restraint clauses

What Are The Types Of Restraint Clauses?

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Posted by Minna Boyle on 9 January 2019

Successful businesses thrive on having an edge – that competitive advantage – over their competitors.

And often you’d want to keep that competitive advantage a secret from your competitors.

However, you can’t keep all that information to yourself. You can’t run a successful business without the support of your team – with whom you’ll need to share confidential business know-how and resources.

If you share such information to an employee or contractor, but they leave your organisation, what happens?

How do you stop your own team from becoming your competitors?

Restraint Clauses

That’s when restraints might come in handy.

First of all, you should have a contract with anyone doing work for your business. Normally, these personnel are categorised as either employees or contractors.

In your employment and contractor agreements, it’s often a good idea to have a restraint clause. There are 3 main types of restraint:

  • Non-compete
  • Non-solicitation
  • Non-poach

Understanding the different types of restraint and their limitations can help you decide how best to protect your business.

Non-Compete

Non-compete clauses are designed to prevent a former worker from working for a competitor or start their own competing business.

You can’t just stop someone from ever working for a similar business though!

That would be a really unfair restriction on their ability to work.

That’s why the court will only enforce non-compete clauses that are considered reasonable to protect the legitimate business interests of the former employer.

If you’re wondering what I mean by ‘legitimate business interests’ keep reading because I’ve explained this in more detail below!

Non-Solicitation

A non-solicitation clause aims to prevent a party from taking away clients or other business affiliates from their former employer.

Your workers may have access to client databases. They may also work closely, and build strong relationships, with your clients.

This is great when they are working for you because customer loyalty is very important for most businesses. However once they leave, you don’t want all your clients to follow them away.

Like a non-compete clause, a non-solicitation clause also has to be reasonable.

Non-Poach

The third, main type of restraint is a non-poach, ie a restraint on recruitment. This prevents a former worker from poaching your other valuable employees.

It’s very similar to the non-solicitation restraint, but internal to the organisation rather than external.

Legitimate Commercial Interests

Now, all of these restraints will only be enforceable if they are reasonable to protect the ‘legitimate commercial interests’ of the business. That’s the law.

This because unlimited restraints would be unfair and make it very hard for people to make a living after leaving an organisation.

Types of interests that can be protected include intellectual property, confidential information and business know-how, trade secrets and business goodwill.

How To Enforce A Restraint Clause

Having a well-drafted restraint clause in your contracts is really important.

If it’s too weak, you may not be properly protecting your business interests.

If it’s too restrictive, the court may not enforce it! Which means it won’t properly protect your business interests either.

Getting an experienced lawyer to draft your contracts for you is the best way to make sure you have the right restraint clause for your business.

Things To Think About

When you’re trying to work out what would be a reasonable restraint, your lawyer should be able to give you guidance.

To help you start thinking about it, there are some questions you can ask yourself. For example:

  • What information and processes give the most value to my business?
  • Who are my main competitors and where are they based?
  • Is it important to prevent someone from certain business activities within a particular time frame?
  • Is it important to prevent someone from certain business activities within a particular geographical area?

What To Take Away…

It’s impossible – and impractical –  to keep all your intellectual property and business know-how a secret from the people you work with.

Having non-compete, non-solicitation, recruitment or other restraint clauses in your contracts with your employees and contractors can help protect your commercial interests if they ever leave your business.

Restraints are meant to protect your business, but they can’t be so onerous that they unreasonably limit your former workers from continuing with their careers.

Having a lawyer draft your employment and contractor agreements can help you think about what legitimate commercial interests you should protect, and ensure that your contracts effectively achieve this.

The peace of mind that you’re protected as much as possible, and won’t end up in court with an unenforceable restraint clause, is always worth it!

Need help with an restraint clause in your contract?

We can help! Just get in touch and we can walk you through your options.

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Minna Boyle

Minna is the legal operations manager at Sprintlaw. After receiving a law degree from Macquarie University and working at a top tier law firm, Minna now manages the legal operations at Sprintlaw and puts a focus on making legal knowledge more accessible to the public.
Minna Boyle

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