Restraint of Trade Basics in the Employment Context

By Rachel Ross Jessica Haddad

18 February 2025

A restraint of trade is, at its core, a contractual prohibition imposed on former employees to restrict their ability to work in competition with their former employer.

As this article will explore, restraints take various forms and, unless tightly drafted, are often deemed by Australian Courts to be unenforceable as they are not required to protect a business’ legitimate interests.

What are restraints of trade and why are they often invalidated by the courts?

Restraint provisions broadly take two forms – non-compete clauses and non-solicitation clauses:

1. Non-Compete Clauses: prevent an employee from entering or starting a similar profession or trade in competition with their former employer within a certain geographic area and for a certain period after the termination of their employment.

Non-compete clauses are the most severe form of restraints and have become increasingly difficult to enforce.

2. Non-Solicitation Clauses: prevent an employee from soliciting or ‘enticing away’ clients or customers of their former employer. In businesses where a significant part of the goodwill of the business is its client base, these restraints can be especially valuable.

Generally, Courts will presume that restraint clauses are not reasonable unless the employer can demonstrate that it has a legitimate interest to protect and that the restraint is ‘no more than reasonable’ to give effect to the protection of that legitimate business interest.

The common law prohibits unreasonable restraints, as they are contrary to public policy and seek to deprive the restrained person from their liberty (for example earning an income) and more broadly undermine the economy by depriving it of competition.

That said, restraint of trade clauses can obviously serve a beneficial economic function. They provide a business with the comfort of knowing that they can invest in people, or share their confidential information, without risking damage to their business.

Accordingly, appropriately drafted restraint clauses will often contain “cascading” provisions in relation to the geographical boundaries and time periods sought to be restrained. In other words, the restraint will generally start at the most onerous restriction (eg non-compete across all of Australia) and provide that, if that restraint is considered too onerous, the restraint will only apply to a “cascading” range of ever-decreasing restrictions, ending with, for example, a non-compete only in relation to an individual suburb.

The rationale for these cascading provisions is that the Court will likely find that one level is enforceable even if the others are not. Proper drafting of a cascading restraint should make clear that the alternate areas and time periods are to be read separately and severally.

 

Reasonable restraints

When assessing reasonableness of a restraint, in addition to the duration and geographical area over which the restraint is sought, Courts will typically look at matters such as the employee’s seniority within the business, the industry generally and more specifically the employee’s history and relationships in the industry and weigh those factors against the activities sought to be restrained.

In order to establish reasonableness, two elements must be proven:

1. Legitimate Interest: The employer must have a legitimate interest in imposing the restraint. This includes protecting commercial interests, goodwill, customer connections and confidential information.

2. Scope of Restraint: The restraint must not be wider than reasonably necessary to protect the legitimate interest. As such, the drafter must ensure the provision aligns reasonably within constraint of time, distance and subject matter.

Notwithstanding that restraint clauses are often read down or found to be invalid, businesses should be cautious not to omit them from their contracts. Rather, businesses should carefully consider what specific interests they are seeking to protect and how that can be reasonably achieved without unreasonably depriving the employee of their own commercial freedoms. For example, a non-solicitation clause that prevents a former employee from contacting the business’ clients indefinitely is unlikely to be enforceable. A provision drafted to prevent the employee from contacting the business’ clients for a limited period of time, having regard to the need to protect the business’ interests, is more likely to be enforceable.

 

Other restraint related contractual provisions

In addition to non-compete and non-solicitation clauses, other complementary contractual prohibitions will also aide to protect a business’ interests even in circumstances where a restraint is deemed unenforceable:

1. Confidentiality clauses: clauses that prevent an employee from using or misusing their former employer’s confidential information, including such things as trade secrets, production and manufacturing processes, client and price lists and other financial and remuneration information, but will not extend to an employee’s general know how.

2. Non-Recruitment Clauses: clauses that prevent an employee from recruiting their former employer’s staff. These provisions are not as commonly used within Australia. Nevertheless, Australian courts have recently held that an employer’s interest in a ‘stable workforce’ may justify a reasonable restraint preventing employees from soliciting their former co-workers. ¹

 

Enforcing restraints

In order to be in a position to enforce a restraint provision, employers must strike a delicate balance between “protection” and “restraint”. Ultimately, enforceability will come down to reasonableness.

A restraint must only last as long as is necessary to protect an employer’s legitimate interest; generally, this will be less than twelve months. The fact that an employee has agreed to the restraint does not mean that the employee regards the restraint as reasonable, and an employee is perfectly entitled to agree to a restraint in an employment contract and later challenge its reasonableness.

For employers seeking to enforce the ongoing obligations within their employee’s employment contract, action must be taken as soon as possible after the employer becomes aware of circumstances that support a threatened breach of those ongoing obligations: for example, at the time the employee informs the employer of their intention to join a competitor. Often this can be addressed by a letter to the employee reminding them of their contractual obligations. If an employer becomes aware of an actual breach, proceedings must be commenced as soon as possible and will often involve applications for injunctive relief to prevent irreparable damage to their business.

 

Changing landscape?

The Australian Government’s Competition Review is currently analysing public submissions it received in response to the Competition Taskforce’s Issues Paper on employment restraint clauses released in April 2024. The Issues Paper sought to address concerns surrounding the rise of restraints in employment contracts and whether they had contributed negatively to Australian innovation, wage increases and economic productivity.

The Issues Paper was released in the context of a broader global scrutiny of restraint provisions with a view to promoting a more competitive economy. In April 2024, the Federal Trade Commission in the United States voted to ban most non-compete clauses (with exceptions for those associated with the sale of a business and in respect of some senior executive contracts).

Treasury’s Competition Taskforce is currently conducting an analysis of non-compete clauses to:

• estimate their prevalence across different industries in Australia;
• understand their impact on labour markets and the Australian economy; and
• explore their relationship with outcomes such as employment, wages, productivity, competition, and innovation.

The aim of this analysis is to explore whether reform to competition law rules under the Competition and Consumer Act 2010 (Cth) is needed, which may result in the ACCC having more oversight of employment restraints.

 

Summary

In light of the changing landscape, employers should consider:

1. reviewing the extent to which it is necessary to rely upon employment restraints throughout its employee’s employment and following termination; and
2. seek to limit those restraints to only what is absolutely reasonable to protect their legitimate business interests.

At the same time, employers should consider ways in which they can reduce their reliance on restraints, for example by establishing new connections with clients deemed to be at-risk, reviewing initiatives to retain employees, and ultimately, enhancing overall service.

Prepared with the assistance of Sheldon Brown and Will Bevan, Research Clerks.

 

1. Stacks Taree v Marshal [No 2] [2010] NSWSC 77; Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; (2006) 71 NSWLR 9; I Ross, ‘Non-compete clauses in employment contracts: the case for regulatory response‘ (TTPI Working Paper, ANU, 2024) 17.

Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.