Restraint of Trade Clauses in NSW: Are They Enforceable for Employers?
I often have companies approaching me with concerns about restraint clauses in employment agreements—seeking clarity on what they can and cannot do. These clauses, which are commonly used to protect legitimate business interests, are far from straightforward. Understanding their implications is essential for both employers and employees. Beyond restraint clauses like non-compete or non-solicitation provisions, there are also confidentiality obligations, which are enforceable indefinitely and apply to everyone.
To help you navigate these complexities, here’s some legal information to ensure you’re informed about your obligations, whether you’re leaving an employer or enforcing these terms.
“Staying compliant isn’t just about the clauses themselves but also about understanding the finer details and staying on the right side of the law. ”
1. NSW Legal Context for Restraint Clauses
Under NSW law, restraint clauses are enforceable only to the extent that they are reasonable and necessary to protect the legitimate business interests of the former employer. Courts will consider:
The duration of the restraint (e.g., 6 months).
The geographical scope (e.g., NSW or Sydney).
The type of restraint (e.g., non-compete or non-solicitation).
Courts in NSW tend to enforce non-solicitation clauses more readily than non-compete clauses. However, even non-solicitation clauses must be limited in time, scope, and purpose to be deemed reasonable.
When NSW Courts Refuse to Enforce Restraint Clauses
While restraint of trade clauses can be valid in NSW, courts will not automatically enforce them. The key issue is reasonableness.
A restraint clause must protect a legitimate business interest, not simply prevent competition. Courts will generally refuse to enforce clauses that are broader than necessary.
Common reasons courts refuse to enforce restraints include:
The restraint is too long
If a clause attempts to restrict an employee for an excessive period of time without justification, it may be considered unreasonable.
The geographic area is too wide
For example, preventing a former employee from working anywhere in Australia when the business only operates in Sydney is unlikely to be enforceable.
The employee had limited access to confidential information or clients
If the employee did not have strong relationships with clients or access to sensitive business information, a restraint may not be justified.
The clause attempts to eliminate competition entirely
Courts recognise that employees have the right to work and earn a living. A clause designed simply to stop a person from working in their industry will usually fail.
In NSW, courts also have the power under the Restraints of Trade Act 1976 (NSW) to read down overly broad clauses so that they operate in a more reasonable way.
1.1 Key Restraint Clauses Relevant to NSW Laws
Given the jurisdiction of NSW, the following restraint clauses in the agreement are most likely to be enforceable:
1.1.1 Non-Solicitation of Clients (6 Months)
NSW courts are more likely to enforce a 6-month non-solicitation clause limited to clients the Individual dealt with during their previous employment (emphasis added).
1.1.2 Non-Solicitation of Employees (12 Months)
A 12-month non-solicitation clause preventing the Individual from poaching former colleagues is also likely to be upheld, especially if the Individual had direct contact with those employees.
1.1.3 Confidentiality Obligations
Confidentiality clauses are indefinitely enforceable (emphasis added) and must be strictly adhered to. The Individual must not disclose or use any confidential information obtained from their former employer.
How Long Can a Restraint Clause Last in NSW?
There is no fixed legal limit on how long a restraint of trade clause can last in NSW. However, the longer the restraint period, the more difficult it becomes to justify.
The acceptable length often depends on the employee’s role and the interests the employer is trying to protect.
As a general guide:
3–6 months may be reasonable for many employees
6–12 months may apply to senior staff or employees with strong client relationships
12 months or more is typically only enforceable in exceptional circumstances
The court will consider factors such as:
The employee’s seniority and responsibilities
Their access to confidential information
Their relationship with clients or suppliers
The nature of the industry
Many employment contracts include “cascading restraint clauses”, which list multiple time periods (for example 12 months, 9 months, 6 months, 3 months). This allows a court to enforce the longest period it considers reasonable.
2. Legal Definition of Solicitation in NSW Employment Law
The concept of solicitation is critical in understanding the Individual’s obligations. Under NSW law, solicitation involves taking active steps to persuade or encourage a client, customer, or employee to change their business dealings or employment relationship.
2.1 Key Legal Points About Solicitation
2.1.1 Active conduct is required: Solicitation involves positive actions to engage or encourage someone to move their business or employment.
2.1.2 Passive receipt of inquiries is not solicitation: If a former client or employee approaches the Individual without prompting, this is not considered solicitation.
2.1.3 General marketing or advertising is not solicitation: Public advertisements or social media posts that do not target specific clients or employees are not considered solicitation.
2.2 What Constitutes Solicitation?
Examples of solicitation include:
Directly contacting a former client to offer services.
Offering incentives to clients or employees to switch to a new business.
Seeking to divert business from the former employer.
Actions that do not constitute solicitation include:
Receiving inquiries from former clients or employees without prior contact.
Public advertising that is not directed at specific former clients or employees.
3. Relevant Case Law
Courts have provided guidance on solicitation in the following cases:
1. Ballance v Ballance [1997] FCA 1206
The court held that direct contact with a former client to encourage them to switch providers constitutes solicitation.
2. TKW Research Pty Ltd v Leach [2001] NSWSC 1078
The court clarified that actively offering services to a former client is solicitation, but passively receiving inquiries is not.
What Employers Should Do When an Employee Joins a Competitor
When an employee leaves to work for a competitor, employers often worry about client relationships, confidential information, and business goodwill.
If the employee has signed a restraint clause, employers should act quickly but carefully.
Review the Employment Contract
Start by reviewing the contract to confirm:
Whether a restraint clause exists
The duration and geographic scope
Whether it covers clients, confidential information, or competing businesses
Legal advice at this stage can help assess whether the clause is likely to be enforceable.
Remind the Employee of Their Obligations
Employers can send a formal reminder letter outlining the employee’s contractual obligations, including confidentiality and restraint provisions.
Often, a clear reminder is enough to prevent breaches.
Monitor Client Contact
Employers should keep an eye on whether the former employee is attempting to:
Approach existing clients
Use confidential business information
Solicit staff members
Documenting these activities can be important if enforcement becomes necessary.
Seek Legal Advice Quickly
If there is evidence that the employee is breaching the restraint, employers may be able to apply to the court for an injunction preventing further breaches.
Timing matters. Courts are more likely to intervene when employers act promptly.
4. Risk Mitigation
To mitigate the risk of breaching the restraint clauses, we recommend the following:
4.1 Confirm the Individual’s Client List and Contacts
Request a list of clients and contacts the Individual worked with at their previous employer. Ensure they do not engage with any overlapping clients for the restraint period.
4.2 Limit the Individual’s Work in NSW for the Restraint Period
Consider assigning the Individual to clients or projects outside NSW or Sydney for the first 6 months to avoid triggering the non-compete clause.
4.3 Include a Warranty in the New Employment Agreement
In the Individual’s new employment agreement, include a clause confirming that they have disclosed any existing restraints and warrant that their duties will not breach those restraints.
Ensure that the Individual:
Does not initiate contact with former clients or employees.
Only responds to inquiries if contacted first.
Avoids using any confidential information from their previous employment.
Need advice on restraint clauses in employment contracts?
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