Restraints of Trade

restraints of tradeEx-employees often have an unfair advantage when competing with their former employer.  Senior employees and those who had relationships with their ex-employer’s clients are likely to have had access to their former employer’s confidential information which may include its trade secrets, business plans and client lists.

They may also be in a position to influence their ex-employer’s clients.  To prevent ex-employees from exploiting the advantage gained during their employment, it is sensible for employers to include restraints of trade in the employment agreements of senior employees and those who had relationships with their clients.

A restraint of trade purports to prevent an employee from doing something during and after his or her employment has ended.

Common types of restraints of trade

  • Restraints that prevent an ex-employee from working for a competitor (non-compete);
  • Restraints that prevent an ex-employee from soliciting certain clients /prospective clients of the employer (non-solicit);
  • Restraints that prevent an ex-employee from dealing with certain clients /prospective clients of the employer (non-deal); and
  • Restraints that prevent an ex-employee from poaching certain employees of the employer (non -poach).

The fact that an employee has agreed to a restraint of trade does not, on its own, mean that the restraint is enforceable.  Restraints of trade will only be enforceable if:

  • The employee has agreed to the restraint and the employer has given some consideration for the restraint (depending on the circumstances, this may be the employee’s salary);
  • The employer has a proprietary interest (i.e. customer connections, trade secrets, stability of the workforce) which is capable of protection; and
  • The restraint is reasonable in all the circumstances: When considering reasonableness, there are a number of factors to be considered including: the nature of the restriction; the geographical ambit of the restriction; and the duration of the restriction.

The Employment Relations Authority and the Employment Court will critically examine restraints of trade and, if the restraint is not found to be enforceable, they can modify the restraint or refuse to uphold it altogether.  Therefore, it is essential that care is taken when drafting restraints of trade.

Unfortunately, it is a commonly held belief by employees (and some employers) that restraints of trade are not enforceable and can be disregarded without consequence.  That is not true.  Provided the Authority or the Court is satisfied that the criteria have been met and that the restraint is reasonable in all the circumstances, they will uphold them.

Employers, who are concerned that an ex-employee has or is likely to breach a restraint of trade, should promptly seek legal advice.  Often all that is required is a reminder to the employee (and, if appropriate, his or her new employer) of the existence of the restraint and the former employer’s intention to enforce it.  If this is not sufficient, the former employer can apply to the Authority for an interim injunction. An interim injunction is an order which prevents a person from doing something until a full hearing can be held.

If granted, the interim injunction is likely to require the employee to stop breaching the restriction until a full hearing takes place.  If, following the full hearing, the Authority determines that the clause was enforceable and that the employee breached it, the employer can ask the Authority to impose a penalty against the employee and possibly damages as well.  In certain circumstances (i.e. where the new employer is aware of the restriction and induces the ex-employee to breach it), it may also be possible to join the new employer to the proceedings and ask the Authority to impose a penalty against the new employer as well.

If you require any further information, please contact us on:  (09) 214 5780

 

Disclaimer:  The information in this Knowledge Centre is not intended to be and does not replace legal advice.  It is provided free of charge for information purposes only.  Reasonable effort has been made to ensure the information is correct and up to date.  However, no responsibility for its accuracy or for any consequences of relying on it is assumed by the author or Just Employment Limited.  We strongly advice that you take advice from a lawyer about your case or matter.