KEY POINTS:
I am wanting to leave the business I am working in and set up a company in a similar field (to my employers' business). I have looked at my employment agreement briefly and it contains a restraint of trade clause. What is the extent of any liability I
may incur if I do leave the business and set up a similar business?
Firstly, I would need to have a look at the restraint of trade clause in your employment agreement in order to advise you properly.
Restraint of trade clauses are aimed at preventing an employee from going to work for a competitor and/or from setting up or buying an interest in a business in competition with its former employer.
It is becoming increasingly common in highly competitive industries and in occupations where employees deal with sensitive commercial information for employers to require employees to agree to non-competition or restraint of trade provisions in their employment agreement.
Essentially your employer is seeking to limit your freedom to have any business dealings with people in the same industry or occupation - with the aim of protecting its commercial interests.
Most commonly restraint of trade/non-competition clauses seek to restrain employees from:
* Carrying on business in the same industry or occupation while they continue to be employed by the current employer; or
* Canvassing the employer's customers to be customers of a current or future business of the employee; or
* Competing against the employer after the current employment ends, either by opening their own business or working for a competitor. As a general principle, contractual provisions that seek to restrain trade or competition are void and unenforceable but they are not illegal.
For a restraint of trade provision to be enforceable, a party to the contract needs to prove that the restraint is reasonable in terms of the parties' interests and the public interest. To enforce such a provision in an employment agreement, an employer would have to prove that the restraint is reasonable; that the employee does not have to prove that it is unreasonable.
What is a reasonable restraint?
First, it is not enough merely to want to protect the employer from competition. There must be something more - something that is sufficient to overcome the basic principle of public policy on restraint of trade: that employees should be free to sell their skills and talents. The something more has to be:
* Some advantage or asset inherent in the business which can probably be regarded as the employer's property, and which it would be unjust to allow the employee to appropriate.
* A proprietary interest which requires protection, such as a trade secret or a continuing business relationship.
Restraint of trade provisions are difficult to enforce even if they pass the "something more" test. Enforcement is usually sought when a person leaves an organisation and goes to work for a competitor or sets up in competition with the previous employer.
In some situations the employer can seek an injunction to enforce restraint of trade clauses and its agreement with the former employee.
If you do leave and your employer decides to enforce the restraint of trade clause and applies to the court for an injunction, as a first step the court will ask if the restraint is expressed in the negative.
In other words, it must contain a promise that the employee will not do something; a promise not to work for a competitor can be enforceable, but a promise only for the present employer will not be.
Next, the courts will examine all the circumstances and decide whether the restraint is reasonable. It will establish whether:
* The former employer has a proprietary interest that is capable of being protected;
* It is reasonable to restrain specified activities of the employee;
* The period of the restraint is reasonable; and
* The geographical limits of the restraint are reasonable.
What is a reasonable period of restraint?
Each case is different, but the courts will not enforce a restraint of trade provision that would prevent a former employee from either setting up in business or working again in the employee's chosen field.
At some point, the information picked up by an employee will be out of date or no longer commercially sensitive, or the employer will have had sufficient time to overcome any disadvantage that might come from competition.
Confidential information
The need to protect confidential information is often given as justification for a restraint of trade provision in an employment agreement. Typically, the employment agreement will seek to restrain employees from using or disclosing the employer's confidential information while the employment continues and for a specified period after the employment ends.
Usually employment agreements include a confidentiality provision which states that confidentiality should continue after the employment ends.
Even if there is no agreement, the duty to maintain confidentiality may continue. If you do decide to leave your employment you cannot be restrained from using your own skills and knowledge when you leave. That said, you would not be allowed to use detailed knowledge of the affairs and plans of your employer's clients in order to secure business for your own enterprise.
I suggest that you carefully read the restraint of trade provision in your employment agreement to establish the extent of your obligation to your employer.
I also suggest that you speak to an employment law specialist/employment lawyer if you are unsure about the extent of your obligation under the restraint of trade provision.
