By Joseph Kelly, Principal, Kelly Workplace Lawyers
It is not uncommon for employment contracts to contain a provision whereby the employee agrees not to work, after leaving the employer, in a particular type of work within a stated area for a stated period of time. Such agreements, being in restraint of trade, are held by the courts to be prima facie void. As such, restraint clauses will only be enforceable if they are found by a Court to be reasonable. ‘Reasonableness’ will be established where:
- the employer has an interest to protect (such as confidential information or a unique form of goodwill) and the restriction imposed is no wider than this interest;
- the stated area of restriction is no wider than that in which the employer’s interest might be affected; and
- the period of the restriction is no longer than is needed to protect that interest.
In considering the three points listed above, the reasonableness of the restraint must be considered both from the point of view of the parties and also with reference to the public interest. This then becomes a two part test:
- Reasonable between the parties: Reasonableness is determined by its effect in practice. It is judged at the time the parties entered into the contract, taking into account, as far as possible, probabilities and future contingencies and is a question of law to be decided by the court.
- In the public interest: Because restraint clauses are prima facie void, it is up to the employer to first establish that the restriction is reasonable between the parties. If the employer is able to establish that the restriction is reasonable, it is then up to the employee to establish that an otherwise reasonable restraint is contrary to the public interest. Again, this is a question to be decided by the Courts.
The courts have traditionally been reluctant to enforce restraints of trade imposed on employees, because of the relative inequality of bargaining strength between employers and employees. As a result, if a restrictive clause is in any way unreasonable, the courts will most likely declare the whole clause void unless the unreasonable part is completely severable by the ‘blue pencil’ test; that is, if the unreasonable part were to be crossed out by a blue pencil, the remainder of the clause would be both reasonable and readable, and able to stand alone. For this reason many restraint of trade clause have a range for the area of restriction (eg a) 1 kilometre, b) 5 kilometre and c) 10 kilometre from the employer’s business) and a range for the length of time for which the restriction is to remain in effect (1 year, 2 years, 5 years etc).
On the whole, the Courts recognise an individuals right to work and will not support clauses that try to unreasonably undermine this right. However, determining what is “unreasonable” in each circumstance is very difficult. As such, we highly recommend discussing any issues you have in relation to restraint of trade with a lawyer from Kelly Workplace Lawyers. Feel free to call on (03) 9639 6003 to make an appointment.
