Restraint of trade and non-compete restraint clauses in employment contracts

• Published date: 10 February 2023
• Law Firm: MDC Legal

Employment contracts, like terms and conditions, are often unread and can contain unexpected surprises if not reviewed carefully before signing. Employment contracts for senior employees or those with a position of influence over clients or client information usually contain 'restraint of trade' or 'non-compete restraint' clauses which can catch employees off guard when they leave their employment.

What is a restraint of trade clause?

A restraint of trade clause or agreement is a term in an employment contract which restricts a party's ability to trade with other parties in the future. The clauses are unenforceable if contrary to the public policy that "a person should be free to use their skill and experience to their best advantage"¹ and should be free to earn a living in their chosen field. This means that the party hoping to rely on and enforce the restraint, usually the now ex-employer, bears the onus of proving its enforceability.²

When is a restraint of trade clause enforceable?

To determine whether such a clause is enforceable a common law test is applied. This test stipulates that a restraint of trade clause is only enforceable if it is proven to protect a legitimate business interest and the protection sought goes no further than is reasonably necessary to protect that interest. ³

What are legitimate business interests requiring protection?

A variety of interests can require protection, this is determined from the context of the business, the employee, and the client. Common business interests recognised by Courts as requiring protection are protection of confidential commercial information, protection of goodwill in the form of customer, client, and supplier connections, and protection of the stability of the workforce in the form of non-solicitation of employees.

Protection of confidential information

Confidential information can include trade secrets, patents, client lists, financial information, pricing, marketing plans, tender, costings and budgets, commercially sensitive workplace policies and sometimes even terms of employment, commercial procedures and practices, and strategy and inventions of the employer. The common thread with what constitutes confidential information worthy of protection is that it is commercially sensitive, the employer has shown an intention for it to remain confidential, and it is not in the public domain.⁴

How a restraint of trade clause operates regarding confidential information is by preventing the employee...