Restraints of Trade… How enforceable are they?
This is a question I get on a semi-frequent basis and often the advice I have heard given is that “restraint of trade clauses are worth the paper they are written on”. That’s not exactly true.
There is a fine line between what is contracted, what is legal, and what is enforceable.
So what are restraints of trade clauses and when are they enforced?
In the context of employment, restraints of trade are specific clauses in employment agreements under which employees agree not to do something that they would otherwise be free to do after they leave their job. These are typically limited in scope by reference to the length of time that they will apply for after the employee has left their job; and the geographic area in which the employee agrees to limit their activities.
The most common types of restraints of trade are agreements that the employee will not poach the employer’s clients or staff or that the employee will not work for any of the employer’s competitors, (sometimes referred to as non-solicitation clauses).
As touched on earlier, it is widely believed that restraints of trade in employment agreements are prima facie unlawful, and therefore, unenforceable. A key reason for the perception that restraints of trade are unlikely to be enforced is the fact that the law errs on the side of ensuring every person is free to make a living in their chosen field of work, following termination of their employment. It would be considered unfair that anyone would be prevented from earning a crust doing what they may have devoted their working lives to.
In order for a restraint to be considered reasonable (and therefore enforceable), the onus is on the employer to show:
that it has a legitimate proprietary interest capable of protection through a post-termination restraint; and
that the restraint goes only as far as necessary for the protection of the employer’s business (aka: proprietary interest)
The two categories in which employers commonly claim proprietary interests are:
Trade secrets; and
If the employer is not able to demonstrate this, the restraint is likely to be merely an attempt to prevent competition and contrary to public policy.
The Employer would also need to show that the restraint has been fairly bargained for (consideration provided), is necessary to protect the employer’s business (as above); and only goes as far as the employer requires.
In general, an employer is entitled to protection from the knowledge and influence a former employee has over the former employer’s customers. The reasonableness of the length of time for which a restraint may operate must be determined in the circumstances of the particular case. Restraints for periods such as 2, 3, or 6 months have commonly been upheld as reasonable, although this depends on the particular circumstances.
In conclusion enforcement of restraints of trade is not always a straightforward matter, but that is no barrier to enforcing them in appropriate cases.
They may very well be enforced, provided the employer can show that the restraint clause:
has been fairly bargained for;
is necessary to protect the employer’s business; and
only goes as far as the employer requires.
In those cases, both the employer and the employee may find that the restraint clauses are well worth the paper they are written on.
This article, and any information contained on our website is necessarily brief and general in nature, and should not be substituted for professional advice. You should always seek professional advice before taking any action in relation to the matters addressed.