24/09/2016, 02:22:PM
24/09/2016, 02:22:PM
Restraint of Trade on Employment!
A restraint of trade clause in an employment contract is a covenant whereby an employee contracts to give up a freedom by entering into the agreement.
Generally, a large number of employment contracts contain restraint of trade clauses, which are either enforceable or unenforceable. Then in most cases, the signing employee is not properly informed as to how that restraint clause will affect their legal rights.
A restraint of trade restricts an employee’s liberty after termination of employment or during the engagement of employment or both. A restraint will only be reasonable if it affords adequate protection of the legitimate interest.
As an example, if a real estate sales agent employment contract has a clause that says that the agent cannot work anywhere within a 30 km radius of the employer’s premises after the employment has ceased for a restraint period of 6 months, and the employee lives within that 30 km radius, this restraint would not be reasonable in the circumstance. In this case the employee is restricted unfairly from gaining reasonable employment in the same industry in a reasonable area where the employee lives, and such restraint based on that condition would be against public policy. There are a lot of important factors to consider in each case for a restraint of trade clause to be enforced. However, a restraint of trade clause that prohibits a person to gain lawful employment will be voidable.
At common law a restraint of trade is contrary to public policy and void, unless it is justified in the circumstance to protect the legitimate interests of the employer, and the term ‘legitimate interests’, means reasonable in this situation.
Where there is a restraint clause in an employment contract it is necessary to determine the meaning of the restraint, and this is done by prescribing the test of reasonableness for the purpose of the restraint. However, if there is ambiguity or uncertainty with the scope of the restraint clause, part of or whole will be void. The interpretation of the restraint will be subject to the employer’s type of business and the employee’s role in it.
So as example, a restraint in an employment contract that restricts the employee from soliciting services of the employer after their engagement of employment, can be construed to only those specific services or products that the employer offers in that type of business. Then if there is uncertainty about the type of service or product, the restraint will not be enforceable. Therefore, technically the restraint clause needs to be specific to the point of the employer’s business and reasonable on the circumstance.
There are numerous employment contracts that list a range of restrictions for a restraint of trade clause, which is an attempt that at least one of the restrictions will be successful in bringing a claim against the employee if they breach that clause. This type of clause which is used in agreement is generally a precedent form, which has not been considered in relation to the employer’s business on a reasonable standard, and should be a warning to an employee that the restraint clause has not been properly drafted and may cause issues to the employee at a later date. Where there is such restraint clause, it is in the employee’s best interest to seek legal advice on that contract before signing.
Once the meaning of the restraint has been determined, the next issues is to consider whether the restraint is reasonable on the circumstance. There are many factors to consider whether a restraint is reasonable. Where a dispute arises over the reasonableness of the restraint, the onus of proving the reasonableness lies with the employer. Whether a restraint is reasonable or not in an employment contract will be ultimately a decision for the court, based on the true construction of the clause and its legal effect on the basis of reasonableness to the interests of the parties and public, and whether the restraint is contrary to public policy.
The security of employment is constantly on the employee’s mind, however, sometimes accepting a contract of employment without due consideration of that agreement, may create more difficulties at a later date where a restraint of trade clause restricts the employee’s freedoms.
So take that extra step before you sign that employment agreement and get that legal advice to protect your legal rights and interests.
The comments in the aforementioned do not constitute legal advice and are general in nature, and if legal advice is required please contact: John Melis at Legal AU Pty Ltd (03) 9999 7799
Legal AU Pty Ltd Lawyers are “Liability limited by a Scheme approved under Professional Standards Legislation.”
