What is a Restraint of Trade Clause and Is It Enforceable?

Restraint of trade clauses are a common feature in many Australian employment contracts and business agreements, especially when you want to safeguard your company’s interests after an employee leaves, a business is sold, or valuable know-how is transferred. But these restraints - and the conditions you put around them - aren’t always ironclad in court. If you’re a business owner or entrepreneur, understanding how these clauses work in Australia can empower you to protect your business while staying within the law.

If you’re unsure whether you need a restraint of trade clause, how broad it should be, or what makes it “reasonable,” this guide will walk you through everything you need to know - from what a restraint of trade clause actually is, to its enforceability, different types (like post-employment restraints and cascading clauses), and best practices for employers Australia-wide.

Keep reading to understand how to use restraint clauses the right way - and how to avoid costly pitfalls.

What Is a Restraint of Trade Clause?

A “restraint of trade” clause is a provision in an employment or business contract that restricts someone’s freedom to conduct certain business activities, usually after they leave a job or finish a contract. The goal is typically to protect confidential information, customer relationships, or trade secrets.

Where Do You Find Restraint Clauses?

• In employment contracts (especially senior staff or employees with client-facing roles)
• In business sale agreements
• In contractor, supplier, or partnership agreements

Typically, the clause aims to stop a former employee or business owner from:

• Working for a competing business (a “non-compete”)
• Starting a competing business
• Poaching clients, suppliers, or employees (“non-solicitation” and “non-dealing” restraints)
• Using or disclosing confidential information

The most common restraint of trade clause in Australia by far is the post-employment restraint. But there are also restraints in the sale of businesses, partnerships, and more.

How Does a Restraint of Trade Work in Australia?

Australian law generally favours freedom to work and earn a living. As a result, any clause that restricts someone’s ability to do business is carefully scrutinised by the courts - especially in NSW, Victoria, and Queensland. Unlike some legal terms, “restraint of trade” doesn’t come from a single piece of legislation, but from a mix of common law (court decisions) and specific state-based acts (like the Restraints of Trade Act 1976 in NSW).

General Principles

• Restraint of trade clauses are generally considered void (unenforceable) unless the party wishing to enforce it can prove it is “reasonable” for the protection of legitimate business interests.
• Reasonableness examines the scope (what’s being restricted), duration (how long the restraint lasts), and geography (where it applies).
• Each state may have slightly different approaches, but the overall principles are very similar across Australia.

If a restraint period is too long, covers too wide an area, or bans more activities than necessary, courts are unlikely to enforce it - especially if it amounts to an “unreasonable restraint of trade.”

What Makes a Restraint Clause ‘Reasonable’?

Reasonableness lies at the heart of enforceability. The courts look for a fair balance between protecting your business’s genuine interests and the freedom of an individual to work or run their business. Here’s what gets tested:

• Type of Activities: The clause should only restrict activities truly threatening your business (e.g., direct competition, poaching key clients, using trade secrets).
• Geographical Area: Only restrict what’s necessary. A national or state-wide ban might be too broad unless your business truly operates at that level. For local businesses, a restraint covering just the surrounding suburbs (or a defined radius) is more defensible.
• Restraint Period: How long the restraint lasts matters - a six-month, 12-month, or two-year ban are all possible, but longer terms are harder to justify unless there’s clear risk (for instance, protecting a goodwill value in a business sale may allow longer than for a standard employment exit).
• Nature of Role/Transaction: Senior staff, business owners, or those with unique client relationships or confidential information may justify stronger restraints than junior employees.

If a restraint of trade clause goes too far, a court may strike it down as an unreasonable restraint of trade - even if both sides agreed to it initially.

What Is a Restraint Period?

Restraint period means the length of time during which a restraint of trade will operate. It’s critical that this period is not longer than necessary to safeguard your business. Typical restraint periods in Australia include 3, 6, 12, or sometimes 24 months, depending on the nature of the role or business being protected.

The Fair Work Act doesn’t set a maximum restraint period after employment ends - reasonableness is again the guiding factor. For sales of businesses or high-level executive contracts, longer restraint periods are more commonly enforced than in standard roles.

What Is a Cascading Restraint Clause?

A cascading clause (sometimes called a “ladder” clause) is a legal drafting technique often used in restraint clauses in Australia. The contract sets out a series of alternative restraint periods, areas, or activities - from most restrictive to least. If a court finds the broadest option unreasonable, it can “cascade down” to the next one, until it finds a level that is reasonable.

For example, a cascading restraint clause might include:

• 24 months, 12 months, 6 months
• Australia-wide, state-wide, city-wide, or within 5km from business premises

The court will then choose the lowest combination it finds reasonable. Using cascading restraint clauses is a smart way to improve the enforceability of your contract - but the overall effect still needs to be fair.

What Types of Restraint Clauses Are There?

Restraint clauses can come in different flavours depending on what you need to protect:

• Non-Compete: Stops the person from working for a competitor or starting a similar business.
• Non-Solicitation: Prevents poaching of clients, customers, or employees.
• Non-Dealing: Extends the non-solicitation by preventing the person from dealing with clients/customers at all, even if the client approaches them.
• Confidentiality: Stops unauthorised sharing of sensitive business information (sometimes overlaps with other types).

Many employment contracts use a combination of these, each tailored to your specific risks and industry.

Are Restraint of Trade Clauses Enforceable in Australia?

The big question: are these clauses legally binding? The answer is… it depends! While restraint clauses are not automatically unenforceable, the Australian courts will only uphold them if they are reasonable - both in the interests of the parties and the public.

