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What is a restraint of trade clause

What is a restraint of trade clause

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Many employment contracts nowadays will feature a restraint of trade clause. Before you sign any document, you should always read the fine print and know what you are agreeing to before entering into a contract.

Understanding exactly what a restraint of trade clause is could help you to avoid a sticky legal situation down the line.

Even if you do sign an employment contract with a restraint of trade clause, it may be deemed to be an unfair restraint of trade, which means the court might uphold that you have the right to gain new employment, even if that employment is with a direct competition, as in the Just Group Ltd v Peck [2016] VSCA 334 case in Victoria.

There are many different things for the court to consider in a case like this, however, so to avoid the possibility of legal action, it's best to understand exactly what a restraint of trade clause is and how it works.

Continue reading to learn everything you need to know about restraint of trade clauses so you can make an informed decision about your employment contract.

What is a restraint of trade?

A restraint of trade clause is typically included in an employment contract to help a business owner to protect their business interests. These clauses reduce the employee's opportunities to pursue certain opportunities during or after their employment, which could impact the company they are currently working for or that they previously worked for.

Different types of restraints

There are many different types of restraints that are commonly found in employment contracts. Depending on the type of work you will be doing, one, some or all of these could be included in your contract.

Some of the different restraint clauses include confidentiality, which prevents an employee from sharing or using any of their previous employers business information, non-compete clauses that stop an employee from entering a similar position with a competing company and non-recruitment clauses that prevent an employee from hiring their former colleagues.

Also commonly included are non-solicitation clauses, which stop an employee from taking the clients of their former employer for themselves.

How is a restraint clause deemed reasonable

In order for a restraint clause to be enacted, it must be deemed to be reasonable. A court can find that a restraint overreaches, providing an unnecessary level of protection for your business.

For a restraint to be legally enforceable, both parties must agree that the restraint is reasonable.

A court will consider many different aspects when they are determining whether or not a restraint clause is deemed to be reasonable or not.

Some factors that will be considered are the negotiation process, the bargaining position of each party, the employees character, the nature of the business, any remuneration or compensation, the duration of the restraint and also the geographical limits of the restraints application.

How a restraint clause is enforced

Generally, it is the employer that will seek an injunction when they want to enforce a restraint clause post-employment.

If the employer is successful, the case will be taken to court and the restraint will be enforced by law, which will prevent the employee from taking part in whatever activities are outlined in the restraint clause.

An interim injunction is often taken out by the employer prior to the trial to prevent the employee from breaking the restraint clause before the courts pass a decision.

Understand what a restraint of trade clause could mean for your future

Before you sign an employment contract, make sure that you pay close attention to any restraint clauses present.

Failing to acknowledge the details of these clauses could impact your ability to find employment in the future, to do business, and other liberties could also be affected.

Do your research and make sure you are happy with your decision before you sign on the dotted line to ensure you are fully prepared for what the future may hold.