Reading time: 5 minutes

Restraint of trade clauses are important tools for businesses to protect their commercially sensitive information and details. They place restrictions on what an employee can do for a limited time after they leave the business. A restraint of trade clause will often limit the employee from ‘soliciting’ or taking any clients from the business. It will also restrict an employee from encouraging other employees to leave with them. There are also ‘non-compete’ clauses to stop employees from working for competing businesses in the same geographic area. However, many employees will flout these restraints once they leave a business. This article sets out three reasons why employees should not breach their restraints of trade and why new employers should not aid or abet those employees. These include: 

  • the risk of an injunction; 
  • the risk of damages and penalties; and 
  • reputational risk. 

The Risk of an Injunction

The first reason employees should not breach a restraint of trade clause (and new employers should be similarly hesitant) is because the Employment Relations Authority is very willing to issue an injunction against the employee in question. This injunction will stop the employee from doing whatever activity is putting them in breach of the restraint of trade. 

For example. this might be:

  • working for a new employer who is a competitor of their original business (in breach of a non-compete); or
  • in servicing a client of the original business (in breach of a non-solicitation restraint).

How this works in practice is that when the original employer discovers that the employee is acting in breach of the restraint, they can apply to the Employment Relations Authority to put an immediate end to the actions in breach. This can have significant impacts on the new employer of the employee. For instance, they may need to find an immediate cover for the employee if they are restrained from continuing to work until the restraint period ends. They may also need to redeploy the employee elsewhere in the business. This is so that they will not be competing with their former employer. 

The Risk of Damages and Penalties

Another risk that employees in breach of their restraints of trade face significant damages and penalties. Your business may have suffered financially or otherwise by a former employee’s actions in breaching their restraint of trade clause. In that case, you can seek damages to cover the loss you incurred as a result of that breach. 

For a practical example, suppose one of your employees leaves the business and succeeds in persuading some clients to leave with them. This will likely put them in breach of a non-solicitation clause if there is one in their employment agreement. You can then seek damages to the amount of the lost business caused by those clients leaving.

The Employment Relations Authority, and other courts, can also issue penalties against an employee:

  • who breaches their restraint of trade;
  • for breach of contract; and
  • for lack of good faith.

These penalties can be significant, as can damages. In recent times, the Employment Relations Authority has ordered damages as high as $50,000 and $70,000 to be paid by employees in breach of their restraint of trade. 

Ongoing Disruption and Reputational Risk

An associated risk if your new employee may be in breach of a restraint of trade clause is the disruption that this may cause to your business. This can take a range of forms, including:

  • dissatisfaction and legal action from the employee’s former employer; and 
  • the need to allocate human resources and legal action to manage the legal risk caused by the breach. 

There is also a reputational risk in terms of being seen to aid and abet an employee in breach of their restraint. This may hamper relationships between your business and local competitors. You do not want them coming after your own employees as a consequence.

Key Takeaways

There are a range of reasons why employees should not breach their restraints of trade. Additionally, reasons why employers should be reticent to assist an employee who would be in breach of their restraint by working for them. Key reasons include direct legal consequences issued by the Employment Relations Authority. This includes an injunction to stop work and significant damages and penalties. There are also indirect consequences, such as disruption to your business and the risk of reputational harm. If you want to know more about restraints of trade or how to respond if a former employee is in breach of a restraint, contact LegalVision’s employment lawyers on 0800 005 570 or complete the form on this page.

Frequently Asked Questions

What injunctions are issued for breaches of a restraint of trade?

An injunction can be issued when an employee is in breach of a restraint of trade to stop them from doing whatever it is that is putting them in breach. This can even include ceasing work for a new employee if they are in breach of a non-compete restraint in their previous employment agreement.

What penalties can be issued for breaches of a restraint of trade?

A range of different remedies and penalties can be issued for breaches of a restraint of trade, particularly when the employee’s original employer can show evidence of financial loss as a consequence of the employee’s actions. For instance, if an employee breaches a non-solicitation restraint of trade in convincing a large client to leave.

What happens if an employee solicits former customers in breach of a restraint of trade?

An employee can be subject to an extremely severe penalty issued by the Employment Relations Authority if they have been found to have solicited customers or other employees while still under an operative restraint of trade provision. The Employment Relations Authority has ordered damages as high as $50,000 and $70,000 for instances where employees have taken customers over to their new employer in this way.

About LegalVision: LegalVision is a commercial law firm that provides businesses with affordable and ongoing legal assistance through our industry-first membership.

By becoming a member, you'll have an experienced legal team ready to answer your questions, draft and review your contracts, and resolve your disputes. All the legal assistance your business needs, for a low monthly fee.

Learn more about our membership

Need Legal Help? Submit an Enquiry

If you would like to get in touch with our team and learn more about how our membership can help your business, fill out the form below.

Our Awards

  • 2019 Top 25 Startups - LinkedIn
  • 2020 Innovation Award 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Award 2020 Employer of Choice Winner – Australasian Lawyer
  • 2020 Financial Times Award 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2021 Law Firm of the Year Award 2021 Law Firm of the Year - Australasian Law Awards
  • 2022 Law Firm of the Year Winner 2022 Law Firm of the Year - Australasian Law Awards