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Restraints of Trade in South Australia

Your employment contract may include a clause that prevents you from carrying on a side business that competes with your employer, or prohibits you from working in a particular industry or profession after you leave your job.  These clauses are known as “restraint of trade” clauses, and employers incorporate them in employment contracts to protect their business.  In South Australia, restraint of trade clauses are regulated by the common law and, where a restraint is in relation to trade or commerce, under the Competition and Consumer Act 2010 (Cth).  Unlike NSW, South Australia does not have any specific statutory limitations on restraint of trade clauses.

Restraints of trade are a legitimate method of protecting a business interest

Common restraint of trade clauses

A restraint of trade clause can come in a variety of different forms. For example, a restraint of trade clause may stop you from working with one of your former employer’s competitors. Alternatively, it may stop you from trying to get business from your former employer’s customers, stop you from competing with your employer while you are still employed by them, or stop you from divulging trade secrets. The restriction will only last for a particular period of time and usually only within a certain geographical area; if none is specified, then the restriction may be invalid.

If you are about to start a new job and there is a restraint of trade clause in the contract your employer wants you to sign, you could discuss the clause with them or ask a lawyer about how the clause might affect you in the future.

The legal principles

Generally speaking, the common law accepts that people should be free to exercise their capacities for work and trade however they see fit.  Because of this, restraint of trade clauses are treated as void and unenforceable as a general rule.  However, if your employment contract has a restraint of trade clause in it because your employer (or former employer) has a legitimate business interest to protect and the scope and timing of that restraint is reasonable, then the clause will be enforceable.  The onus is on your employer or former employer to show this to be the case.

When does a restraint of trade clause protect a legitimate business interest?

An employer may have a legitimate business interest to protect if it is trying to protect its business and income.  This can include protecting its relationships with clients from future competition, protecting its trade secrets or protecting its goodwill.  However, simply trying to protect itself from future competition has been held not to be a legitimate interest.  Because of this, restraint of trade clauses are most commonly found in industries where an employee learns trade secrets, such as the food and pharmaceuticals industries.

When is a restraint of trade clause reasonable?

Whether a restraint of trade clause is reasonable will depend on all the circumstances of the case.  It will be unreasonable if it goes beyond what was necessary to protect the employer’s business.  A Court will consider a number of factors in deciding whether a restraint of trade clause is reasonable.  These factors include:

  • How long the restraint of trade clause lasts for.  If it lasts for too long, it may be considered to be unreasonable.
  • The kind of work you did as an employee, including factors such as your role with your employer, your seniority, your work duties and whether your role required you to deal with clients.  If you were required to deal with clients or your work involved a high level of sophistication, such as access to trade secrets, a restraint of trade clause is more likely to be reasonable.
  • The geographical extent of the clause.  This will depend on the nature of your former employer’s business.  For example, if their market is solely limited to South Australia, it may be unreasonable to restrain you from performing a similar role in Western Australia.

“Cascading” clauses

In NSW, a court can “read down” a restraint of trade clause, meaning even if it is unreasonable, the court can modify it to apply in more limited circumstances (e.g. a clause that applies for 2 years can be read down to apply for 1 year). In South Australia, courts do not have the power to do this. To deal with this, employers often include “cascading” restraint of trade clauses in employment contracts, which consist of multiple restraints which overlap. This means that if one or more restraints are unenforceable, they can be severed from the rest of the employment contract, and the reasonable restraints of trade can continue to operate.

How are restraint of trade clauses enforced?

Before a hearing is held to determine whether a restraint of trade clause is void, your former employer may seek an interlocutory injunction to prevent you from doing anything which would breach the restraint of trade clause. As mentioned above, your former employer has the onus of proving to a court that a restraint of trade clause is not void.  However, if it discharges this onus, the onus then turns to you to show that the restraint of trade clause is not in the public interest.

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