Today, I write about restraints of trade in the employer/employee context. Commercially, restraint of trade clauses can be valuable to facilitate greater participation for employees in a business. This is supported by the case law; restraints are more likely to be enforced should employees have been involved in the nitty-gritty of management, marketing and client sourcing and retention.
If a restraint clause imposes no greater restraints than those reasonably necessary for the protection of the legitimate interests of the employer, it will be enforceable. The burden to prove validity is on the employer, who will be seeking to rely on the promise. The court will take a stricter view against enforcement of a restraint of trade in an employment relationship (as to opposed to a commercial agreement between say business owners), but will recognise that an employer may have interests capable of protection by a restraint such as retention of customers and trade secrets.
So, in the case of Hanna the court held that a restraint on an insurance broker employed for 20 years was enforceable where the employee was prevented from competing for 12 months. The former employer’s legitimate interest was protected and the promise was reasonable in scope.
In Pearson’s case an employee of a recruitment agency was bound by a 24 months restraint. In the circumstances, the long restraint was held to be enforceable and also in the whole of Australia, because the restraint was necessary to protect intimate client relationships, techniques and resources used by the agency to sell its services to clients, methods by which the agency obtained contracts and its strategies to retain clients. Also, the restraint of trade in that case was subject to specific negotiation between the parties when the contract of employment was entered into.
To bolster restraints of trade, restraint clauses sometimes feature so-called cascading; the restraint period starts high and ends low and the restraint distance starts wide and ends narrow. It has been held again and again that these clauses are enforceable, and they are, provided they are drafted correctly.
In a column to follow, about some reasons why business fail, I will allude to shareholders agreements and restraints of trade as mechanisms to help reduce disputes amongst business owners.