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Restrictive Covenants – key considerations for employers in Australia – November 2022

11 October 2022

Our Australian employment experts outline considerations for restrictive covenants (more commonly known as restraint of trade clauses) in Australia.

What are the key types of restrictive covenants in your jurisdiction?

The key types of restrictive covenants in Australia (more commonly known as restraint of trade clauses) are outlined below. 

  • Confidentiality clauses: Prevents employees from disclosing or using a former employer's business information. 
  • Non-compete clauses: Prevents employees from entering or creating a similar profession or trade in direct competition with their employer. 
  • Non-solicitation clauses: Prevents employees from soliciting or enticing away their employer's clients, customers or suppliers. 
  • Non-recruitment clauses: Prevents employees from recruiting any of the employer's current employees. 

These clauses are often used in employment contracts to protect the employer's business interests by restricting an employee's conduct during and/or after their employment. 

Does the employer have to pay compensation to the employee in relation to the restrictive covenants? 

With respect to the non-complete clause, yes, the employer will likely need to pay compensation to the employee for the agreed time period, as it will otherwise likely be unenforceable. If the employee then breaches the agreement, they will then be liable to pay damages to the employer. In regards to non-solicitation and non-recruitment clauses, payment is not strictly necessary, but is recommended if you want to ensure enforceability. 

Are there limits to the post-employment restriction period and to the geographical area of the restrictive covenants?

Generally, all restraint of trade clauses are presumed to be unenforceable unless the employer is able to show that the clause is reasonable. In establishing whether a clause is reasonable, the employer must prove that they have a legitimate interest in imposing the restraint, and that the scope is not wider than is reasonably necessary to protect their legitimate interests. Whether the scope of a restraint is considered reasonable will depend on three key considerations: 

  1. Duration;
  2. Geographical area in which it is to have effect; and
  3. Activities it purports to control.  

Because of the requirement for the scope to be reasonable, and the fact that each case varies greatly, the most popular practice is to include a cascading clause. A cascading clause allows for the various issues that may arise in relation to the period and area of a restraint of trade clause, and enables the court to eliminate the parts of the clause that are unreasonable, leaving the reasonable aspects of the clause intact. 

Can the employer unilaterally revoke the agreed restrictive covenant at the end of the contract or otherwise avoid its application?

Strictly speaking, if no compensation is payable, the employer may unilaterally revoke or avoid application of a restrictive covenant by simply advising the employee of same or choosing not to enforce such a clause. That said, if compensation is payable for compliance with a restraint of trade clause, the employer should seek consent from the employee to revoke the clause, as it otherwise may be considered a breach of contract. 

What remedies are available to the employer when an employee breaches their restrictions?

Generally, an employer will seek an injunction when looking to enforce a post-contractual restraint of trade clause. Such a remedy, if successful, will enforce the restraint to prevent the employee from undertaking any activities identified in the restraint. Damages can also be sought.

Restrictive Covenants Webinars
We will be hosting a series of restrictive covenant webinars, learn more and register here.

Further Reading