Are restraint of trade and non-compete clauses valid?

This is a common question raised by both business owners and employees in my day to day work.  The answer is never straight forward and a number of factors need to be considered. 

 Typically a restraint of trade clause stops an employee from moving on to work in a competitor business or setting up their own business in direct competition, in a particular area and for a particular period of time. Some also stop an employee from taking their old employer's customers or staff to a new employer or business.   It is only fair enough that a business try to restrain departing employees to protect their legitimate business interests – the employee taking customer details, secrets, ideas, designs to a new employer. However, there can be instances where restraint clauses go too far in restraining a particular employee.  

The starting point to determining whether a restraint of trade clause is valid, is to answer whether the clause is reasonable having regard to both the parties' interests and to the public interest.  This is a balancing exercise of the interests of the employee being able to go and earn a living, with the rights of an employer to protect their business bottom line by not having secrets, customers or key staff walk out and take a huge amount of business with them.  

The wording of the clause must be considered very closely to determine 

• Whether it was reasonable when the employee signed the employment contract 

• Whether the period of time is necessary to protect any business interest of the employer 

• Whether the area that the restraint covers is wider than the employers legitimate interest. 

 Any clause the restricts a person from making a living will not be enforceable. In one case in Western Australia, a woman had worked at a fashion company. The clause was so restrictive that it stopped her from working in any competitor business in the same industry, in any state. That meant she couldn’t even clean the toilets at a competitor.  

However, a clause that legitimately protects a business from a former employee taking all of the business’s clients, is likely to be more reasonable because it protects the businesses' legitimate interests.  Take for example, the senior executive who earns a substantial six figure salary and has intimate knowledge of the marketing plans of the business, moving to the same role at a competitor.  

These examples are two of the extremes, but there is no blanket rule for whether a non compete or restraint of trade clause will be valid for any particular employee. For advice on your specific situation, contact our business lawyers Lachlan Edwards on 03 5445 1031 and Siobhan Liston 03 5445 1067