A Clause for Concern: Restraint of Trade Clauses


This article is part of CAP Labour’s original research series that briefly explores issues in Australian and international labour law. In this article, ANU law student Maxine Viertmann looks at the use of restraint of trade clauses in employement contracts, and the position of Australian courts on their use.


Author: Maxine Viertmann

Binding obligations, ambiguity and implied contractual terms have long been a cause for concern for employees entering into employment contracts. Restraint of trade clauses are yet another contractual stipulation for employees to look out for.

The prima facie position at common law is that restraint of trade clauses are unenforceable. However, the courts have acknowledged that where the restraint of trade clauses are necessary or reasonable to protect the legitimate interests of employers, they may be enforceable (see Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111).

Restraint of trade clauses are often included in employment contracts in the employer’s attempt to restrict the actions of past employees after cessation of their employment. Such restraint of trade clauses include non-competition and non-solicitation clauses whereby the ex-employee may be prevented from providing services to similar or competitor businesses, for a designated period of time or within a set geographical area, or precluded from soliciting clients from the employing company to the employee’s future place of work.

The most concerning aspect of restraint of trade clauses is that the courts have found broad and far reaching restraint clauses to be enforceable due to their necessity to protect legitimate employer interests. Broad restraint clauses preventing ex-employees from providing any services or conducting any business for competing companies for periods as long as two years have been found to be enforceable (see Pearson v HRX). Similarly, clauses may be so broad that they preclude the provision of aforementioned services within the same state as the previous employer. Despite its breadth, this was held to be a valid and enforceable restraint clause as long as it is reasonable to protect the employer’s legitimate interests (Emco case, Koops Martin Financial Services Pty Ltd v Reeves).

The Court will assess the reasonableness of the restraint clause in protecting legitimate employer interests by taking into account a series of factors, including but not limited to, the nature of the ex-employee’s role with the employer company, the degree of connection between the previous employers and the employer company’s customers, the nature of the industry, the specifics of the ex-employee’s role, as well as the length and geographical limitation of the state.

Despite the possibility that they may be unenforceable, those seeking to enter into contracts of employments should be wary of restraint of trade clauses before being bound upon signature.

Leave a Reply

Your email address will not be published. Required fields are marked *

*