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Restraints of trade – not worth the paper they are written on!

These are often the bullish words we hear when someone is planning to leave their employment to compete with their employer. Whilst it is true that restraints of trade are void at common law unless they can be proved to protect a legitimate business interest, many contractual restraints of trade have been carefully drafted and will be enforceable.

Further, what many employees overlook in their haste to dismiss their contractual restraints of trade are the common law and statutory obligations which apply whilst they are still employed.

An employee is not necessarily free to resign and then do as they please. In addition to any contractual restraint of trade obligations which may be found to be enforceable after they leave, employees must not:

  • use or disclose their employer’s confidential information (during or after employment); or
  • take or use their employer’s property, including its intellectual property (during or after employment).

In addition to any contractual obligations owed and their common law obligations, Section 182 of the Corporations Act states that a director, officer or employee of a company must not improperly use their position to gain an advantage for themselves (or someone else) or cause detriment to the company.

Therefore, diverting business away from the employee’s current employer to a new employer or business in which the employee has an interest whilst still employed by the current employer (even during the notice period) will potentially breach an employee’s contractual, common law and statutory obligations.

Section 183 of the Corporations Act further states that a person who obtains information because they are or have been a director, officer or employee of a company must not improperly use the information to gain an advantage for themselves (or someone else) or cause detriment to the company.

These obligations apply over and above any contractual or fiduciary obligations and prevent an employee diverting business to their newly established business, new employer or from using information such as confidential customer lists or pricing formulas, profit margins or tender information in their new role.

Therefore, taking steps whilst still employed to establish a new business, court customers of your employer, divert business to your new business or failing to fulfil your employment obligations faithfully and properly may result in legal action being brought against you – even if the “restraint is not worth the paper it is written on!”.

Employees wanting to leave their employment to start up a new business or wanting to accept a position with a competing employer should seek specialist legal advice before proceeding to ensure that their new position or business prospers without risk.

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