What is a restraint of trade?
A restraint of trade is a clause in an employment contract that restricts an employee from dealing with the clients, customers and employees of a business after their employment ceases. Restraints of trade are critical for senior or managerial employees and are an important way for a business to protect their confidential information, trade secrets and customer relationships.
Is it a standard clause?
Unfortunately, no. A restraint of trade clause will not be upheld by a court unless it is deemed necessary to protect the legitimate business interests of the employer. This means there is no one size fits all approach. A standard clause or clause with the maximum possible restriction might act as a deterrent but is unlikely to be enforceable. For example:
If you own a restaurant then it would be reasonable to prevent your top chef from heading over to your competition across the street and cooking for them. But it would be unreasonable to stop your chef from switching careers and becoming a car salesman – Why? there is no competition between your restaurant and any car dealership that opens-up nearby.
How do I know what clause is right for my business?
A restraint of trade clause should consider the nature of your business, relevant industry standards and the seniority of the employee. A restraint of trade would not be necessary for a casual or part time retail assistant, whereas a restraint of trade would be necessary for a key employee with intimate knowledge of how your business operates. You must consider the potential risks associated with the employee’s role.
What type of restraint is enforceable?
A restraint clause is likely to be enforceable if the business has a legitimate interest to protect AND the clause is necessary to protect that interest. Using the example above,
if you own a restaurant then it is necessary to prevent your top chef from heading to a competitor within a 15km radius of your restaurant because the chef may take your recipes, menus and operating processes. Loyal staff may also want to follow the chef. It would not be necessary to prevent your top chef from heading to a competitor in another State. Why? Working for a restaurant interstate is unlikely to take custom from your restaurant.
When deciding whether a restraint of trade is enforceable the Court has to balance the competing rights of the employer business with the right of the employee to work and earn an income.
What does “cascading” mean and why should a restraint be cascading?
After you have considered what your business needs to protect, a “cascading” restraint of trade clause is preferable as it is most likely to be effective and enforceable. A cascading clause presents a list of decreasing restraint periods. For example:
The head chef must not work for a competitor restaurant:
- Within 12 months of ceasing employment in the State of NSW; or
- Withing 9 months of ceasing employment in a 250km radius of our restaurant;
- Within 6 months of ceasing employment in a 100km radius of our restaurant; and
- Within 3 months of ceasing employment in a 50km radius of our restaurant.
The benefit of a cascading clause is if a court thinks the restraint in (i) is unreasonable, it looks down the list to options (ii), (iii) and (iv) to find a restraint that it might find reasonable and enforceable. It reduces the risk your clause is considered unnecessary.
Is There Anything Else I Should Know?
Yes. Restraint clauses must not only be reasonable, but they must be clear and certain. This means the language and format must be easy to understand. If your cascading clause is uncertain, unclear or the formatting is clunky a Court may order that it is void for uncertainty. The clearer and more straightforward the clause, the better.
Why Can’t I Just Use an NDA?
You can use an NDA and NDAs do have a place in business dealings. However, NDAs are limited to confidential information. A restraint of trade not only prohibits your former employee sharing your confidential information with a competitor, it prohibits them from working for the competitor, as well as stealing your clients, customers and employees.
Where Can I Find Contracts with a Cascading Clause?
Cherrypicka templates contain an option to include a cascading restraint however because of their complexity our template restraint of trade clauses should be used in conjunction with legal advice.