Do restraint clauses really work?

Restraint clauses in employment contracts are conditions restricting an employee from sharing information, starting a business in a similar field as the employer, moving to a competitor, or prohibiting a former employee from approaching clients or co-workers. The primary intention of a restraint clause is to protect an employer’s information and business interests.

There are number of types of restraint clauses commonly used by employers:

• Non-disclosure: prevents an employee or ex-employee from using or disclosing confidential information gained during the course of their employment.
• Non-solicitation: prohibits an ex-employee from approaching the employer’s clients or seeking to influence co-workers to leave the employer.
• Non-compete: restricts an ex-employee from establishing or working for a competing business.

In late 2023, the Australian Bureau of Statistics (ABS) conducted the Short Survey of Employment Conditions, the first ABS employer survey on this topic. The survey found:

• 46.9% of all Australian businesses reported they used at least one type of restraint clause.
• The majority of businesses that used restraint clauses reported that these clauses applied to 76-100% of their employees.
• Non-disclosure clauses were the most common restraint clause, used by 45.3% of Australian businesses in 2023. The next most common was the Non-solicitation of clients (25.4%), followed by Non-compete (20.8%) and Non-solicitation of co-workers (18.0%).

The clause type I’m frequently asked about is the “non-compete” (sometimes known as “restraint of trade”) and whether these clauses have genuine value when written into an employment contract. Without delving too deeply into legal waters – after all, that’s why you’d ask a lawyer, right? – my short answer is typically “no”. Why? Because to enforce such a clause you’d have to mount a legal challenge and oftentimes, the ex-employee’s defence will take advantage of a precedent set by the High Court of Australia in the case of Buckley v Tutty (1971):

“Unreasonable restraints are unenforceable as it is contrary to public welfare that a person should be unreasonably prevented from earning a living in whichever lawful way he chooses and that the public should be unlawfully deprived of his services.”

Plain English translation? Courts will often recognise that employees have the right to earn a living, and cannot be restricted from operating a business purely because it may complete with a previous employer.

In my opinion, simple restraint clauses can be included in a Contract of Employment as more of a general expectation that employees should “do the right thing”: a moral deterrent more than anything. Any competent HR Consultant can draft these restraint clauses for you. The exception might be if you operate in a niche field or you have key positions of high value such as CEO’s, COO’s or those working in technology specifically relating to the product you offer. In such cases, having a legal specialist draft concise restraint conditions (including reasonable in the interests of both parties, reasonable geographic area, reasonable duration and circumstances when parts of the clause are found to be unenforceable) tailored to your operation can offer you the best chance of a favourable outcome should you elect to take legal action against a current or former employer for a restraint-related breach.

Like a chat about what you should include in your Contracts of Employment? Call Bare Bones Consulting or shoot us a message through the “Contact Us” window on this page. We’re all about making HR simple.