Restraint of trade clauses are typically found in employment contracts, directorial agreements, shareholder agreements, and specific service arrangements.
Restraint of trade agreements is an important part of the business world that we need to be informed about.
Why do I need a restraint of trade clause?
The purpose of a restraint of trade clause is to protect the proprietary interests of the employer (which can be anything from the employer’s goodwill to the employer’s client base). This is done by providing that, after termination of the employee’s contract of employment, the employee may not: work for the employer’s competition or start a business in competition for a certain period of time, within a particular geographical location or perform certain services.
These agreements normally protect the company’s confidential information, trade secrets, customer relationships, and business interests.
Referring to a matter that SVN Attorneys recently dealt with on behalf of “Client A” where an employee was due for an extension on his contract with Client A, but upon receiving the new contract, said that he was resigning and moving to a new position.
The problem that Client A faced was that the former employee signed a contract with a company that was direct competition, and he would be working on a new project for a shared client by both companies.
The former employee signed a restraint of trade agreement which led SVN Attorneys to advise that the agreement be enforced.
There are 4 requirements that must be met in order for the restraint of trade clause to be valid:
a) There must be a legitimate interest that is protected (of the employer).
b) That such an interest will be prejudiced should the restraint of trade clause be contravened.
c) Is the prejudiced interest of the employer greater than the right of the employee to be economically active after termination.
d) A consideration for current public policy.
The Alternative to a restraint of trade
As useful as it is, a restraint of trade agreement can also be overly restrictive, critics argue that these clauses can be overly restrictive, limiting workers’ career growth and innovation opportunities. This can negatively impact both earning potential and the broader economy.
In a recent movement to limit the use of these restrictive agreements, it would be advisable to investigate alternatives for an agreement that safeguards an employer or company.
What Are The Alternatives to A Restraint of Trade?
An alternative to relying on restraint of trade clauses is to use fair and specific non-disclosure agreements (NDAs) or confidentiality clauses. These agreements can be customised to meet the specific requirements of your business and clearly outline what information is considered confidential.
Another agreement that can be relied on is Non-solicitation clauses that prevent employees, or former employees, from soliciting clients, customers, or other employees of a company they once worked with for a specified period after their employment or contract ends. This clause prevents an employee from working with a competitor or client by restricting the new company from poaching or soliciting the employee. However, it is less restrictive than a restraint of trade because the employee is free to apply for and accept any job they want.
How To Implement A Non-Solicitation Clause?
If you decide to include a non-solicitation clause in your agreements, it is recommended to include the following three elements to make it effective and enforceable:
- Clearly define the prohibited activities, such as not soliciting clients, customers, or personnel from the company in any manner.
- Define the reasonable time frame for these restrictions.
- Limit the geographical scope of the clause to areas where the company has a legitimate interest.
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