With businesses becoming more competitive, employers are finding that they need to take more steps to protect any confidential information they have, and their current clientele.

They are now more likely to insert restraint of trade clauses into their employment, and independent contractor, agreements.

The most common restraint of trade clause will prohibit a previous employee from working in a certain area of employment, in a specified geographical location, for a particular amount of time.

However, just because a restraint of trade clause is included in an employment agreement does not provide protection for an employer automatically.  Certain aspects will be looked at in terms of reasonableness, such as; the time period specified in the clause, the geographical distance over which the restraint is made, and the kind of work under restraint (specialist etc).  In addition to this, an agreement in restraint of trade must be supported by valuable consideration.

In one case, a medical practitioner was employed by a health clinic, providing both primary health care and a teaching facility.  The GP had signed a contract under the status of an independent contractor.  Included in the agreement was a restraint of trade clause precluding her from practicing as a general practitioner under the following terms:

1. Within five kilometers of the clinic;
2. For a period of one year from the termination of her contract with the clinic.

The GP was remunerated at a higher hourly rate compared to what she received prior to entering into the agreement.  She became dissatisfied with the conditions while working for the clinic and subsequently resigned.  She decided, along with another previous employee of the clinic, to lease premises approximately 200 metres from the clinic for the purpose of starting a new medical practice.

Her former employer applied to the High Court for an interim injunction in a bid to restrain her from opening her practice at that specific location.  The employer relied on the restraint of trade clause in the agreement.

The GP argued the restraint of trade clause was unreasonable and frustrated the professional obligations of doctors which required them to be available to provide care as and when required.

The Court had sympathy with the clinic owner’s desire to have a period free of competition from previous employees to allow the new medical staff there to settle in and consolidate the clients.  The Court held, that to allow the injunction it would have a greater negative impact on the GP by not allowing her to start her business, rather than the former employer who is afraid of the competition.

On the evidence provided, the Court found that there was no proof that the GP received consideration for the restraint of trade clause.  There was no reference in the agreement to any connection between the hourly rate and the restraint of trade provision.  There were other equally likely reasons for the increase in hourly rate.

The application for an interim injunction was dismissed.

For a restraint of trade clause to be enforceable it must be:

1. Reasonable – the restraint must not be greater than what is necessary to protect the proprietary interest (e.g. An employer in the same situation above cannot impose a restriction on a former employee of, say a geographical area the size of a city, it is simply unnecessary); and
2. Justifiable – by attempting to protect proprietary interests of the employer.

In the majority of occurrences, it would seem from the case law that the most effective defence an employer can have against a previous employee competing against its interests is a comprehensive express provision for a reasonable restraint of trade.  It can be is no wider than what is required to protect the interests of the employer, yet does not limit the previous employee nor prevent them from working in their specific area of work within a reasonable distance from the previous employer’s business.  Most importantly, the employee must be adequately compensated for it.

Restraint of trade clauses have proven challenging for many employers.  Getting all of the scope, the consideration and wording right is vital to being able to enforce the clause if challenged.