From time to time, we see restraint of trade clauses (also known as restriction of trade clauses) making headlines in the media, either because an employer seeks to enforce the clause or an ex-employee is challenging the terms and wants to start a new job.
But courts don’t always side with the employer and a lot of restraint of trade clauses are found to be unenforceable as they go beyond the employer’s legitimate business interests and are too restrictive on the employee.
So why is it that employers still regularly include restraint of trade clauses in employment contracts and why do employees agree to them when they sign?
This blog post takes a close look at restraint of trade and non-solicitation clauses. We cover what they are, how they can be used, whether you need them, and if you do, how to make yours compliant and enforceable.
What is a restraint of trade?
A restraint of trade is literally what it sounds like: a clause in an employment contract that restrains an employee who leaves your company from starting a business or working for one that is in direct competition to you.
Restraint of trade clauses can be useful to protect your business interests - e.g. your intellectual property (IP), trade secrets or client information - especially if you are in a highly-specialised area.
It means someone cannot leave with things like your exclusive technology or specialised ways of working and go to work for your direct competitors or set up an organisation in direct competition with you.
Restraints of trade are typically for a set period of time (between 3 and 12 months), a defined geographic radius or area (e.g. all of Australia or the relevant State or Territory), and scope (e.g. specific to your company’s product or area of specialisation).
Types of restraint of trade clauses
There are two main types of restraint clauses in Australia
- Non-compete restraints: Designed to restrict an employee from working for a competitor in the same or a largely similar role or setting up their own business in competition. Non-competes are generally limited to a maximum of 6 to 12 months and within a defined geographic area.
- Non-solicitation restraints: These aim to prevent an employee from soliciting, poaching or dealing with clients or other employees after they leave an employer. The clause may be specific to not encouraging other employees to leave employment (called non-poach restraints) or not interfering with clients, suppliers, employees or contractors of the former employer (called non-interference restraints). Non-solicitation clauses are often more enforceable than non-competes.
There are also non-disclosure clauses that restrict ex-employees from using or sharing confidential information learned during their employment, e.g. client lists, product formulas, trade secrets or other IP. You can also include a non-disclosure agreement in the settlement agreement at the end of employment.
Are restraint of trade clauses enforceable in Australia?
Restraint of trade clauses are notoriously hard to enforce. That is because courts will only enforce them if they are reasonable in protecting the employer's "legitimate interest" (e.g. their confidential information) or the business’ reputation.
Using restraint of trade clauses to protect your company from competition will not typically be enough to justify the test of reasonableness. You need to be able to prove the employee has confidential information that could cause damage to your business or its reputation.
So often, in practice, workers do have the right to leave your business and work for a similar business (or start their own).
Restraints in NSW
The legal situation in New South Wales is a little different, as under the NSW Restraints of Trade Act 1976, all restraints of trade are valid unless they are found to be against public policy. To be against public policy, there has to be a ‘manifest failure’ by the employer in attempting to keep the restraint within reasonable bounds. In NSW, courts can also adjust the scope of a clause to ensure it is reasonable.
Principles for determining whether a restraint of trade clause is enforceable
From a legal perspective, there are a few questions you can ask yourself to determine whether a restraint of trade clause in your employment contract is enforceable, should it come to that. Those are:
- Do I have a legitimate business interest that must be protected, e.g. confidential information, trade secrets, or specialised skills that are unique to my business?
- Does the clause clearly define the activities the employee is restricted from performing, e.g. opening a rival business nearby?
- Is the period of restraint reasonable? 3 months is typical, though in some cases 6-12 months could be justified.
- Are the geographical limits of the restraint reasonable? For example, the employee should be free to work in Adelaide if you’re based in Sydney and your markets don’t overlap.
Should my business use restraint of trade clauses?
Whether you need to include restraint clauses in your employment contracts really depends on your industry, operations, and the employee’s position. Remember, restraints are not always enforceable and the courts will only uphold them if they are reasonable.
Having restraint clauses for all your workers may not be necessary, unless you are in a highly specialised area, e.g. you make niche products or offer a very unique service. It is more common to have broader restraining clauses for senior or executive roles, as they typically have access to commercially-sensitive information, but you need to be clear on what restraint clauses you want to enforce and be sure they are only aimed at protecting your interests.
If you are thinking about using restraint of trade clauses for your employees, here are some questions to ask yourself:
- What is the position? Is this a senior enough position to warrant it?
- What level of access does the person have, i.e. will they have access to sensitive strategic information, trade secrets, IP, or key client relationships?
- What potential risk does this pose? This needs to be more than just “the person sees how our operations work” - they need to have significant enough knowledge to be able to potentially damage your business if they leave and take that information or expertise elsewhere. In most scenarios, this would be your executive team and no one else.
- Is your industry highly-specialised or do you have proprietary technology?
If you do include restraint of trade clauses, you have an obligation to act fairly and reasonably. They are to protect your business interests, not to discourage people from leaving the company or to stop them working in their chosen field when they go. Placing significant pressure on an employee to agree to the clause may also make it unenforceable.
So, to increase the likelihood of the restraint of trade being enforceable, it needs to be reasonable while not unfairly restricting a person’s ability to earn a living. This means the combination of the time period (not too long), geographic radius (not too broad), and scope of coverage should not be unreasonable.
Providing compensation for restricting the person’s ability to earn a living for the duration of the restraint period may also help make the clause enforceable. This is so, if the person leaves, they can get by without working for the period of time the restraint covers.
Editing your current restraint of trade clauses
If you have restraint of trade clauses in your existing employment contracts, you may want to review and edit them.
As mentioned before, have a look at the radius, breadth, time length, and compensation. If you don't have these things in your current clauses, or they are unreasonably restrictive, you should amend them.
In doing so, you must consult with the affected employee before you make changes to their employment contract, even if they are beneficial to them.
Proposed changes to use of restraint of trade clauses
Earlier this year, the Albanese Government proposed various changes to the use of restraint of trade clauses and other “anti‑competitive business agreements”, including bans on:
- Non‑compete clauses for all workers that earn less than the high‑income threshold in the Fair Work Act (currently $175,000).
- ‘No-poach’ agreements that prevent staff from being hired by competitors.
- Fixing wages by making anti‑competitive arrangements that cap workers’ pay and conditions, without the knowledge and agreement of affected workers.
The changes come after a Treasury report found the use of restraints was becoming more common in Australia and there was proof they reduce job mobility, employee wages, and “firm dynamism”.
The Government says it will also consider changes to non‑solicitation clauses and non-compete restraints for high-income workers during the consultation process.
The reforms are scheduled to take effect from 2027, operating prospectively to give businesses and workers time to adjust. We will be watching developments closely.
What should I do if an ex-employee breaches a restraint of trade or non-solicitation clause?
Step 1: Serve them with a cease and desist letter that points out the breach and the evidence you have, and asks them to respect the clause in their employment contract and stop.
Step 2: If they don’t stop, send them a follow-up letter reiterating your request.
Step 3: Get legal assistance to write and issue a letter of demand or begin legal proceedings asking the courts for an injunction to stop the person’s activities.
How can MyHR help with restraint of trade clauses?
As we’ve said, restraint of trade clauses can be notoriously tough to enforce, so they need to be well-defined and reasonable.
If you need help drafting or reviewing any of the terms of your employment contracts, the team at MyHR are the experts. We prepare hundreds of customised contracts for clients each week, all delivered on our feature-rich HR platform.
