Restraint of trade clauses are now quite commonly used in employment contracts, but this wasn’t always the case.
A covenant in restraint of trade, also sometimes referred to as a ‘non-compete’ clause, is a term in an employment contract that requires an employee, after leaving an employer, not to perform a particular type of work within a geographical area around the current employer’s place of business for a specified period of time.
Traditionally, employers weren’t able to include covenants in restraint of trade in their employment contracts as it was considered contrary to public policy. The law has developed over the years to recognise these clauses as valid, provided they are justified in the circumstances, particularly to protect the employee’s legitimate business interests. It is now well established that an employer may impose restraints on their ex-employees, directed at protecting the goodwill of the business following the employee’s departure.
The employer must demonstrate that, at the time of the agreement regarding the restraint:
· The restraint is required to protect the employer’s legitimate business interests, such as confidential information, goodwill, a stable workforce, customer connections, or commercial interests; and
· The restraint includes no more than is reasonably necessary to protect those interests.
When considering what should be included in a non-compete clause, the basic question is: what is the employer seeking to protect? Common reasons for inserting a non-compete clause are to ensure that employees do not take up employment with a competitor or set up a rival business.
Is the covenant in restraint of trade reasonable?
Whether the restraint is reasonable will be judged at the time the contract is made, in light of all of the surrounding circumstances, including the length of the restraint, the geographical area over which the restraint is to operate and what the employee is being restricted from doing.
Courts are more likely to uphold restraints regarding customers, clients, employees and confidential information, and less likely to uphold restraints against ‘competition’ (e.g. working for a competitor.) A ‘non- compete’ restraint which serves no further purpose than to prohibit employees from working with a rival organisation are unlikely to be enforceable, as this is contrary to public interest.
The circumstances of how the employment contract was terminated will also be relevant in assessing the reasonableness of the restraint clause. For example, if an employee is made redundant following a company restructure, a non- compete clause maybe held to be unreasonable.
The general factors a court will assess in determining the reasonableness of a particular restraint of trade clause include:
· The nature of the ‘protectable’ interest that is the subject of the agreement;
· The duration of the restraint;
· The extent of the restraint; and
· The relevant bargaining power of the parties at the time of entering into the agreement and whether, as a result, it would be unconscionable to enforce the restraint.
To view more information about our Business Law service please click here