Restraint of trade – what is reasonable?

Many businesses continue to struggle in the current economic conditions and for some, a decline in revenue through a sudden loss of custom could be quite damaging.  As such, the unexpected resignation of an employee who has strong customer relationships could potentially jeopardise the business, particularly if that employee moves to a competitor.

Many employers have a restraint of trade clause in their employment agreement to protect them against such contingencies.  However, it is not until an employee leaves to go to a competitor that these clauses are tested.

In the past, a restraint of trade clause was considered ineffective.  However, employment relations authorities now seem to be taking a more practical perspective.  Their perspective should be taken with a degree of caution because a restraint of trade clause may not be the ‘silver bullet’ that some employers might expect.  An employee will always have the right to use their skills and experience to earn a living.  Therefore, the key to an employer protecting their interests rests in how reasonable the restraint of trade clause is, and this is generally tested as follows:

What was the position of the employer and employee when they entered into the employment agreement?
This test is essentially about bargaining equality. Were both parties free to obtain advice at the time the employment agreement was offered, or was the employee coerced into signing?

What ‘consideration’ was provided?

When an employee starts a new job, the remuneration offered in the employment agreement is usually considered sufficient to include a restraint of trade clause.  If an employee was promoted from an office administration role (where typically a restraint of trade would not be relevant) to a business development or sales role, then negotiation over the new employment agreement would need to demonstrate consideration.

What is the nature of the proprietary interest to be protected?

The restraint must be essential to protect an employer’s interest. For example, an employer would have difficulty restraining a hairdresser from establishing their own business.  However, if that same hairdresser were to entice clients to leave by openly contacting clients of their former employer before or after leaving, then a reasonable restraint of trade is likely to offer protection to the former employer.

How long can an employee be restrained for?

In most cases restraining an employee for a period of 12 months would be difficult to enforce, however a period of six months or less is more likely to be considered reasonable.

How far (geographically) would the employee be restrained from working?

Using the earlier example, a hairdresser who seeks to establish a business within one kilometre of their previous employer might be restrained, but should be perfectly entitled to use their skills at a block of shops 10 kilometres away.

How broad is the restraint?

Similar to the geographic restriction, if the employer intends to prevent a former employee from working in the same industry, then this would prove difficult to enforce.  However, restraining a technical sales representative working in the same specialist sector of the industry within a 100 kilometre radius may be more acceptable.

In summary, a restraint of trade should not restrict an employee from earning income once they leave an organisation, but it is sensible for an employer to protect their interests in today’s economic conditions.  Employers should give careful thought as to what proprietary interests they need to protect and seek advice before drafting a reasonable restraint of trade clause.

Published Spring 2012.

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