What is a Restraint of Trade Clause?

“Restraint of Trade” clauses (also known as “Non-Compete” clauses) are very common in Employment Law. They apply to post-employment conditions (for when an employee leaves the business).⠀

Typically, they refer to the following;⠀

  • The former employee can’t use their former employer’s trade secrets/confidential information/intellectual property⠀

  • The former employee can’t work for competitors within a certain geographical area and/or for a certain period of time after leaving⠀

  • The former employee can’t solicit clients or staff from their former employer⠀

  • The terms are “reasonable” for both parties in order to protect the former employer’s business interests (onus is on the party providing restraint)⠀

  • The terms are “reasonable” in the interest of the public (onus is on the party wishing to remove the restraint clause to demonstrate they’re not reasonable in the interest of the public).⠀

Another common inclusion contained within a Restraint of Trade clause is a “Ladder/Cascading” clause.

If a court decides the first tier of the clause is unenforceable, a lower tier will apply (hence the term: Ladder/Cascading). The clause will cascade through different options for the court to enforce on behalf of the employer. ⠀

Generally speaking, courts will strike out broader restrictions and it’s important these clauses are drafted carefully.⠀

A simple example of a Ladder/Cascading clause:

 

 

Non-Compete Clauses were recently highlighted in the news when Australian fitness influencer Kayla Itsines filed a lawsuit against her former business partner Cass Olholm.

The two influencers previously worked together at Kayla’s fitness company up until Cass left in February 2023. She attempted to launch her own fitness app eight months later but was allegedly in violation of a 12 month non-compete clause Cass signed with Kayla. Cass said the non-compete clause was for 6 months only.

This led to Kayla launching legal proceedings in the hopes of having an injunction granted in order to prevent Cass’ App being launched in this timeline.

Unfortunately for Kayla, Judge Jack Costello of the Australian Supreme Court did not grant the injunction stating;

“The applicant (Bikini Body) has not made out a prima facie case that it has a legitimate commercial interest to protect, or one that requires the imposition of a restraint.” He went on to say 12 months is an unreasonable time to wait.

You can read that article here.

For a court to decide whether a clause is enforceable or not depends on how reasonable the measures are for each party, the definition of Restraint of Trade clauses within each State/Territory (and how the court has applied these terms in previous cases) and how well defined that clause is in protecting legitimate business interests.⠀

Restraint of Trade clauses can be a good protective measure for employer’s to include in their employment contracts. It’s important to regularly review the efficacy of restraint clauses to ensure they’re still relevant to current employment conditions and that they do not conflict with the Competition and Consumer Act 2010.⠀

It can be a risk for employer’s when hiring new employees but a well-drafted Restraint of Trade clause within your Employment Contracts can protect your interests. ⠀

If you need assistance drafting employment contracts, or advice on a Restraint of Trade clause, contact our office on hello@littonlegal.com.au