What does Restraint of Trade mean?

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December 21, 2020
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December 21, 2020
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A restraint of trade is a provision generally found in employment contracts, which prohibits an employee from working directly or indirectly with a competitor business for a specified time and within a limited geographical area, after their employment ends.

A restraint of trade can be included in other agreements such as a shareholders’ agreement, where shareholders agree they will not be interested or engaged in another business similar to the business of their company while they are a shareholder and after they cease to be a shareholder for a specified time and within a limited geographical area. This article focuses on a restraint of trade in the context of employment.

Employers are increasingly striving to protect their confidential commercial information such as trade secrets, client information and product development ideas to maintain a successful business. A restraint of trade assists employers with achieving this by prohibiting employees from using such information after they leave their employment for the benefit of a competitor. However, a restraint of trade does not always provide full protection to an employer.

There are two main types of restraints: non-competition, which prevents a former employee from working in the same or similar industry as their former employer, and non-solicitation, where a former employee can work in the same industry but cannot contact their former employer’s clients about their new venture.

The Courts take a prudent approach when assessing the enforceability of a restraint of trade clause and may disregard such a clause from the outset, depending on its reasonableness. Generally, restraints of trade are only enforceable if they are reasonable and not against public interest. This involves assessing the following factors; whether the:

  • time period and geographical limitations are reasonable for a particular industry. A time period in the range of 2 to 6 months has commonly been viewed as a reasonable period of restraint, of course this depends on the particular circumstances of each case.
  • specified activities (the employee’s job) may be restrained reasonably.
  • former employer has an exclusive interest capable of being protected, such as a trade secret or patent.

Depending on whether the courts find a restraint reasonable, an employer may seek an injunction to stop an employee from breaching their restraint of trade, and/or damages for the loss as a result of the breach, together with penalties for breaching their employment contract.

It is suggested that restraint of trade provisions are included in employment agreements from the outset of employment negotiations. However, if an employer wishes to add a restraint of trade clause into an employment agreement after it is in place, the employer must consult the employee about this and give them the opportunity to seek independent advice together with consideration in return. Consideration can be in the form of a higher wage or specific payment from the employer to the employee for allowing the employer to enter a restraint of trade clause into the employment agreement.

It is important to understand the implications of a restraint of trade clause as both an employer and employee. The key is to find the balance between protecting your business while ensuring the restraint is reasonable and accordingly, enforceable.

Please contact our employment team to discuss restraints of trade either at the outset, during or the end of employment, whether you are an employer or employee.

Shelley Eden
Shelley Eden
Partner

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