What Are Restrictive Covenants? Legal Implications In Australia

Restrictive covenants often appear in Australian employment and business contracts, but they can be tricky to navigate. If you’re hiring staff, selling a business or joining a new role, these clauses can shape what happens when the relationship ends - from who you can work for to which clients you can contact.

In this guide, we’ll explain what a restrictive covenant is, when it’s used, how Australian courts assess enforceability, and practical steps to draft and implement restrictions that actually hold up. We’ll also cover what to do if a covenant is breached and the key takeaways for employers and professionals alike.

What Is A Restrictive Covenant?

A restrictive covenant is a clause in a contract that limits a person’s activities during the relationship and/or after it ends. You’ll commonly see them in employment contracts, director and senior executive agreements, partnership or founder documents, and business sale contracts.

They’re designed to protect legitimate business interests - such as confidential information, customer relationships, goodwill and team stability - not to punish someone for leaving or to prevent lawful competition for its own sake.

Typical forms of restrictive covenants include:

• Non-compete: Restricts a person from working for, or starting, a competing business for a set time and within a defined area.
• Non-solicitation: Prevents a person from approaching your customers, suppliers or referral partners to take business away.
• Non-dealing: Prohibits dealing with your clients at all (even if the client makes the first move) for a limited period.
• Non-poaching (non-recruitment): Stops someone from enticing your employees or contractors to leave and join them.
• Confidentiality: Requires ongoing protection of confidential know‑how. This often sits alongside a Non-Disclosure Agreement and is generally easier to enforce.

When drafted carefully, these clauses help manage the real risks that arise when people move on - especially in relationship-driven industries like professional services, technology, healthcare, and sales.

Are Restrictive Covenants Enforceable In Australia?

Yes - but only if they’re reasonable. Under Australia’s common law “restraint of trade” doctrine, a restrictive covenant is void unless it goes no further than necessary to protect a legitimate business interest (for example, customer connections or confidential information).

Courts look at the overall context and will consider factors such as:

• Geographic scope: Does the area match where your business genuinely operates or competes?
• Duration: Is the time period proportionate to the risk (months rather than years in many employment scenarios)?
• Activities restricted: Is the clause narrowly focused on the risk (e.g. soliciting your clients) rather than a blanket ban on earning a living?
• Seniority and access: Senior staff with deep client relationships or sensitive knowledge can be subject to tighter restraints than junior staff.
• Tailoring: Restrictions tied to the person’s actual role and territory are more likely to hold up than generic “one size fits all” wording.

Most disputes are decided under common law. Competition law plays a limited role in employment covenants. The Australian Competition and Consumer Commission (ACCC) enforces the Competition and Consumer Act 2010 (Cth), which broadly prohibits anti‑competitive conduct between businesses - but day‑to‑day employee restraints are typically assessed as a restraint‑of‑trade issue rather than a competition law breach.

Policy watch: the Australian Government has been consulting on potential reforms to non‑compete clauses in employment settings. Proposals are focused on limiting overly broad restraints, particularly for lower‑paid workers. At the time of writing, changes have not been legislated - so ensure you get current advice if you’re drafting or enforcing restraints.

Where Are Restrictive Covenants Used?

Restrictive covenants appear across different commercial relationships. The right approach depends on the context and the interest you’re protecting.

1) Employment And Contractor Agreements

Employment agreements for senior or client‑facing staff often include targeted non‑solicitation and non‑poaching clauses, and sometimes a carefully scoped non‑compete. The same risks can arise with contractors, so it’s common to include appropriate restraints in a Contractor Agreement as well.

2) Founder, Shareholder Or Partnership Documents

Where owners are actively involved in the business, restraints help protect goodwill if someone exits. It’s common to address this in a Shareholders Agreement or a partnership agreement.

3) Business Sale Transactions

When you sell a business, the buyer is paying for goodwill and customer relationships. A non‑compete and non‑solicitation covenant in the Business Sale Agreement is standard so the seller can’t immediately set up next door and erode what the buyer just acquired.

Each scenario calls for different drafting. For example, a business sale restraint can reasonably be broader and longer than an employee restraint because the seller receives value for the goodwill being protected.

How Do I Draft And Implement Enforceable Restrictions?

Getting the wording right is critical. Here’s how to maximise enforceability while staying fair and commercial.

Be Specific About What, Where And For How Long

• Define the restricted activities in plain terms (e.g. “solicit or attempt to solicit any client you dealt with in the last 12 months”).
• Match the geographic area to where you genuinely do business.
• Choose a time period that reflects the risk - a shorter, well‑targeted restraint often works better than a broad, lengthy ban.

Use “Cascading” Restraints

Courts can sometimes read down an overbroad restraint. To improve your chances, use cascading (step‑down) options for time and area - for example, 12/9/6/3 months and Australia/state/city. If the longest option is too broad, a narrower option may still be enforceable.

Tailor To The Role And Legitimate Interests

• Link the restriction to the person’s actual access to clients, confidential information or strategic knowledge.
• Aim for non‑solicitation and non‑poach first. Reserve non‑competes for roles where lesser restraints won’t protect the business.

Embed Restraints In The Right Documents

Include clear restraints in the relevant agreement at the start of the relationship. For senior hires, consider a standalone deed or clause set (for example, a tailored Non‑Compete Agreement) that sits alongside the main employment terms.

Onboarding, Reminders And Exit Hygiene

• Explain the covenants before signing and during induction so expectations are clear.
• At exit, remind the person of their obligations and return-of-property steps. Good “offboarding hygiene” can prevent a dispute.

Because small drafting choices make a big difference, it’s wise to arrange a contract review before you rely on a restraint - especially for key staff or a sale transaction.

What If A Restrictive Covenant Is Breached?

Act promptly but proportionately. Your strategy should focus on stopping harm and preserving evidence.

Initial Steps

• Gather evidence of the conduct (timelines, client approaches, emails or messages, LinkedIn or marketing activity).
• Write to the person with a firm but constructive letter identifying the clause, the alleged breach and what must stop. Many disputes resolve at this stage.
• Where appropriate, send a formal cease and desist letter and request undertakings not to repeat the conduct.

Court Options

• Injunction: An urgent court order restraining the person from continuing the breach (for example, soliciting named clients).
• Damages: Compensation if you can show loss caused by the breach (lost profits, wasted spend, etc.).
• Account of profits: In some scenarios, recovery of profits made through the breach.

Courts will still ask whether the underlying restraint is reasonable. This is why targeted covenants, evidence of risk, and measured enforcement help your case.

Key Takeaways

• Restrictive covenants limit certain post‑relationship conduct to protect legitimate interests like confidential information, goodwill and team stability.
• In Australia, restraints must be reasonable in scope, time and geography, and tailored to the person’s role and access - otherwise they’re likely to be void.
• Focus on targeted non‑solicitation and non‑poaching first; reserve non‑competes for situations where lesser restraints won’t suffice (particularly in employment).
• Use cascading options and embed restraints in the right contracts, such as an Employment Contract, Shareholders Agreement or a Business Sale Agreement, depending on the context.
• If there’s a breach, move quickly to stop ongoing harm - start with a practical letter or a formal notice, and consider an injunction where needed.
• Given evolving policy settings around non‑competes and the nuance of drafting, get a professional contract review so your restraints are enforceable and proportionate.

If you’d like a consultation about restrictive covenants - drafting, reviewing or enforcement - you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.