What is a restraint of trade clause?
A restraint of trade clause is a clause in an employment agreement that endeavors to prevent an employee from working for a competitor or starting up a business in competition with the employer either during the employment relationship or after the employment relationship has ended.
Post-employment restraint of trade clauses generally apply for a specified period of time after the employee’s employment has ended and possibly within a defined area (e.g. within 10km of the employer’s business location).
Other restrictions may also be included in a restraint of trade clause, such as:
Does the restraint of trade clause apply to you?
A restraint of trade clause will only apply to you if your employer can establish that it is ‘reasonable’. For the restraint to be ‘reasonable’ your employer must show that the restraint of trade clause is reasonably necessary to protect a legitimate interest of the employer’s business.
In assessing this, the following factors will be taken into account:
Generally, a broad restriction on competition will not be deemed reasonable.
Legitimate business interests that are commonly recognised as justifying a restraint include:
Where the restraint of trade clause contains a series of ‘cascading clauses’ – starting from broader areas/time periods (e.g. 40km/1 year) and cascading to more narrow areas/time periods (e.g. 10km/6 months), the court may sever the broader part of the restraint clause if they find it to be unreasonable and accept the part that is least broad in scope.
Please contact our lawyers at McDonald Murholme if you have any further questions regarding this issue.