In Australia, restraint clauses are a common element in employment contracts. These provisions aim to protect the interests of an employer by restricting the employee’s ability to move to a competitor (non-compete clauses), share information (non-disclosure clauses), and poach former clients or co-workers (non-solicitation clauses). Restraint clauses can be contentious provisions in employment contracts, raising questions about fairness, as these clauses can negatively impact a worker’s employment mobility and career opportunities. In addition, restraint clauses are not always enforceable under Australian law. Understanding the legal implications and enforceability of restraint clauses can be crucial for both employers and employees.
Use of restraint clauses in Australia
Historically, restraint clauses were predominantly used in employment contracts for highly paid professionals such as senior management, who had access to trade secrets or valuable relationships through their employment. These clauses were usually negotiated between the business and the employee in return for other benefits.
In recent years, however, restraint clauses have proliferated, even emerging in popular templates for employment contracts. Today, a significant number of employment and business contracts in Australia contain a restraint clause. According to the Australian Bureau of Statistics, in 2023 non-disclosure clauses were the most common form of restraint, used by nearly half of all Australian businesses, while about a quarter of businesses used non-compete clauses. Clauses restricting the solicitation of co-workers were the least common, used by less than twenty percent of businesses. Some examples of restraint clauses include:
- an employment contract for a senior employee in a PR firm with a six-month restriction from taking another role in the PR industry.
- a café franchising contract that contains a clause that the franchisee cannot operate a food business within a two-kilometre radius of the franchise location.
- a sale contract for an accounting business that restricts the seller from operating another accounting business for four months after the sale.
- a manufacturer contract that restricts the manufacturer from producing similar products for other businesses.
Enforceability
When a business is concerned that someone has breached a restraint clause, it must take steps to stop any further breach and assert its rights, such as by sending a formal cease-and-desist letter. In some cases, it might be necessary to seek an injunction to enforce the restraint clause. However, it is often only at the point that a business files for enforcement that it discovers that the restraint clause is actually void or unenforceable.
Courts frequently find restraint clauses to be void as a point of public policy because they restrict the freedom of individuals to earn a living. They may also find that they are unenforceable because they breach the Competition and Consumer Act 2010 by creating a cartel. However, the courts do uphold restraint clauses that are reasonably necessary to protect the legitimate business interests of a party. Therefore, for a restraint clause to be enforceable, it must go no further than necessary. The courts will look at the extent of the restraint, its temporal and geographical scope, any consideration paid in return for the constraint, and widely accepted business practice.
As an example, the courts are likely to enforce a restraint that protects trade secrets because the confidentiality of this information is a reasonable interest of the business. In contrast, although a business may wish to prevent a former employee from moving their expertise to a competitor, this is unlikely to be considered reasonable, particularly as it would unfairly limit the employee’s ability to find suitable work. For example, in McMurchy v Employsure Pty Ltd: Kumaran v Employsure Pty Ltd [2022], the NSW Court of Appeal considered the reasonableness of a nine-month restraint against two former sales managers. In this case, the court enforced the restraint against one of the managers on the basis that they had access to trade secrets during their employment. However, the court declined to do the same to the other manager because they did not share access to confidential information, and therefore the reasonable interests of the business were not endangered by their employment with a competitor.
Under Australian common law, the courts can strike out offending parts of a restraint clause, effectively reducing the restraint until it is reasonable. To facilitate this, restraint clauses are often drafted in cascading style, listing alternative restrictions from expansive to narrow, allowing the courts to “read down” the clause. However, in most jurisdictions, the courts cannot alter or modify any words in the clause, so it may be necessary to strike out the entire restraint clause, even if doing so negates a legitimate interest protection. This is not necessary in New South Wales, where the Restraints of Trade Act 1976 allows the courts to read down all unreasonable restraint clauses. Where the Act applies, the courts can not only strike out words but also modify provisions to protect a legitimate interest.
While employers increasingly see the value in restraint clauses, they are certainly not unproblematic. Non-compete clauses are banned in several US states and the UK government has proposed statutory limits on non-compete clauses. There has been a growing call in Australia to follow this lead and curtail non-compete clauses in employment contracts. In 2025, the Treasury’s Competition Taskforce is expected to release a Review on restraint clauses with the intent to increase competition and productivity.
Restraint clauses are a useful tool to protect business interests, but only when they are valid and enforceable. It is vital to have experienced legal advice when drawing up a restraint clause in an employment contract, and if necessary, targeted legal advice and representation to enforce the clause. Please contact the team at Taylor Rose on 1800 491 469 for assistance.
