What is a restraint of trade clause in an employment contract?
A restraint of trade clause is a provision in an employment contract that restricts an Employee’s ability to compete with their Employer after they leave their job. This can include restrictions on where the Employee can work, what they can do, and who they can work for.
For example, a restraint of trade clause might prevent an Employee from working for a competitor for a period of time after they leave their job, or from soliciting the Employer’s customers or employees.
Why are restraint of trade clauses used?
Employers use restraint of trade clauses to protect their legitimate interests, such as:
Confidential information: The Employer may want to protect its confidential information, such as customer lists, trade secrets, or intellectual property. The employer may wish to prevent the employee from using this valuable information for competition post-employment.
Trade connections: The employer may want to protect its trade connections, such as its relationships with customers, suppliers, or distributors. These relationships can be valuable to the Employer, and the Employer may want to prevent the Employee from using them to compete with the employer after they leave.
Goodwill: The Employer may want to protect its goodwill, which is the value of its reputation and customer base. The Employer’s goodwill can be damaged if the Employee starts a competing business or solicits the Employer’s customers after they leave.
Are restraint of trade clauses enforceable?
Not all restraint of trade clauses are enforceable. In order for a restraint of trade clause to be enforceable, it must be reasonable and necessary to protect the employer’s legitimate interests.
The following factors may be considered by a court when determining whether a restraint of trade clause is reasonable:
The duration of the restraint: The restraint must be for a reasonable period of time. A court will consider the nature of the Employer’s business, the type of information that the Employer is trying to protect, and the likelihood that the Employee will use the information to compete with the Employer.
The geographical area covered by the restraint: The restraint must be limited to a reasonable geographical area. A court will consider the location of the Employer’s business and the location of the Employee’s potential customers.
The type of work prohibited by the restraint: The restraint must only prohibit the Employee from doing work that is similar to the work they did for the Employer. A court will consider the Employee’s skills and experience, and the likelihood that the Employee will be able to find other employment if they are prohibited from doing similar work.
The Employee’s seniority and experience: The restraint must be less restrictive for more senior and experienced Employees. This is because more senior and experienced employees are more likely to have access to confidential information and trade connections.
The availability of other employment: The restraint must not make it impossible for the Employee to find other employment. A court will consider the state of the economy and the availability of jobs in the industry.
What are the consequences of breaching a restraint of trade clause?
If an Employee breaches a restraint of trade clause, the Employer may be able to sue the Employee for damages. The amount of damages that the Employer can recover will depend on the specific circumstances of the case.
In some cases, the Employer may also be able to obtain an injunction to prevent the Employee from continuing to breach the restraint of trade clause.
What should Employees do if they are asked to sign an employment contract with such a clause?
Employees should carefully review any employment contract that contains a restraint of trade clause before they sign it. They should also seek independent advice to ensure that the clause is reasonable and enforceable.
An employee concerned about a restraint of trade clause can negotiate its modification or removal with the employer.
Conclusion
Restraint of trade clauses can be a useful tool for Employers to protect their legitimate interests. However, it is important for Employers to ensure that these clauses are reasonable and enforceable. Employees should also carefully review any employment contract that contains a restraint of trade clause before they sign it.