Here’s how it works in practice:

• In Employment Contracts: Greater scrutiny, as employees are seen as having little bargaining power. Strong restraints rarely enforced except for key roles (e.g. senior managers, salespeople, trusted advisers).
• In Business Sales: More likely to be enforced, as the buyer is protecting purchased goodwill.
• Geographical and Duration Limits: Clauses with very broad scope are usually struck out unless justified (the more localised and shorter, the better for your case).

The most important thing is to ensure your restraint clause is customised to your unique business needs. That way, you show the clause is genuinely aimed at protecting your interests rather than simply limiting someone’s ability to earn a living.

Restraint of Trade by State: Key Points

• New South Wales (NSW): Section 4 of the Restraints of Trade Act 1976 (NSW) allows the courts to read down an unreasonable restraint to something reasonable, using the “severance” or “blue pencil” approach. Cascading clauses are commonly used here for added protection. Read more on restraint of trade in NSW.
• Victoria: Follows the common law, with a careful look at reasonableness. If a clause is too broad, it's likely to be struck out.
• Queensland: Also applies common law tests. For more, see restraint of trade Queensland.

When Are Restraint of Trade Clauses NOT Enforceable?

A restraint of trade clause will be unenforceable in Australia if:

• It goes beyond protecting legitimate business interests (such as simply trying to limit normal competition rather than safeguarding actual confidential info, customer connections, or specialist knowledge)
• The scope, geography, or time is clearly excessive
• There is no real risk presented to the business
• It is against public policy
• It restricts an employee so heavily that it stops them from earning a living or causes undue hardship

It’s important to remember that enforceability is always a matter of degree - there is no fixed formula, but overly broad or generic “template” clauses are especially at risk.

What Should a Good Restraint Clause Contain?

To improve enforceability and clarity, a restraint clause in Australia should specify:

• The activities being restricted (e.g. working with competitors, soliciting clients, poaching employees)
• The restraint period (how long the restriction lasts – e.g. 6 months post-employment)
• The geographical area (e.g. within 10km of your business, throughout Victoria, Australia-wide – justified by your business footprint)
• Cascading options (so if the broadest option fails, narrower options can be enforced)
• Which party is covered (e.g. all employees, or only those with access to confidential info or special relationships?)

A strong, well-crafted clause is far more likely to stand up in court - and discourage disputes in the first place.

Common Mistakes to Avoid with Restraint Clauses

• Using generic, non-tailored clauses or templates
• Overreaching with the restraint period or geographical scope
• Trying to cover every possible activity, rather than focusing on genuine threats
• Failing to use cascading clauses (especially if based in NSW)
• Not updating restraint clauses to reflect changes in your business, staff role, or operations

What Legal Documents Might Include a Restraint Of Trade Clause?

• Employment Contract: Outlines post-employment restrictions for key staff.
• Business Sale Agreement: Protects buyer’s goodwill when acquiring a business by stopping the seller from immediately starting a compete business or poaching clients.
• Partnership Agreement or Dissolution Agreement: Prevents former partners from immediately competing post-dissolution.
• Contractor Agreements: Can be included for high-level or specialist contractors with access to sensitive business know-how.

If you’re not sure what your business needs, or how best to draft and enforce a restraint, expert legal advice is essential.

Post-Employment Restraints: What Should Employers Know?

Post-employment restraint clauses are common - and can help protect your business from competitive threats, loss of client connections, or misuse of inside knowledge. But you need to remember:

• The clause should only go as far as necessary to protect your business interests
• It’s harder to enforce for ordinary staff; more senior or specialist employees give you a stronger case
• Non-solicitation clauses (preventing ex-employees from poaching clients or staff) are often more enforceable than outright non-competes
• Cascading clauses and reasoned, clear drafting boost your prospects if you end up in a dispute

A good practice is to review these clauses when you update or renew contracts, or if there’s a major change in someone’s role.

Best Practice: How To Put an Enforceable Restraint Clause in Place

1. Identify What Needs Protection: Is it customers, suppliers, confidential information, unique processes, or staff?
2. Keep It Proportionate: Only use as wide a restraint as necessary – usually, a narrowly-drawn (and well-justified) clause is more enforceable than an aggressive, broad one.
3. Use Cascading Options: Especially in NSW, a cascading clause gives your contract extra resilience in case the broadest option fails.
4. Tailor for Role/Transaction: Senior management, business sellers, or highly skilled employees may justify more restrictions.
5. Review Regularly: If an employee’s role changes or your business model shifts, update the contract (and consider signing new agreements).
6. Seek Legal Help Early: Drafting and reviewing clauses (and understanding what’s defensible if challenged) is best done with professional input. Speak to a lawyer about restraint clauses if you’re unsure.

Key Takeaways

• A restraint of trade clause restricts someone from competing, soliciting clients, or disclosing information after leaving a business - but only if it’s reasonable.
• These clauses are judged by scope, geography, and duration - being too broad can make them unenforceable.
• Use well-drafted cascading clauses for added protection, especially under the Restraints of Trade Act in NSW.
• Post-employment restraints are hardest to enforce for junior staff, and easier for senior roles or business sellers.
• Restraint periods, activities, and geographic reach all need to be justified by business needs.
• Get restraint clauses reviewed by a legal expert - templates and “one size fits all” solutions can lead to expensive mistakes.

If you’d like a consultation on restraint of trade clauses or updating your employment contracts for your business, contact Sprintlaw at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat. We’re here to help you put the right legal protections in place, so you can focus on growing your business with peace of mind.