27/05/2014

Have you ever thought about how a restraint of trade clause could impact your future or business?  When the time comes to sell your business, you will want to be able to ensure that the buyer is happy that it will not face competition from you or your long-term employees.  It may be too late then to request your employees sign a restraint; they may already be planning their new business.

A restraint of trade clause seeks to restrict an employee from enticing clients for a specified period both during and after working for their employer.  The clause generally also prevents departing employees from soliciting their employer's clients or using confidential information obtained during the course of their employment.

A 2012 decision of the Federal Court held a restraint of trade clause was valid where it prevented an employee from working for any of his employer's competitors for a period of two years anywhere in the world!  The Court reached this decision because the clause provided reasonable and legitimate protection to the employer in its area of operation.

That level of protection is probably a bit excessive for most small businesses, but some period may be enforceable and it will improve your chances of convincing the buyer that they will not be undermined by your ex-employees.

If you're an employee:
 
•    a valid restraint of trade could get in the way of future career moves because of the restrictions an employer could seek to impose on you;
•    and you have a valid restraint, your previous employer may be able to obtain an order from the court that you must stop all activities in breach of the restraint clause – this could have catastrophic financial and emotional consequences on you and your family;  
•    breaching a restraint of trade clause could mean becoming liable to pay monetary compensation to your ex-employer or being subject to an injunction; and  
•    as it is a term of the contract, the scope of the restraint of trade clause can be negotiated with your employer.  

If you’re an employer:
 
•    a well-drafted restraint of trade will help ease your fear of employees leaving your company and taking your company's knowledge and customers away to start a rival business or join a competitor;  
•    that in turn could improve your goodwill as it will increase your ability to provide comfort to buyers;
•    the wording of a restraint of trade in an employment contract needs to set the right balance between adequate protection for the employer and ability for the employee to earn a living in their chosen vocation;
•    as your business evolves do not make the mistake of thinking your restraint of trade clause is still sufficient; review and update it every few years; and
•    if you decide to take the matter to court, it will fall on you to first prove that the restraint of trade clause is reasonable to protect your legitimate business interest, which in some cases can be quite tricky!

Whether you are seeking the best advice as an employer, on how to draft a valid restraint of trade clause, or as an employee, on whether the clause will hold you back for your next career move, Townsends Business & Corporate Lawyers offers a fixed-fee service that meets your needs.

For more information on restraint of trade or to order online, go to our website Restraint of Trade or call our Help Desk on (02) 8296 6222.