If you are an employer, you might consider including a form of post-employment restraint of trade clause in your employment agreements. The restraints you are looking for to place as an employee can differ per the situation.
But as a general agreement, the restraint of trade agreements clause can seek to prevent an employee from soliciting staff, clients, and customers from the former employer or working for a rival company for some time after leaving the business. In this guide, you will learn some of the important principles of restraint of trade clauses.
What Is A Restraint Of Trade?
A restraint of trade clause is an employment agreement that applies throughout employment. It can also continue to apply when an employee leaves the business. To safeguard the legitimate interests of your business, you can enforce a restraint clause if necessary.
But whether a provision is considered necessary or not will depend on the wording and facts of the specific situation. The two most important types of restraint clauses are as follows:
This is a clause that prevents a previous worker from taking part in activities in competition with a former employer
This clause prevents the workers from actively soliciting clients or employees of the previous employer.
What Is Considered Reasonable Between The Parties?
You can only enforce a single restraint of trade clause if it is reasonable as per the circumstances. Whether enforcing the clause is reasonable or not depends on the following:
- The clause safeguards a legitimate business interest
- If the scope is necessary to safeguard their legitimate interest.
A legitimate business interest can include the following:
- A commercial interest like private information can cause damage to your business if leaked
- The goodwill of your business is like the relationship between your customers/partners and your business.
If a court finds out that the restraint clause goes beyond providing your business with sufficient protection, the court will not allow it to enforce the clause. But if the clause provides your business with sufficient protection, the court can consider whether the restraint can negatively affect the public interest. This is why as a potential employer, you must establish what is reasonable before enforcing any restraint clause or restraint of trade agreement on your employee.
What Does A Court Consider?
When deciding whether a restraint is reasonable, the court can consider your circumstances and factors like:
1. Negotiation Process–
The negotiation process can easily provide a proper indication of every party’s intentions. Specifically, the comments you and your employees will make when negotiating the restraint clause are essential.
2. Parties’ Bargaining Position-
If there are imbalances in power between you and your employees when agreeing to the restraint, this might be reflected in the agreement. Other than this, whether your employee acquired the services of business lawyers may also indicate the relative bargaining power during the negotiation.
3. Nature Of The Business And Characteristics Of Employees-
For instance, if your employee is in close contact with the customers, it is likely that the restraint is reasonable and will be allowed.
4. Duration Of The Restraint-
The longer the period of restraint will be, the fewer chances are there of the restraint being reasonable.
5. Remuneration And Compensation-
As the restraint can limit your outgoing employee’s learning capacity, the court may also consider whether your employee was compensated for the restraint.
6. Geographical Restraint Area-
If the restraint seems to cover a large geographical area, the court may not consider it reasonable. This is why employers always include a cascading clause in their agreement to avoid geographical and duration problems. This type of clause helps to provide alternate periods and geographical areas to read down the clause till they consider it reasonable. People hire commercial lawyers in such cases, too, for help.
Drafting A Restraint Of Trade Clause
When drafting a restraint of trade clause into your contract, you must consider the above factors. If not, your employee may take you to court, and if it happens, you will risk a court finding the restraint unreasonable and unenforceable. You can hire commercial litigation lawyers in Perth for those cases.
For instance, in a specific incident, an employer wanted to enforce a restraint clause to prevent the organization’s financial officer from working with a competitor company. The court decided that it was not reasonable due to factors such as:
- The restrained attempt to prevent that employee from working at other businesses that were not in competition with the specific company
- The duration period was too long as the clause applied to both Australia and New Zealand for two years after the end of her employment.
Contact Commercial Lawyers Perth WA
You can read the above blog to learn more about the restraint of trade clauses. If you want to create such agreements, you need to take the help of the best lawyers from Commercial Lawyer Perth, WA. These lawyers have years of experience and can help you to define the terms that can help outline the agreement properly. They can prove to be a great form of legal help if matters go to court.