Are restraint of trade clauses enforceable?

Restraint of trade clauses (or non-competition provisions) in employment agreements were in past times generally unenforceable, even though employers commonly included them within individual employment agreements.

In more recent years courts have been more willing to enforce them if they reasonably protect a real asset of the employer.

When are restraint of trade clauses likely to be enforceable?

• If a restraint of trade clause is to be enforceable, the employer must show that the restraint is reasonably necessary to protect a legitimate commercial or proprietary interest. Such interests could include trade secrets, customer lists, a continuing business relationship or budget forecasts. The restraint of trade will only be enforced to the extent required to protect these interests.
• The restraint of trade clause must also protect an employer from more than competition itself. This is because the law protects an employee’s right to earn a living and their right to pursue a career in their chosen field. If a restraint of trade prevents this, then it is unlikely to be enforceable.
• An employer must show that the restraint of trade is reasonable.
• If compensation (like additional remuneration) is given for a restraint of trade or the employee agrees to the restraint of trade, then the clause is more likely to be enforceable.

When will a restraint of trade clause be reasonable?

When determining whether a restraint of trade clause is reasonable, a court will consider the following:

1. An employee’s role;
2. The employer’s business;
3. The geographical scope of the restraint;
4. The nature of the restraint, and
5. The duration of the restraint.

This will be assessed against the circumstances behind the agreement between the parties.

What happens if a restraint of trade clause is not reasonable?

If a restraint of trade is unreasonable, the court may delete or modify the restraint of trade. 

What can an employer do to enforce a restraint of trade clause?

If the restraint of trade is reasonable, an employer can apply to the Court for an injunction to stop an employee from committing a breach. Additionally, the Court may award compensation and/or penalties from the employee or their new employer.

What if you are unsure of your rights and obligations under a restraint of trade clause?

If you are concerned about a possible breach of a restraint of trade clause we recommend that you seek legal advice to establish whether the restraint is reasonable and whether the restraint can be enforced. 

If you are an employer who is concerned about a legitimate commercial or proprietary interest, you should take steps to ensure your employment agreements are drafted correctly to protect your business assets and interests. 

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced employment law team who can answer your questions and put you on the right track.