Employing highly intelligent and highly qualified employees in a range of sophisticated commercial businesses is a risky business for employers. To acquire competitive business advantage in an increasingly globalized and networked world requires the employment of highly qualified, well educated, experienced and clever employees. Often, employees have access to secret and confidential information which is both price and market-sensitive. The potential employee will need access to this information to perform his or her anticipated role.  When the employment relationship ends, however, the employer is faced with a double problem.  First, the employee is leaving.  Whether the departure is voluntary or involuntary, it will be an inconvenience and a disruption to the employer.  Secondly, and more importantly long term, the departing employee will take with him or her, knowledge of the secret and confidential information which may be the very basis of the employer’s competitive advantage in a particular industry or market.

To minimize this long term disruption, employers often include restraint of trade clauses in employment contracts when employing people. Commonly, the restraint of trade will prevent the former employee from seeking employment with any competitor of the former employer in the particular market for a period of time. In current times, where there is a shortage of trained staff, the reason why an employee departs is generally because he or she has received a better offer from a competitor.

Employers, therefore, always ensure that staffs are employed pursuant to written contracts of employment which contain enforceable restraints of trade. The courts will not allow employers to prevent former employees from conducting a living by practicing the skills which may have taken many years to acquire through university courses or practical experience.  However, this is only a general rule or starting point.

Contracts of employment generally and restraints of trade particularly need to be carefully drafted to have their intended legal effect. Employers and employees need to be carefully advised on the range of tactics available in post employment scenarios. Potential employers and employees are both well advised to seek legal assistance when drafting or accepting terms of employment.  Due to the seniority of the employees, their employment contracts are less likely to be workplace agreements but more likely to be private, one-off, contracts of employment.

It is the norm to find a restraint of trade clause within an employment agreement.

They are a means for employers and partnerships to prevent departing employees or partners from taking clients or competing with the business for a period of time after they leave. They can be very important particularly for businesses that rely on client relationships. The employer requires the restraint of trade in the agreement to safeguard him against a situation where an employee resigns from his employment, only to find that the employee is now working for his competitor.

The employee normally signs the agreement, not bothering to think about the consequences of such a clause, and only worrying about it when he/she is about to resign from his/her current employment.

A restraint of trade is, in short, a stipulation in the employment agreement stating that the employee, upon termination of the employment relationship for whatsoever reason, is prohibited from being involved in a business similar in nature to that of the employer.

Most clauses to this effect usually have an added clause stating the period of such restraint, calculated from date of termination of employment, and also the area of the restraint.

An employee restraint is effectively preventing an employee from working in his or her chosen field.

One should take restraint covenants seriously: many contracts of employment impose obligations on employee preventing that person from being employed by competitor companies long after the employment relationship has ceased. Executives often assume that these restraint covenants are unenforceable and can be ignored. This is not the case.

It is true that the common law frowns on restraints that prevent a person from earning his/her living. However, if the circumstances justify the restraint, the courts will uphold it. Usually the courts will be less likely to uphold a restraint between an employer and employee. Courts will usually only enforce restraint clauses if they are ‘reasonable’. If a restraint clause is not ‘reasonable’ then a court will usually find the whole clause to be void and unenforceable. This is why you often see restraint clauses with ‘cascading’ provisions which cover a number of alternatives. For example, the clause may say that the restraint is for 1, 2 or 3 years and cover X, Y or Z, (as to the time period or geographic area etc) whichever is reasonable.  This allows a Court to pick whichever scenario is ‘reasonable’ and avoid the whole clause from being held unenforceable.

Negotiating a contract of employment : When negotiating a contract of employment, your initial response to the restraint of trade covenant should be to have it deleted. If this is not possible, you should attempt to narrow the activities, geographical area and timeline to which it applies.

Restraining clauses in employment contracts are enforceable : To be enforceable, the restraint must protect a “legitimate interest” of the employer and the extent of the restriction must be no wider than is strictly necessary to protect it. In other words, it must be reasonable. Examples of such interests include business connections and business secrets.

The restraint is reasonable, i.e. sufficiently protects the interest and goes no further. The “reasonableness” will be assessed in terms of the activities which the employee is being required to refrain from, the geographical reach and the timeline as stated by Brereton, J., in John Fairfax Publications Pty Ltd v. Bert &Ors [2006] N.S.W.S.C. 995.

Generally, if a restraining clause is found to be unreasonable, then it will be void. In certain circumstances the court may uphold it either by construing ambiguities or by severance. Severance consists of the application of what is known as the “blue pencil test”; if individual words which make the clause excessively wide are able to be crossed out and the clause still makes grammatical sense, without altering the nature of the obligations, then the courts may be willing to sever the illegal aspects of the clause and enforce the remainder.

If it is already too late and one has signed an agreement that contains a restraint of trade covenant and are considering a career change: the clause will need to be looked at very carefully, because these types of clauses are often poorly drafted or drawn too widely and it is possible that one’s proposed future activities are not, in fact, caught by the clause. Another approach that can work is simply to be open with either the current or former employer and renegotiate the restraint of trade covenant. This could be particularly effective where the restraint clause is arguably defective and neither party wishes to be embroiled in litigation.

In circumstances where renegotiation is not possible or has been rejected by the employer or the risks of litigation are too great, one may have to consider temporary work in a non-competitive industry or line of work while you wait out the restraint period.

To ignore the potential problems created by a restraint of trade covenant will simply result in receiving a letter of demand from the employer’s solicitors. It is for this reason that you need to take early advice on one’s options.

Restraint of trade affects post-termination restrictive covenants in employment contracts, and restrictions on competition in contracts for the sale of businesses.

Recently the court favors that there should be no agreement in restraint of employment just because an employee has spent time working for a particular employer and he has technical know – how in a particular field. Neither Australian nor Victorian general law restrains a former employee from seeking employment with a competitor. Prohibiting agreements that run counter to public policy are void, unless the reasonableness of an agreement could be shown. Any restraint which tries to prevent an employee from working not only in the particular business of the former employer but any other associated or ancillary business is likely to be struck down. The public have an interest in every person’s carrying on his trade freely: so has individual. All interference with individual liberty of action in employment, and all restraints of employment of themselves, if there is nothing more, are contrary to public policy. As such restraint agreements violate Articles 14, 16 and 21 of “The Constitution of India”.

An employer is entitled to protect his trade secrets but may not restrict an employee from using his skill and knowledge – even if that skill was acquired while the employee worked for the employer. The courts will not allow employers to prevent former employees from conducting a living by practicing the skills which may have taken many years to acquire through university courses or practical experience. The information is only knowledge which an employee would obtain through the repetitive working of his or her ordinary job, courts are less likely to regard this as secret or confidential information, these sorts of information which are publicly available (even such as client contact details and price lists) may also not qualify.  If there is no secret or confidential information, then there can be no restraint. A contract of employment contains provision which is alleged to be a void restraint of trade.

Hence, as stated by Lord Smith LC2 in Mitchell v Reynolds , it should be the privilege of every person in a free country, in all matters not contrary to law, to regulate his own mode of carrying on any profession according to his own discretion and choice.

The courts will not allow employers to prevent former employees from conducting a living by practicing the skills which may have taken many years to acquire through university courses or practical experience.  However, this is only a general rule or starting point.

The common law frowns on restraints that prevent a person from earning his/her living. However, if the circumstances justify the restraint, the courts will uphold it. Usually the courts will be less likely to uphold a restraint between an employer and employee. Courts will usually only enforce restraint clauses if they are ‘reasonable’. If a restraint clause is not ‘reasonable’ then a court will usually find the whole clause to be void and unenforceable.

By LawZ Bureau,