In the context of an employment contract, a restraint of trade is a provision or clause in the contract which seeks to restrict or limit an employee’s ability to engage in certain activities that may be deemed harmful to the interests of the employer. Such activities may include running a competing business, soliciting customers or employees, sharing confidential information, or working for a competitor.
The purpose of a restraint of trade is to protect the business interests of the employer, such as their customer base, goodwill, trade secrets or confidential information. For example, in an employment contract, an employer may include a “non-compete” clause to prevent a past employee from working for a competitor and using the knowledge and contacts gained during their employment to harm or undermine the employer’s business.
There are various kinds of potential restraint clauses, with the most common being:
- “non-compete” clauses, which are used to prevent an employee from setting up, or working for, a competing business for a specified period after ceasing their employment;
- “non-solicitation” clauses, which are used to prevent an employee from soliciting or approaching customers, employees or suppliers of the employer for a specified period of time after ceasing their employment; and
- confidential information clauses, which are used to prevent a former employee from using confidential information obtained during their former employment.
Restraints of trade can limit and interfere with an employee’s freedom to work, to carry on a business and otherwise earn a living. As such, courts have historically closely scrutinised such provisions and restricted their enforceability to ensure that they are reasonable and necessary to protect legitimate interests and do not unduly restrict competition.
The validity of restraints can have significant ramifications for employers and employees. Whether a particular restraint of trade is reasonable and enforceable is a question of law which depends on the true construction and legal effect of the contract in question.
We have experience and expertise from acting for both employees and employers in relation to the preparation and enforcement of restraint of trade clauses.
