The problem with restraint clauses in employment contracts

Restraint of trade clauses are becoming increasingly common in employment contracts. These clauses operate to protect a business’ legitimate interests, such as its confidential information and/or its customers and connections. Restraint clauses can vary dramatically depending on the nature of the employment, the industry, and the agreement reached between employer and employee.

 Restraint clauses have generally been considered to be unenforceable in a legal context. However, they can be upheld if the employer can demonstrate the restraint clause is reasonable. Three key features which must apply for restraint clauses to be valid are:

  • The employer must have a legitimate interest to protect
  • The scope of the restraint must be reasonable in all the circumstances, and
  • The assessment of what is reasonable or not is made at the time the contract was entered into, not at the time of an employee leaving.

 In assessing “reasonableness”, the courts will look at the scope of the restriction, the period of time attached to it, and the geographical area in which it is to operate.

 If the clause goes beyond what is reasonably necessary to protect a legitimate business interest, the court will not enforce it. Unfortunately for employers, it is well established that an employer does not have a legitimate interest when simply protecting itself from competition. A recent decision out of the District Court in Queensland has reinforced this view.

 In Commsupport Pty Ltd v Mulligan & Mirow, an employee had the following clause written into their employment contract:

 “For a period of three months from the date the employee’s employment with the employer concludes (for any reason), the employee may not directly or indirectly, in any capacity whatsoever:

(a)    Act for any person or entity (natural or otherwise) that the employer had or has as a client during the six month period immediately prior to the employment with the employer concluding; or

(b)    Contact or cause another to make contact with any person or entity (natural or otherwise) that the employer had as a client during the six month period immediately prior to the employee’s employment with the employer concluding, with a view to enticing that person or entity to use the professional services of the employee or a third party”

The Court found this clause to be unreasonable. The Court made it clear that restraining an employee from dealing with customers following termination of employment is much more likely to be considered reasonable if that particular employee was involved in cultivating a relationship with those specific customers. The fact that an employee had contact with customers will rarely be enough, in and of itself, to enforce a restraint. A restraint relating to customer connections will usually only be upheld in situations where the employee holds influence over the customers.

The Court noted in Commsupport that restraints often fail for having been drawn so broadly that it applies not only in respect of customers with whom there was a relationship of influence, but also to those where no such relationship existed. The Court stated that this is the point at which the legitimacy of interests gives way to the restraint being one merely against competition.

This case highlights the importance in drafting restraint clauses carefully to ensure they are not so broad they become unenforceable, particularly for provisions concerning the solicitation of clients and customers. This is an area of employment law we see frequently tested in Court and it is well worth consulting with an employment lawyer to check the validity and enforceability of any such clause.  

This article was written by Senior Associate, Adam Crichton 

Practice Area: Employment

Head Office

5th Floor, 80 King William Street Adelaide, South Australia 5000
t: Australia (08) 8414 3400  International +61 8 8414 3400
t: Australia (08) 8414 3400
t: International +61 8 8414 3400
f: Australia (08) 8414 3444  International +61 8 8414 3444
f: Australia (08) 8414 3444
f: International +61 8 8414 3444

Connect With Us

ShareThis

New Look.

Same people.

We're refreshing our look to better represent the service we're providing! Our new website is coming soon.

enter our existing website