When signing an employment contract with your employer, there are a few items which most people are concerned with (pay, hours, benefits, role). The rest of the agreement tends to be dismissed as legal jargon, but there is one issue which should always be front of mind and that is restraint of trade.
In world cricketing circles, the notion of restraint of trade has recently been elevated in discussions in the framework of franchise and club cricketers, requiring No-Objection Certificates (NOC’s) to compete. These are essentially consents by national cricketing authorities permitting who and where their nations players can play and for.
Restraint of trade is relevant for every employee
Whilst at first glance this discussion may not have any relevance for the average employee, it has the scope to inform many employment contracts because of its relevance to restraints of trade, if challenged in an Australian court. The concept of an NOC is essentially a restriction enforced by that particular authority about whether an individual can play at a certain time for a certain team. It is no different to a standard restraint of trade clause in your standard commercial employment contract.
Most employment contracts have these clauses, particularly in a commercial space, where businesses are increasingly concerned about intellectual property, consumer relations and client base. If an employee leaves a workplace, the employer doesn’t want to have to worry that they might lose clients to a new start-up founded by old employees. That is where the restraints clause comes in and prohibits an employee from trading in a certain industry or business type in a certain region(s) for a set period of time.
In that way, an employee is not only restricted when they do leave, but they also have a greater incentive to stay. A variation to those restraints might well form part of a negotiation with an employer upon an employee’s redundancy or resignation. This is because an employee wants the freedom to operate in an industry which they may be especially trained or qualified in.
The use of restraints may also vary and may be limited to soliciting of clients, use of suppliers or distributors, or poaching of other employees. When negotiating an employment contract, the breadth and enforceability of the restraints on trade should be one of the prime elements which form the negotiation.
If you are locked into an employment contract though, with a wide reaching restraint on trade, all hope is not lost. In Portal Software v Bodsworth [2005] NSWSC 1179, Brereton J said:
“At common law, a restraint of trade is contrary to public policy and void, unless it is justified by the special circumstances of the particular case, for which purpose it is sufficient justification that the restriction is reasonable having regard to the interests of the parties concerned and in reference to the interests of the public”.
There are a number of factors which Courts take into consideration when determining whether a restraint of trade is a valid clause of a contract. These include:
- the nature of the business and the work involved;
- the geographic location of the business and the relative market of the industry;
- the scope of the restraint in terms of geography and time period;
- the importance of goodwill in the marketplace;
- the burden that enforcement of the restraint would have on the employee;
- the overall reasonableness of the restraint.
If you are an employer looking to draft employment contracts, we can assist you with including restraint clauses which are valid and enforceable to protect your business’ goodwill.
If you are employee, our team of legal professionals can advice you on the enforceability of your current restraints and your opportunities in the market.
