Restraint of trade provisions in settlements
Employees beware: A restraint of trade provision in an employment agreement can be challenged, but if put into a settlement agreement the restraint of trade is enforceable.
How can a restraint of trade provision be challenged?
A restraint of trade provision can be challenged on the following grounds:
- Clauses that purport to restrict the employment or trading activities of one or more of the parties are prima facie (on the face of it) contrary to public policy and therefore void.
- The employer must have a proprietary interest that the clause is designed to protect. A bare covenant against competition cannot be enforced.
- The Courts will not enforce a provision that is wider than is necessary to protect the employer's business or that would prevent an employee earning a living.
- The Courts will not enforce a restriction that applies to a wider area than is strictly necessary or which is unreasonably restrictive of the employee.
- The Courts will not enforce a restriction that is for an unreasonably long period.
- The Courts will not assist in protecting the employer from competition if the employer has no interest justifying protection.
- A restraint of trade clause does not survive if the employer breaches the contract (e.g. unjustifiable dismissal).
Restraint of trade provisions in settlement agreements
Where a settlement is being negotiated to resolve an employment relationship problem, employers through their representatives or lawyers are increasingly sneaking in restraint of trade provisions into the employee's record of settlement agreement. If an employee signs an agreement to be bound by a restraint of trade, that agreement is binding and enforceable on the employee.
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