Restraint of Trade

A restraint of trade clause aims to prevent an employee from working for a competitor or starting up a business in competition with the employer after the employment relationship has ended. Restraint of trade clauses are prima facie void. In other words, they are often not enforceable unless they are:

1. reasonable as between the parties; and

2. not unreasonable in the public interest.

In the case of Just Group Ltd v Peck [2016], VSCA 334 the Supreme Court of Victoria held that a restraint clause can only protect “legitimate interests of the employer” and cannot extend any further than that.

As a general rule, an employer does not have a legitimate interest in preventing an ex-employee attaining new employment, even if that employment is with a competitor. The surrounding circumstances and facts of a case are considered when determining the reasonableness of such a clause. For example, the Court may consider:

• the interests that the restraint seeks to protect;
• the employee’s current role versus their previous role;
• the geographical area of the restraint;
• the timeframe over which the restraint will operate; and
• the nature of the industry.

In Just Group Ltd v Peck [2016] VSCA 334 the Court also stated that “an employer does not have a legitimate interest in protecting itself from competition per se”. As a result, the employer failed to establish a legitimate business interest to rebut the presumption that the clause was void.

Notwithstanding, a restraint of trade clause may be upheld to prevent an employee, who has obtained confidential information during their previous employment, from engaging with a competitive business that could use that information or prevent an employee from soliciting customers of the former employer. As such, confidentiality and non-solicitation obligations will continue to operate and be enforceable as they are legitimate business interests.

Notably, in Commsupport Pty Ltd v Mulligan & Mirow [2018] QDC 134 the Court stated that a restraint on solicitation of customers is much more likely to be considered reasonable if the employee was involved in developing a relationship with those specific customers. The fact that an employee had contact with customers will rarely be enough, in and of itself, to enforce the restraint. A restraint relating to customer connections is likely to be upheld in situations where the employee holds influence over the customers.

Please contact our lawyers at McDonald Murholme if you have any further questions regarding this issue.