Non-compete and other restraint clauses in employment contracts

“What is a restraint of trade clause and why does it matter to me?”

We can explain!

Restraint of trade clauses are found in many employment contracts, for people at all levels of seniority.  They are clauses that seek to stop an employee from doing the kind of thing that might theoretically disadvantage their employer in their business, such as:

• working for a similar employer, or starting a similar business of their own, nearby where they used to work;
• taking their co-workers or clients to a new job; or
• using confidential information from their old job at their new job.

“OK that makes some sense, but can my employer do anything about it?”

Maybe.

A restraint of trade clause is likely to be valid if it is reasonably necessary to protect the legitimate business interests of the employer. In other words, if it is reasonable and protecting your employer’s business from genuine harm then it may be enforceable.

Whether a particular restraint clause is enforceable depends on things like what type of job or role the employee has, how long the restraint is for (i.e. what is the time period that it prevents the employee from doing the things it describes), the geographical area that it covers, the kinds of activities it prevents, the nature of the employer’s business, where the employee works, and the list goes on.

There is another problem, one that we also see in our work all the time: there is nothing stopping an employer from trying to enforce a restraint of trade clause, regardless of whether it is enforceable or not. They might do this by threatening or even commencing legal proceedings.  We often see behaviour like this used as a scare tactic to try and stop an employee from resigning, or to put them off working at or running a similar business elsewhere.

“That’s not very helpful.”

We agree.

Restraint clauses can be scary and confusing because:

• there are currently no limits on when and how they can be included in employment contracts; and
• the law currently makes it hard to be certain whether any given clause is valid just by looking at it.

Fortunately, the Treasury is currently conducting a review of the use of restraint clauses in Australia and asked for submissions on the topic (spoiler alert: we made a submission!)

In our submission we make a total of 10 recommendations which include asking for limits on when restraint clauses can be used, tools to help employees understand their rights and penalties for employers who abuse them. We believe these changes can help prevent situations where workers might be scared into staying at their job and not finding new work that might be better paid or better suited to them.

You can have a read of our submission here, and you can skip to pages 8 and 9 for a summary table of our recommendations!

We can advise on restraint clauses

Did you also know that restraint clauses are an issue that we can help with? If you have a restraint clause in your employment contract that you are concerned or unsure about, you can request assistance from us by completing the form here.

Disclaimer: Please be aware that this resource provides general information only. It is not legal advice. If you have a question about how the law applies to your specific situation, you can click here to request free legal assistance.