The ins and outs of a restraint of trade clause

Restraint of trade

The world of business is increasingly competitive.  Business owners as employers have become more focused on securing and safeguarding information that sustains their business, such as trade secrets and profit margins.  Those employers may consider the inclusion of a restraint of trade clause in their employment agreements as a safeguard against employees leaving their employment and using this sensitive information to the former employer’s detriment.

 

What is a restraint of trade clause?

A restraint of trade clause is designed to protect a business’s sensitive information to which its employees may have access.  The most common conditions in restraint of trade clauses tend to prohibit or limit an employee from working in a certain field of expertise, and/or in a designated geographical location, and/or for a specified period of time.

 

Consideration

An employer considering the inclusion of a restraint of trade clause within an individual employment agreement is advised to consider offering the employee consideration such as an increase in wages or salary, given the imposition the employee may face if a restraint of trade clause is sustained.

 

Practicalities to consider

A restraint of trade clause does not automatically protect an employer.  The Courts take a careful approach when making determinations about restraint of trade clauses, and often deem restraint of trade clauses unenforceable from the outset.

Where a dispute arises, the Courts examine all aspects of the restraint of trade clause, paying particular attention to whether the conditions are reasonable in order to protect the employer’s interests, relative consideration or compensation, as well as the reasonableness and practicality of the conditions imposed upon the employee.

The Courts may consider the following factors when considering the enforceability of a restraint of trade clause:

  • Whether the former employer has a proprietary interest that is capable of being protected; (for example, did the employee have access to confidential information or having built up a strong customer/client/supplier relationship);
  • Whether it is reasonable to restrict the employee’s employment options/activities;
  • Whether the period of the restraint is reasonable;
  • Whether the geographical limits of the restraint are reasonable.

Before considering inclusion of a restraint of trade clause it is vital to understand what is the interest or the purpose of the restraint of trade clause; what reasonable parameters may be imposed in order to achieve that purpose; and in return whether fair consideration or compensation been offered to the employee.

Restraint of trade clauses can be very beneficial for employers, especially if a business is reliant on securing and safeguarding its interests critical to the successful running of the business.  It is essential to understand all aspects of a restraint of trade clause before relying on one to protect your business, as finding the right balance in a restraint of trade clause is vital to ensure that it is enforceable.  We are available to help draft and discuss such terms.