A restraint of trade clause is meant to prevent a valued employee from taking up employment with a competitor or a client following the termination of their employment.
Such clauses are common in many employment contracts. However, by operation of section 4 of the Restraints of Trade Act 1976 (NSW), restraints of trade are invalid if they are “against public policy”. It is an accepted principle of law that all restraint of trade clauses are against public policy unless they are reasonable in their geographical scope, restraint period and the enforcer of the clause has a “legitimate commercial interest” being protected by the clause.
The recent case of Quantum Service and Logistics Pty Limited v Schenker Australia Pty Limited  NSWSC 2 considered the general principles of enforcement of restraint of trade provisions. That case involved an employee who ceased employment with a supplier (Quantum) who tried to take up employment with a client of the supplier (Schenker). That employee had worked on site with the client for a number of months. Interestingly, the supplier and the client had also entered a service agreement which prevented employees of either party taking up employment with the other. In an interim judgment, Justice Robb ordered the employee of Quantum be restrained from commencing employment with Schenker on the basis that, at the preliminary stage of the hearing, the restraints of trade were reasonable in the circumstances and intended to protect the legitimate commercial interests of Quantum, namely the protection of their confidential information. Justice Robb has reserved his final judgment for the case to proceed to a final hearing and for the parties to properly prepare their cases.
The above case highlights a number of important considerations for businesses in considering the structure of their business and the terms of employment contracts. The key points to remember are:
- If your business has trade secrets or confidential information (which all businesses do!), you need to ensure your employment contracts are properly drafted to ensure the protection of those secrets and information;
- Restraint of trade clauses need to be reasonable in the circumstances (by sufficiently limiting the geographical scope and restraint period) and must be closely aligned to protect a legitimate commercial interest. It is not reasonable to stop employees from taking up employment with a competitor for no genuine commercial reason;
- Act quickly. If you need to enforce a restraint, enforcing it before the employee takes up their new employment provides you more options in ensuring the restraints are properly enforced; and
- Review your existing employment contracts and ensure that employees who possess confidential information, trade secrets or any other information vital to your business have adequate restraint provisions in their contract.
Although restraint of trade clauses are readily determined to be unenforceable by a Court, a properly drafted restraint of trade clause is a simple and cost effective way to protect the legitimate commercial interests of your business.
This article is for general information only and is not intended as legal advice. If you need specific help please contact our office.