Understanding restraint clauses – balancing business interests and employee rights

25th March, 2025

Introduction

Restraint clauses are contractual provisions that restrict an employee from engaging in certain conduct following the termination of their employment.  A restraint clause is generally drafted having regard to:

  • geographical area;
  • period of time;
  • defined businesses or activities that the employee cannot be involved in (ie. also known as a ‘non-compete clause’);
  • former clients or employees who the employee cannot solicit (ie. also known as a ‘non-solicitation clause’).

The common law doctrine of restraint of trade applies in Australia (New South Wales is the exception, which is governed by the Restraints of Trade Act 1976 (NSW)).

Under the common law, there is a presumption that a post-employment restraint will not be enforceable and void against public policy unless the enforcing party can prove:

  • the restraint clause protects the legitimate interest of the employer; and
  • the restraint is reasonable and not any wider than is required to protect such interest.

Employer’s legitimate interest

It is well established that employers do have a legitimate interest in protecting:

  • confidential information;
  • trade secrets; and
  • the employer’s customer/client connections.

A restraint clause that attempts to simply limit competition will not be protecting the legitimate interest of an employer.

Reasonableness

The reasonableness of a restraint clause is assessed at the date the parties entered into the employment contract, not the date of which the cause of action arose.

In determining whether a restraint is reasonable at the date the parties entered into the contract, Courts will have regard to the terms of the contract (including position and total remuneration) and the employee’s role in the business, including the employee’s access and exposure to confidential information and trade secrets, together with client/customer connections and details (ie. where an employee will have ongoing personal dealings with clients/customers).

Severance of a restraint clause

Whilst Courts (other than in NSW) do not read down restraint clauses, if the scope of a particular clause is unreasonable, for example, if a restraint clause does protect the legitimate interests of an employer but is too broad in respect of the geographical area or period of time, the Courts have adopted a ‘blue pencil test’.  This allows a Court to remove the offending part of a clause, provided that the removal does not alter the nature of the contract and does not require any addition or modification of the wording other than by excision. In other words, it must leave the clause enforceable without the need for rewriting.  This is commonly known as the ‘cascading’ options that allow for various combinations of geographical areas or time periods.

Conclusion

A properly drafted post-employment restraint is vital to protect an employer’s legitimate business interests. MPH Lawyers has vast experience in employment law, including disputes relating to breach of restraints – please contact Nigel Pakes or Daniel Murdzoski by email on npakes@mphlawyers.com.au or dmurdzoski@mphlawyers.com.au or on (08) 9221 0033 if you require any assistance.

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