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Looking for that next job opportunity? Understand restraint of trade provisions in employment contracts

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Attwood Marshall Lawyers Commercial Litigation Partner Charles Lethbridge looks at the nuances of enforcing clauses that restrict employees from certain behaviours when they move on from their current role. It is imperative to properly understand the ramifications of your contract and the agreement you are bound to.

Somewhat controversial and often misunderstood, “restraint of trade” provisions in employment contracts can be looked down upon, as they can tilt the power balance towards employers and unfairly limit how employees use their skills and experience to get ahead in their careers.

Designed to stop an employee from acting in a detrimental way to their employer when they leave their current job, restraint of trade provisions can do all manner of things, from restricting an employee’s ability to work in a similar field or for a competitor, to poaching their former colleagues or customers.

Disputes over restraints of trade provisions can be complex and costly to resolve, as they often involve legal challenges to determine whether they are valid and enforceable.

At Attwood Marshall Lawyers, we regularly take on cases involving disputes between employers and former employees over alleged breaches of post-employment restraints.

In most cases, the former employee claims they had no idea that their employment contract included restraint provisions or that such provisions could be, and often are, enforced.

Do I have “restraint of trade” clauses in my employment contract and can I challenge them?

There are typically two types of restraint clauses found in employment contracts: non-competition and non-solicitation.

  • Non-competition clauses seek to prevent former employees from competing with their former employer by working for a competitor or setting up a competing business nearby.
  • Non-solicitation clauses prevent former employees from soliciting or dealing with clients or customers of the former employer for a specific period after leaving their former workplace. Non-solicitation clauses can also prevent a former employee from soliciting other employees to leave the business for a set period after finishing employment.


By restricting an employee’s conduct after they leave employment, restraint of trade clauses can also protect the employer’s confidential information, client lists, and trade secrets.

When a business is sold, a seller may also include a restraint of trade clause in the sales contract to prevent the use of confidential information obtained during the course of running the business. A restraint of trade clause may also prevent a buyer from competing with the business for a certain period.

However, with those pros also come a list of cons. Critics argue these provisions unfairly limit an individual’s career options and earning potential, restrict their rights to use their skills and experience, as well as generate an inequality of bargaining power between employers and employees.

They can also be a source of contention between buyers and sellers, limiting the buyer’s ability to expand their business or enter new markets.

For restraint of trade provisions to be enforced, a court must be satisfied the restraints are reasonable and protect an employer’s legitimate interests.

Crucially, both employees and employers need to be aware of the scenarios when restraint of trade provisions are enforceable, or not, and seek legal advice if they have any queries before signing on the dotted line.

Case study

The New South Wales Court of Appeal recently ruled on a case involving post-employment restraint of trade clauses. In McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201, the Court upheld a decision that deemed a restraint of trade clause reasonable and enforceable against a former employee who joined a competitor’s business.

The Court of Appeal also upheld the Supreme Court’s decision that the former employee, Mr McMurchy, had breached his fiduciary duties to Employsure by poaching a colleague to join the competitor’s business.

The employment contract included a confidentiality provision that prohibited Mr McMurchy from disclosing or misusing confidential information obtained during employment. Additionally, the contract contained a post-employment restraint provision that obligated Mr McMurchy not to be engaged as an employee or consultant in any business in competition with Employsure.

The post-employment restraint provision included a “non-compete period” of 12, nine, six, or three months, depending on the Court’s decision – known as a “cascading clause.”

Mr McMurchy accepted a position with a business that directly competed with Employsure. Furthermore, he gave his new employer names of other employees from Employsure whom they could attempt to poach.

Employsure took legal action to obtain interim restraining orders that stopped Mr McMurchy from working for their new employer until the court case was over.

After the trial, the Supreme Court found that the post-employment restraint period of nine months reasonable and enforceable.

The court reasoned that Mr McMurchy had breached the employment contract by inducing another employee (Mr Kumaran) to leave to join their new employer. It also found Mr McMurchy had breached his fiduciary duties to Employsure.

Mr McMurchy and his new employer appealed the Supreme Court’s decision. The Court of Appeal examined Employsure’s legitimate business interests, which they deemed necessary to protect.

An employer can only enforce restraint provisions if the clause aims to safeguard their legitimate business interest and only for a reasonable period after the employment contract ends.

The Court of Appeal agreed that Employsure’s protection of its confidential information was a legitimate business interest.

The court upheld the decision that the nine-month post-employment restraint was reasonable, given the time during which the former employer’s confidential information would likely remain current.

Lessons for employers and employees

As the case above shows, where an employment contract contains provisions designed to protect an employer’s confidential information, a court can additionally find that an employee has breached an implied fiduciary duty owed by an employee to an employer.

They may have engaged in conduct detrimental to their former employer’s business by encouraging employees to leave employment and take up positions with a competitor. Or, they could have taken or passed on confidential information such as trade secrets or client lists.

Employees must read their employment contracts and understand the ramifications of any restraint of trade provisions.

By meticulously reviewing the terms and comprehending the implications of restraint of trade provisions, an employee will be in a much better place to confidently navigate any potential dispute that arises with their former employer.

Attwood Marshall Lawyers – helping you protect your rights and resolve disputes effectively

When entering into a new employment contract or business agreement, it is crucial to understand your rights and obligations. Don’t wait until a dispute arises to seek legal advice. An employment and business lawyer can review your contract beforehand, ensuring it is fair and safeguards your interests.

If you find yourself embroiled in a dispute over a contract, make sure you seek trusted legal guidance promptly. This not only provides clarity about your rights but also facilitates effective negotiations to swiftly resolve the matter.

If you would like more information about contract matters or resolving disputes, please contact our Commercial Litigation Department Manager, Amanda Heather on direct line 07 5506 8245, email aheather@attwoodmarshall.com.au or free call 1800 621 071.

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Charles Lethbridge - Partner - Commercial Litigation

Charles Lethbridge

Partner
Commercial Litigation

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Disclaimer
The contents of this article are considered accurate as at the date of publication. The information contained in this article does not constitute legal advice and is of a general nature only. Readers should seek legal advice about their specific circumstances. 

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