Understanding Employment Agreement and Restraint of Trade

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A number of recent decisions in Courts across Australia have highlighted the growing need for businesses to review the level of protection afforded by their current employment contracts in relation to the conduct of past employees. Specifically, whether they contain confidentiality and/or restraint of trade clauses, and if so, whether these clauses have been effectively drafted to afford full protection of their legitimate business interests.

Arguably the most important assets to any business are those that are intangible; including marketing strategies, customer lists, business models, intellectual property, demographic data and other valuable information. Employees to a business are privy to this vital information, the carefully constructed core of any good business. During employment, every employee owes a recognised duty not to directly compete with his or her employee. However this duty does not extend beyond the conclusion of the employment. Therefore when a valued employee leaves, how can businesses be protected from the knowledge that they have gained being taken directly to a competitor or being used to create direct competition?

Protecting your business

Employers often complain that protecting these intangible, legitimate business interests from being exploited by former employees is an impossible task. However, with the advice and expertise of business lawyers in Melbourne, your hard work can be protected by a carefully constructed Employment Agreement which includes a post-employment restraint of trade clause.

Australian courts have shown a willingness to enforce post-employment restraint of trade clauses, provided that they meet the set requirements of ‘reasonableness’. This means, that whilst it is not in the public interest for the Courts to protect businesses against all competition, the law will intervene to protect the exploitation of confidential information and trade secrets by previous employees. Furthermore, there is an important distinction between ‘business-specific’ trade secrets and confidential information which can be protected, and ordinary knowledge acquired within or outside of employment which cannot be.  An employee is still entitled to retain and make use of his or her ‘stock in trade’.

Restraint of trade clauses

A typical and well- constructed restraint of trade clause will contain the following;

  • Non-competition clause
  • Non-solicitation of client clause
  • Non-dealing clause
  • Confidentiality clause
  • Protection of intellectual property developed by the employee during employment

Which business interests can be legally protected?

Three main rules govern the construction of legally protected restraint of trade clauses.

  1. The public and the individual has an interest in every person carrying on trade freely
  2. All restraints of trade that interfere with individual liberty are contrary to public policy and void.
  3. A void contract can be enforced by an employer if it is reasonable in all the circumstances.

As a general rule, restraint of trade provisions are void. The law will only allow the protection they afford in “special circumstances” which make it necessary to protect the interests of the parties. The employer must identify the relevant risk the clause seeks to protect and must not impose more than adequate protection that is reasonable. In assessing what type of protection will be regarded as reasonable, the courts will have regard to the nature of the business, the value of the client base, the length of the restraint provision and a comparison between the former and current positions of the former employee within each company.

It is important for business owners to regularly review the efficacy of their restraint clauses and to seek the assistance of a business lawyer in order to assess the reasonableness of their restraint clauses and their likelihood of being enforced by an Australian Court if necessary. Employees who work in roles where they develop a personal relationship with their client and acquire knowledge of their client’s affairs also need to carefully review restraint of trade clauses within their employment contracts, and how these clauses may affect their future careers and obligations to previous employees.

Ensuring that restraint of trade clauses within employment contracts are carefully drafted and understood by both the employer and employee is of significant importance to all Australian businesses in order to avoid costly litigation and ensure that all parties are aware of both their rights and obligations.

Author: Group Features Editor

James is the Group Features Editor for Agenda Daily managing the business, entertainment, lifestyle, technology and travel sections. After completing a degree in law, he decided that writing was his first love and has been a journalist for over three years working in magazines, TV, radio and online.

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