#1 Identify when a ‘restraint of trade’ clause is necessary
Naturally, employers don’t want their former employees setting up shop next door in direct competition of the business. In our experience, the threat of a current or potential employee becoming direct competition doesn’t always cross an employer’s mind until it is too late.
Therefore, our first tip on restraint of trade is for employers to consider each of their employees (prospective or current) and ask themselves, what damage could be caused to the business if the employee was to resign tomorrow and directly compete?
If the answer includes any damage potentially sustained by the business, then a restraint of trade clause should be considered.
#2 Draft restraint of trade clauses to protect your business
What is needed to adequately protect your business in the situation of restraint clauses in employment relationships? Traditionally, the courts are reluctant to enforce a restraint of trade. Restraint of trade provisions must be ‘reasonable’ and provide an employer with no more than adequate protection for the business. As a rule of thumb, restraint of trade clauses should be drafted as narrow in scope as possible to give an employer the best chance of being able to rely on it. There are various restrictions an employer may want to impose on their employee to protect their business.
Here are a few examples:
- to contact suppliers of the business;
- Restricting an employee’s ability to own or operate a competing business;
- Restricting an employee’s ability of seeking employment with a competing business
How restraint of trade clauses operates
In seeking to be as ‘reasonable’ as possible, employers should consider what actions could the employee take that would cause damage to the business and limit the restraint clause to those possible scenarios.
#3 Identify a geographical location
Restraint of trade clauses should always include a ‘reasonable’ geographical limitation. For example, simply attempting to prevent an employee from seeking work with a competitor anywhere in the world would likely be viewed as unreasonable by a court.
To increase the likelihood of a restraint clause being enforceable, it is important to limit restraints to the trading region of the business.
#4 Cascading Restraint
If you require assistance in restraint of trade in the employment relationship, get in contact with our office on (07) 3876 5111 for an obligation free consultation.
Because of the uncertainty about what the court might consider reasonable, employers should consider a “cascading” restraint clause. A cascading restraint clause means that the restraints are drafted in several tiers. This type of drafting provides separate combinations of geographic areas, restraint periods, and covenants. The benefit to such clauses is that where one tier is unenforceable, the next tier may be considered reasonable. This means that although some combinations of areas, restraints and covenants may be unreasonable, there are ‘back up’ restrictions that can be relied upon.
#5 Seek Legal Advice
As our first 4 tips have highlighted, restraint of trade provisions are difficult to enforce if they are not carefully drafted. Restraint of trade provisions must be drafted on a case by case basis to be ‘reasonable’ and provide an employer with no more than adequate protection for the business.
When engaging new employees or amending existing contracts, employers should seek legal advice to ensure restraint of trade provisions are drafted comprehensively to increase the likelihood they will be enforceable. Further, employees should seek legal advice when an employee leaves the business and enforcing the restraint of trade clause becomes necessary.
If you require assistance in restraint of trade in the employment relationship, get in contact with our office on (07) 3876 5111 for an obligation free consultation.
Written By
Director
NB Lawyers – Lawyers for Employers
About the Author
Jonathan Mamaril leads a team of handpicked experts in the areas of employment law and commercial law who focus on educating clients to avoid headaches, provide advice on issues before they fester and when action needs to be taken and there is a problem mitigate risk and liability.
Assisted by William Sherry, Lawyer.