Employment & Safety Briefing – Restraint of trade clauses – can they be enforced?

The answer: Maybe. Whether a restraint clause will protect your business or not, is going to depend on how it’s drafted.

Imagine this… you are the owner of a consulting firm renowned for its exceptional service and expertise. It’s a place where strategies are not just plans, but the lifeblood of the business. Alex, a consultant with a knack for solving complex problems, has been pivotal to the firm’s success. But now, Alex is leaving to start a venture of their own.

You face a dilemma: Alex’s departure could mean the loss of trade secrets and trusted client relationships. That’s where the restraint of trade clause comes into play. It’s a legal promise Alex made to protect the firm’s confidential methods and client base.

Restraint of trade clauses are not just legal jargon but they are an important and necessary shield for businesses to thrive and maintain their competitive edge.

The starting point

The starting point is that restraints are void and have no legal effect. But that’s not the whole story. It is possible to craft these clauses in a way that stands up in court, and courts have shown that they are willing to uphold reasonable restraints.

In the employment world, you’ll typically find two types of restraint clauses:

• Non-compete clauses aim to stop an employee from joining a competing company for a period of time.
• Non-solicitation clauses are there to keep employees from coaxing away colleagues or clients to join them in a new venture.

For these clauses to hold water legally, the employer must show they’re protecting a legitimate business interest. And the clause can’t be over-the-top; it has to be just enough to safeguard the employer’s interests.

Defining a legitimate protectable interest

A legitimate business interest capable of being protected will be determined on a case-by-case basis and will typically include things like:

• Maintaining customer relationships and safeguarding business goodwill;
• Protecting trade secrets and confidential information vital to the company’s competitive edge; and
• Ensuring the stability of the workforce by retaining the company’s current employees.

Reasonable restraints

When evaluating the reasonableness of a restraint, the following elements are typically considered:

• Timeframe: How long the restraint lasts matters. The longer it lasts, the less likely it is to be enforceable.
• Location: The specific areas where the restraint is enforced.
• Restricted activities: It’s about what the employee can’t do during the restraint period.
• Industry norms: Every industry has its quirks, and that plays into what’s reasonable.
• Employee’s role and network: A person’s job and who they know can influence the restraint’s fairness.
• Confidential information: Whether the employee has confidential knowledge and the significance of such information.

In instances where a restraint of trade clause is deemed excessive, courts may opt to “sever” parts of the clause. This process involves removing the unreasonable segments while maintaining and enforcing the reasonable components.

Should the court be unable to isolate any reasonable portion within the clause, the entire clause will be invalid.

Cascading restraints

A ‘cascading restraint’ is a legal mechanism designed to provide flexible enforcement options for non-compete clauses.

It is a series of decreasingly restrictive options that kick in to give a non-compete clause the best chance of being found to be enforceable. For instance, a cascading restraint might limit an ex-employee from poaching clients for:

• 18 months, 12 months, or 6 months after they leave; and
• within a radius of 300 km, 200 km, or 100 km from their former employer’s location.

If a court finds any part of this too restrictive, they’ll just remove that piece, leaving a more reasonable timeframe or distance that still applies.

Key points

• Drafting is key: Restraint of trade clauses need to be carefully crafted to be enforceable, balancing protection of the business without being overly restrictive.
• Legitimate interests: They must protect genuine business interests, like customer connections and confidential info, to be considered reasonable in court.
• Flexibility with cascading restraints: These offer a tiered approach to enforceability, adapting to what the court deems reasonable in terms of time and geographic scope.