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Restraint of Trade Clauses in Employment Contracts - Can You Have Them?
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In today's episode, we're exploring one of the most complex and controversial issues in employment law: restraint of trade clauses in employment contracts. I'm diving into this because in the small business circles in which I operate, there's a lot of discussion around whether or not restraint clauses are valid and whether we can have them.
It has also become more topical in the broader community due to a recent decision in the United States, where the Federal Trade Commission made a ruling banning the use of restraint of trade clauses in contracts altogether. The question we’re now asking ourselves now is: will Australia follow suit?
Restraint Clauses: What Are They and Are They Enforceable?
Restraint of trade clauses are designed to prevent former employees from competing with their ex-employer in ways that could harm the business. These clauses come in two main types: non-compete and non-solicit. A non-compete clause restricts an employee from working in a similar business, while a non-solicit clause prevents them from contacting the former employer's clients. The million-dollar question here is whether these clauses are enforceable. The simple answer? Only if they are reasonable. I’ll take you through the nuances of what our legal system deems a restraint clause enforceable or not.
Tailoring Clauses to Your Business Needs
One of the most common mistakes I see is the use of broad, generic restraint clauses that cover large geographical areas and long periods. These are often unenforceable from the get-go. Business owners need to draft these clauses to fit their specific needs. We’ll discuss how to make sure your restraint clauses are not so broad that they prevent an employee from earning a living, as the courts heavily scrutinise such clauses.
Practical Steps to Protect Your Business
Rather than relying solely on restraint clauses, I recommend bolstering other areas of your employment contracts to safeguard your business. By being proactive and understanding what is reasonable for your specific business, you can better protect your interests and avoid the high costs and stress associated with any legal battles that may arise.
If you're a small business owner or planning to hire employees, this episode is a must-listen to ensure you're setting yourself up for success while staying on the right side of the law.
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