Restraint of trade clauses are a common feature of employment contracts and are designed to protect a business once an employee leaves their role. These provisions typically restrict situations where a former employee joins a competitor, approaches existing clients or uses confidential information obtained during their employment.
Businesses rely on these clauses to protect client relationships, trade secrets and other commercially sensitive information. However, they are not automatically enforceable. Australian courts will only uphold restraint provisions where they are reasonable and necessary to protect legitimate business interests. If a restraint goes beyond what is reasonably required, the court may refuse to enforce it.
Potential reforms to non-compete clauses
Restraint of trade provisions, particularly non-compete clauses, have recently become the subject of policy discussion in Australia, with regulators questioning whether their widespread use may limit employee mobility and competition.
In the 2025-26 Federal Budget, the Australian Government announced plans to review the use of non-compete clauses in employment contracts to encourage labour mobility, productivity and wage growth.
One proposal under consideration would restrict the use of non-compete clauses for employees earning below the high-income threshold under the Fair Work Act 2009, currently around $175,000 per year.
While reforms may be introduced in the coming years, potentially from 2027, further details have not yet been released. In the meantime, businesses should review their employment contracts and consider how restraint provisions are used.
When restraint clauses are enforced
Courts may uphold restraint clauses where they are reasonable in their scope and necessary to protect legitimate business interests, such as confidential information, client relationships or commercially sensitive knowledge. In determining whether a restraint is enforceable, courts will generally consider factors including the length of the restraint, the geographic area it applies to and the types of activities it seeks to restrict.
Employment contracts frequently include non-solicitation clauses, which prevent former employees from approaching clients or customers to transfer their business to a competitor.
In AEI Insurance Group Pty Ltd v Martin (No 4), the employee had worked as an insurance broker and later joined a competing brokerage after leaving his former employer. His employment contract included a clause preventing him from soliciting clients of the business for 12 months following the end of his employment.
The Court found that he had contacted clients and that more than 50 ultimately transferred their business to the competing brokerage, resulting in a breach of the non-solicitation clause. Martin was then ordered to pay $500,000 in damages to his former employer.
Restrictions on competing businesses
Courts may intervene where a former employee attempts to establish or operate a competing business in breach of contractual obligations. Employment contracts may include non-compete clauses, which restrict a former employee from working for or establishing a competing business for a defined period after leaving their role.
In Australian Timber Supplies Pty Ltd v Welsh, the Queensland Supreme Court considered the conduct of a former employee who began operating a competing business shortly after leaving his position. The employee had worked in a role that gave him access to commercial information, customer relationships and knowledge of the business’s operations.
After resigning, he established a new company and began trading in the same industry as his former employer. The employer alleged this conduct breached the restraint provisions in his employment contract and the Court agreed. An injunction was then granted preventing the employee from operating the competing business for the relevant restraint period.
When restraint clauses are not enforceable
Restraint provisions that are too broad may not be upheld by the courts and must remain limited so they do not impose unnecessary restrictions on a person’s ability to work.
Employers often rely on restraint clauses to protect confidential information, non-disclosure obligations, strategic knowledge and key commercial relationships developed during employment. However, those protections must be balanced against an employee’s ability to continue working in their chosen field.
In Just Group Ltd v Peck, the Victorian Supreme Court examined a restraint clause imposed on the company’s former Chief Financial Officer. The clause attempted to prevent the employee from working for numerous competing retailers across Australia and New Zealand for up to 24 months.
The Court concluded that the clause was unreasonable in its scope and refused to enforce the restraint, allowing the employee to take up the new role.
What to do if a restraint clause may be breached
Restraint of trade disputes often arise after an employee leaves a business and begins working in a competing role or industry.
If this occurs, practical steps may include:
Reviewing the employment contract – carefully examining the restraint clause, including the duration, geographic scope and the activities being restricted.
Sending a cease and desist letter – employers may issue a cease and desist letter reminding the individual of their contractual obligations and requesting that the conduct stop immediately. In many cases, this step can resolve the issue without court proceedings.
If the conduct continues, employers may seek legal remedies such as:
- An injunction preventing further breaches
- Damages for financial loss.
As the cases above demonstrate, courts may grant these remedies where restraint clauses are reasonable and properly drafted.
The importance of well-drafted contracts
Restraint of trade disputes often turn on the specific wording of an employment contract. Clauses that are overly broad may be difficult to enforce, while carefully tailored restraints that protect genuine commercial interests are more likely to be upheld.
Reviewing employment contracts and obtaining legal advice early can help ensure restraint provisions operate as intended and reduce the risk of disputes when employees move on.
Aubrey Brown Lawyers advises businesses on employment contracts, workplace disputes and restraint of trade matters.
To arrange an appointment with our team, call (02) 4350 3333 or visit aubreybrown.com.au.
