Our employment lawyers show how restraints of trade work in employment contracts in Victoria.
A restraint of trade clause is a critical tool in agreements to restrain a party from certain conduct. It is also a common clause used in employment contracts and agreements.
The enforceability of restraint of trade clauses in Victoria is not straightforward and depends on a few factors. Getting advice is essential for both employees and employers given their complexity.
Whilst, restraint of trade clauses can be applied to many agreements, this article focusses on their use and effectiveness in employment agreements in Victoria.
The Victorian approach to Restraint of Trade Clauses
It is the starting position in Victoria to regard restraint clauses as void and contrary to public policy. This, however, does not necessarily mean that they will be void and unenforceable in every situation.
A former employer, being the 'enforcing party') will have to establish that the restraint is reasonable to successfully rebut the legal presumption.
It is then up to the enforcing party to persuade the court that enforcement would be against public interest.
When is a restraint reasonable?
Whether a restraint clause is reasonable will depend on a trifecta of interconnected factors including whether the interest to be protected:
- is a legitimate business interest:
- clarity of expression; and
- the scope of the restraint itself.
Is it a legitimate business interest?
Legitimate business interests warranting protection which have been recognised by the courts include:
- preserving customer, client and trade connections;
- preserving goodwill; and
- protecting confidential information and trade secrets.
It is important to note that preventing competition from a former employee is NOT a legitimate interest.
Clarity of Expression - Is the restraint set out clearly?
Clarity of expression can either make or break a restraint, so where there is ambiguity, this will be construed in favour of the employee unless the clause can be severed. Examples of ambiguity include the use of language rendering a restraint clause too wide so that it does more than is necessary to protect a business' legitimate interest.
What is the scope of the restraint?
A restraint must be no greater in scope than what is reasonably necessary to protect a legitimate business interest. Scope in this sense includes the geographical restraint area as well as the duration of the restraint. If a restraint is too long in duration or too broad geographically then it could be invalid. However, cascading clauses are quite effective at navigating this situation so that courts would likely strike out the invalid period/geographical areas and enforce the valid clause.
Is a restraint of trade enforceable?
Provided that the enforcing party establishes a legitimate business interest to be protected, and the clauses are concisely drafted, the restraint is more likely to be enforced in Victoria.
For employers and employees this can be a vexing question that needs to be resolved by obtaining legal advice.
Speak to an experienced Melbourne employment lawyer to ensure you get the right advice on how to protect yourself or your business.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.