Restraint of Trade: Worth the Paper it is Written on?

Many employers want to include a restraint of trade in their employment agreements in an attempt to protect their business’s propriety interests such as clients, employees, and commercially sensitive information. However, there is a tension between the employer’s desire and the employee’s fundamental right of the freedom to work and earn a living. For the most part, if the restraint unduly impinges on the employee’s ability to earn a living then the restraint will not be enforceable. 

When employing a person, the key aspects for an employer to consider if they want to add a restraint of trade, all revolve around the “reasonableness” of the restraint. The court will look at:

• The geographical area of the restraint. The smaller the geographical area, the more likely it will be upheld. If your clients are in a radius of 3 kilometres from your business you can’t have a restraint of 10km radius.
• The duration of the restraint. The restraint should allow the employer the opportunity to build new relationships with key clients, change marketing strategies etc. The restraint will not be enforceable if its long and is really just a tool to reduce your competitors.
• The nature of the restraint. Is the restraint valid for the employee’s seniority and their position in the organisation? If the restraint is for an office employee who has no contact with key clients then it’s unlikely to be enforceable whereas the same restraint for a senior sales person with close relationships with the clients would be.
• Whether the restraint protects a proprietary interest or is simply a methodology for preventing competition. If it is the latter, it will not succeed.
• The ‘consideration’ given for the restraint. For example does the remuneration package reflect the likelihood that employee may be unable to work for a given period of time because of the restraint. 

A restraint is generally considered unreasonable if the negative impact on the employee is greater than the positive outcome for the employer. Fundamentally - is the restraint fair in the circumstances? 

Our suggestion is in the first place to consider alternative clauses such as non-solicitation, non-engagement and confidentiality clauses that may be more effective and less risky to achieve the outcomes you are looking for. 

There are examples of employers successfully enforcing a restraint of trade, and as such there can be some value in such a clause. However the courts regard them prima facie as unlawful and unenforceable. Therefore the starting point for an employer in a dispute regarding a restraint is fraught with challenges, and it takes careful drafting of clauses and a clear understanding of the outcome the employer is looking to achieve to get one that will stand up to the test.