Restraint of trade clauses are common provisions found in employment contracts, partnership agreements, and sale of business agreements. In the context of employment, these clauses are designed to restrict former employees from engaging in specific activities after their employment ends. Such restrictions may include working for a competitor, soliciting clients, or recruiting former colleagues. Historically, these clauses were considered contrary to public policy and therefore unenforceable.
However, the legal landscape has shifted over time. Restraint of trade clauses can now be enforced if they are deemed reasonable in the specific circumstances of the case. For a restraint to be valid, it must balance the employer’s legitimate business interests with fairness to the employee, while also being consistent with the public interest. Courts typically evaluate factors such as the duration of the restraint, its geographic scope, and the nature of the restricted activities to determine whether the clause is reasonable and enforceable.
Enforcing Restraint of Trade Clauses
Courts generally take a stricter approach to restraint of trade clauses in employment contracts compared to similar provisions in commercial agreements. Despite this, employment-related restraints that prevent former employees from competing with their employer or soliciting clients, customers, or employees have been upheld in certain cases.
To successfully enforce a restraint of trade clause under common law, an employer must demonstrate the following:
Legitimate interest
The employer must show that the restraint is necessary to protect a legitimate business interest, such as confidential information, goodwill, a stable workforce, customer relationships, or other commercial interests.
Reasonableness
The restraint must be no broader than is reasonably necessary to protect the employer’s legitimate interest. This includes considering the duration, geographic scope, and specific activities being restricted.
Breach of the restraint
The employer must establish that the former employee has breached the terms of the restraint, which involves examining the specific wording of the clause and the employee’s post-employment actions.
On the other hand, an employee seeking to challenge a restraint of trade clause must demonstrate that the clause is harmful to the public interest.
In March 2025, the Federal Government announced plans for legislative reform that would ban non-compete clauses for employees earning above the high-income threshold under the Fair Work Act 2009 (Cth). These changes are expected to take effect in 2027, although further details about the proposed reforms are yet to be released.
Consequences for Employers
- Employers may incur significant litigation costs attempting to enforce unreasonable restraints. Courts will likely continue scrutinising restraints closely to balance commercial protection against unfair restrictions on trade and employment.
- Poorly drafted restraint clauses may be declared unenforceable. Employers may be exposed to risk regarding confidential information, client relationships, and staff retention if restraints fail.
- Stricter limits on restraints may increase labour market competition and employee mobility. Businesses may need to rely more heavily on confidentiality clauses, non-solicitation clauses, and intellectual property protections instead of broad non-competes.
Restraint of trade clauses can be a valuable tool for employers to protect their business interests, but they must be carefully drafted and reasonable to be enforceable. Employers should ensure that any restraints included in employment contracts are tailored to the specific circumstances and do not impose unnecessary restrictions on employees.
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Disclosure statement: This information is general in nature and does not take into account any individual’s or business’ specific circumstances. You should obtain independent legal advice before making any decisions based on this information. Liability limited by a scheme approved under Professional Standards Legislation.