I have been dismissed by my employer and have a strict restraint of trade clause. Does this clause still apply?

I have been dismissed by my employer and have a strict restraint of trade clause. Does this clause still apply?

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:

  • not communicating trade secrets of other confidential information to other persons, particularly competitors’ in trade with the former employer; and
  • not soliciting customers of the former employer.

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:

  • the duration of the restraint;
  • the geographic area in which it applies; and
  • the activities of the employee the clause seeks to restrain.

Generally, a broad restriction on competition will not be deemed reasonable.

Legitimate business interests that are commonly recognised as justifying a restraint include:

  • the employee’s knowledge of the employer’s business secrets or confidential information; and
  • the employee’s influence or connection over those who are important to the business such as customers, clients and other employees.

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.

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