prevent the employee form working at all; and

Cascading Clauses – with alternative time periods and geographic areas may help to ‘hedge your bets’.”

Successful cases

Noman Building v Mr Smith (Tressox Lawyers)

In WA -Nomad Modular Building sought to restrain a former employee, Mr Smith, from taking up employment with Australian Portable Buildings (APB) shortly after he resigned from Nomad. The restraint clause in Mr Smith’s employment contract prevented him from being engaged in a competing business and from soliciting or interfering with clients, employees and contractors of Nomad in WA and Queensland for a period of 6 months. In this case it was found that:

Genuine Interest – Nomad had a genuine interest to protect – it was reasonable to protect its relationship with customers who knew Mr Smith and to protect itself against the loss of employees and contractors who undertook its work. Also the extent of the restraint was reasonable as it did not prevent Mr Smith from working at all – it only prevented him from working for a firm making portable buildings.

Area – the restraint for WA and Queensland was reasonable. Nomad’s main business was in WA but it was planning to establish a business in Queensland and Mr Smith had knowledge of Nomad’s plans and strategy for Queensland.

Time – 6 months was reasonable but the Judge found it was probably the maximum that could be applied.

Hanna v OAMPS Insurance Brokers Ltd 2010 (Maurice Blackburn lawyers)

This case is an example of a cascading restraint of contract clause where the employment contract contained a number of separate restraints which served to extend the restraint period. The company sought to rely on a 15 month restraint clause where Hanna successfully argued a 12 month period was sufficient.

Ross and Anor v ICETV 2010 (Maurice Blackburn lawyers)

In a 2010 court decision, a clause which restrained two senior employees (a Chief Executive and Chief Technology Officer) from competing with the employer’s business or soliciting clients for 12 months after their employment ended was deemed valid.

The employees were ordered to pay damages for the loss suffered by the Company flowing from their breach of the restraint of trade clause.

Fishlock v The Campaign Palace 2013 (Maurice Blackburn lawyers)

Mr Fishlock was the executive creative director of the Campaign Palace where he was responsible for management of creative staff and productivity and management of Sydney and Melbourne creativity divisions of the company.

Mr Fishlock had been working in this role for eight years when he was informed by the employer by email that his responsibilities would be significantly cut, including a loss of overseeing the Sydney and Melbourne divisions.

He brought a claim for damages on the grounds that the employer had repudiated his employment contract. He also sought a declaration from the Court that the restraint of trade clauses in his employment contract were invalid and unenforceable.

The NSW Supreme Court found that the employer had repudiated Mr Fishlock’s employment contract, and as a result, the employer was not entitled enforce the restraint of trade provision in the employment contract.

Mr Fishlock received $268,259.00 in damages in relation to the employer’s repudiation.