Restraint of Trade Clauses in Employment Contracts

This material is designed and intended to provide general information in summary form on legal topics, current at the time of publication, for general informational purposes only. This is not legal advice. 

Introduction 

Restraint of trade clauses (restraints) are terms in an employment contract between an employer and employee that try to restrict a worker’s conduct, especially once the worker stops working for the employer.  

Restraints can be divided into three categories: 

1. Non-disclosure à confidentiality or privacy terms to not share information about the business 

1. Non-compete à terms to prevent a worker from working for or starting a competing business 

1. Non-solicitation à terms to prevent a worker from taking away or offering services to (ie solicit) clients or customers of the business 

The purpose of restraints is to protect the employer’s business interests. However, they can be problematic for workers trying to find a new job.  At the Working Women’s Centre SA we see restraint clauses increasingly being included in employment contracts as standard contract terms.  Restraint clauses should not be used as a standard term in all contracts, and only in specific circumstances. This factsheet provides a summary of the current legal approach towards restraints so workers can understand the meaning and effects of agreeing to them.   

General rules regarding restraints 

The 2013 Victorian Supreme Court case of Wallis Nominees (Computing) Pty Ltd v Pickett [1] summarises the rules courts apply when deciding if restraints are valid and can be enforced. This is summarised as follows:[2]

• The starting position is that restraints are unlawful or invalid 

• However, restraints can be lawful if, depending on the specific case, they are reasonable to protect a party’s interests  
  • Eg a law firm partner’s employment contract including restraints to prevent the partner from going to a rival firm, or starting their own firm, and taking clients with them 

• Restraints should not go beyond what is reasonable to protect one’s interests   

• • Eg preventing a worker from working for a rival business in the same city is likely more reasonable to protect a business’ interests than preventing a worker from working interstate  

• Whether a restraint is lawful will be decided in the context of the date the contract began  

• • Eg if a contract began on 1 December 2023, the Court would decide if the restraints were reasonable on 1 December 2023, not when the legal claim began on 10 December 2024 

• The responsibility of proving the specific circumstances showing why the restraints are reasonable is on the party wanting to enforce the restraints  

• • Eg if an employer wants to enforce restraints, it is the employer’s responsibility to show the restraints are reasonable  

• Restraints may be interpreted or understood in reference to the facts, context and surrounding circumstances of the case 

Example of Restraint Terms in an Employment Contract 

Yohanna is a qualified hairdresser with 5 years of experience. She took a 2-year break after giving birth to twins and is keen to get back into the workforce. One day, she sees that a salon in the Adelaide CBD, Sissy Scissorhands (Sissy’s), is hiring. After two rounds of interviews, Yohanna wins the position and is offered an employment contract which includes the following terms:  

12 Restraints 

12.1 Non-solicitation 

During the Employee’s employment with the Employer and for each Non-Solicitation Period (refer to Clause 13) thereafter, the Employee must not, without the Employer’s prior written consent, directly or indirectly, within each Non-Solicitation Area (refer to Clause 13), interfere with or disrupt, or attempt to interfere with or disrupt, any relationship, whether contractual or otherwise, between the Employer and any of the Employer’s customers, clients, suppliers, distributors or joint venture partners, or identified prospective customers, clients, suppliers, distributors or joint venture partners, including any such customers, clients, suppliers, distributors or joint venture partners to whom the Employee was introduced, or in respect of whom the Employee carried out any work, during the course of her employment with the Employer. 

12.2 Non-competition  

During the Employee’s employment with the Employer and for each Non-Compete Period (refer to Clause 13) thereafter, the Employee must not, without the Employer’s prior written consent, directly or indirectly, within each Non-Compete Area (refer to Clause 13), and whether alone or jointly with or on behalf of anybody else, including: 

(a) in partnership or in association with any other person; 

(b) as an agent, representative, director, officer or employee of any other person; 

(c) as a member of, or holder of any shares or other securities in or from, any other person; or 

(d) as a trustee of, or consultant or adviser to, any other person, 

carry on, operate or be engaged, interested or employed in any other business or endeavour that is the same as, is materially similar to, or competes with, the Business or any part of the Business in which the Employee was involved during her employment with the Employer. 

13 Restraint details 

For the purposes of Clause 12—  

13.1 Non-Solicitation and Non-Compete Periods mean: 

(a) 12 months; or 

(b) 6 months; or 

(c) 3 months. 

13.2 Non-Solicitation and Non-Compete Areas means: 

(a) Within 50 kilometres of the Business; or  

(b) Within 40 kilometres of the Business; or  

(c) Within 30 kilometres of the Business; or 

(d) Within 20 kilometres of the Business; or 

(e) Within 10 kilometres of the Business; or 

(f) Within 5 kilometres of the Business. 

Yohanna is unsure what these terms mean, but she is desperate for work and accepts. After 6 months at Sissy’s, she realises that she would prefer to work somewhere closer to her home in Elizabeth. Yohanna remembers the restraints in her contract and is not sure what she can do moving forward. 

Based on the rules outlined in Wallis Nominees above, the starting position is that the restraints in Yohanna’s contract are unlawful. However, if Sissy’s want to enforce the restraints, they will need to show that the restraints are reasonable and necessary to protect their business interests. Sissy’s need to show that the Non-Solicitation and Non-Compete Periods and the Non-Solicitation and Non-Compete Areas do not reach beyond what is necessary and reasonable to protect their business interests.  

In practical terms, Sissy’s need to show that the time periods and geographical areas in Clause 13 are reasonable restrictions to protect their business interests. This is why the clause has multiple time periods and geographical areas – if the broadest scope (ie 12 months within a 50km radius) is unreasonable, then a Court will need to decide if an alternative option under the clause (ie 6 months within a 30km radius) is reasonable and valid.  

Ultimately, it is up to Sissy’s to enforce the restraints if they want to. Because Yohanna signed the contract, there is a risk that if she resigns and tries to work as a hairdresser in the next 12 months within 50km of Sissy’s, that Sissy’s will start a legal claim against her to enforce the restraints. Even if all the restraints are decided as unlawful, Yohanna will still have to go through the legal proceedings, which can be costly and time-consuming.  

This is why it is important to get legal advice about what contract terms mean before signing the contract.  

Contact the Working Women’s Centre SA on 08 8410 6499 to organise a legal advice appointment with one of our lawyers. 

[1] (2013) 45 VR 657.

[2] Wallis Nominees (Computing) Pty Ltd v Pickett (2013) 45 VR 657, (Warren CJ, Davies AJA) at [14] citing the judge at first instance.