You’ve been offered a great new role, or you’re ready to start your own venture, but there’s a clause in your old employment contract that says you can’t compete with your former employer, can’t contact their clients, or can’t poach their staff for the next twelve months. Can they actually stop you? Or, if you’re the employer watching a key employee walk out the door towards a competitor, can you enforce the restraint you had them sign?
Restraint of trade is one of the most misunderstood areas of employment law. Employees often assume these clauses are unenforceable “scare tactics”, while employers often assume the clause they had signed will hold up. Both assumptions can be wrong. At Hills Solicitors, we’ve advised Maitland and Hunter Valley employers and employees on restraints since 1894. Here’s how they actually work in NSW.
What Is a Restraint of Trade?
A restraint of trade is a clause in an employment contract (or a business sale contract) that limits what a person can do after the relationship ends. In the employment context, the most common types are non-compete clauses, which prevent a former employee from working for a competitor or starting a competing business, non-solicitation of clients clauses, which prevent them from approaching or taking the former employer’s clients, and non-solicitation of staff clauses, which prevent them from poaching former colleagues.
Restraints usually operate for a defined period after employment ends and within a defined geographic area. The purpose, from the employer’s perspective, is to protect the business from a departing employee using their knowledge, relationships, and access to compete unfairly.
The Starting Point: Restraints Are Presumed Void
Here’s what surprises many employers. At common law, a restraint of trade is presumed to be void and unenforceable as being against public policy. The law starts from the position that people should be free to work and earn a living.
A restraint only becomes enforceable if the employer can show it goes no further than reasonably necessary to protect a legitimate business interest. In other words, the burden is on the employer to justify the restraint, not on the employee to escape it. This is the opposite of what many people assume.
What Makes a Restraint “Reasonable”?
Because a restraint is only enforceable to the extent it’s reasonable, the courts look closely at whether it goes further than necessary. Three factors matter most.
- Duration: How long does the restraint last? A restraint of a few months may be reasonable for a role with ongoing client relationships, while one lasting several years will usually be much harder to justify. The question is how long the employer genuinely needs to protect its interest, for example, how long it takes to rebuild a client relationship with a replacement employee.
- Geographic area: How wide is the restricted area? A restraint covering the Hunter region might be reasonable for a locally focused business, but one covering all of NSW or Australia would need strong justification and often fails.
- Scope of activities: What exactly does the restraint prevent? A narrow clause preventing solicitation of clients the employee actually dealt with is far more likely to be enforced than a broad clause preventing any work in the entire industry.
The overarching test is whether the restraint protects a legitimate business interest (such as client connections, confidential information, or staff stability) without going further than necessary. A restraint that simply tries to stop ordinary competition, without protecting a specific legitimate interest, will generally fail.
The NSW Difference: The Restraints of Trade Act 1976
NSW is unusual. In most of Australia, if a restraint is drafted too broadly, a court will often strike it out entirely, leaving the employer with no protection at all. NSW is different because of the Restraints of Trade Act 1976 (NSW).
Under this Act, a NSW court has the power to read down an overly broad restraint and enforce it only to the extent that is reasonable, rather than striking it out completely. This means a restraint that would fail entirely in another state might still be partially enforced in NSW. It gives employers a little more protection, but it is not a licence to draft unreasonable restraints, as the court still only enforces what is reasonable, and poorly drafted restraints still create uncertainty and litigation risk.
This NSW-specific rule is one reason it’s worth getting local advice on a restraint, whether you’re trying to enforce one or challenge it.
If You’re an Employee Facing a Restraint
If a former or current employer is relying on a restraint to stop you taking a job or starting a business, don’t assume it’s automatically enforceable, and don’t assume it’s automatically worthless. The answer lies in the specific wording and your circumstances.
Before you act, it’s worth getting advice on whether the restraint protects a legitimate interest or just tries to stop ordinary competition, whether its duration, area, and scope are reasonable for your role, and what you can and can’t safely do. Breaching an enforceable restraint can expose you to an injunction and a damages claim, so it’s better to understand your position before you move, not after. In many cases a restraint is narrower in practice than it looks on paper, but that assessment needs to be done properly.
If You’re an Employer Enforcing a Restraint
If a departing employee is competing, taking your clients, or poaching your staff in breach of a restraint, you may be able to act, but often you need to act quickly. The main remedy is frequently an injunction, a court order stopping the employee from continuing the breach, and because the damage is ongoing, these applications are often urgent.
To give yourself the best chance of enforcement, the restraint needs to have been reasonably drafted in the first place, tailored to the role and the legitimate interest it protects. This is why the drafting stage matters so much, an overreaching restraint is far weaker than a carefully scoped one. If you’re facing a breach, early advice is essential because delay can undermine both the urgency argument and the practical value of any remedy.
Prevention Is Better Than Litigation
The best time to deal with a restraint of trade is when the contract is drafted, not when the dispute arises. A restraint that is carefully scoped to protect a genuine business interest, with a reasonable duration and area, is far more likely to be enforceable and far less likely to be litigated. A generic restraint copied from a template is often either too broad to enforce reliably or too narrow to protect anything. This is where a properly drafted employment contract earns its keep.
Whether you’re an employer wanting enforceable protection or an employee wanting to understand what you’ve signed, getting the restraint right, or properly assessed, is worth far more than fighting about it later.
Frequently Asked Questions
Are restraint of trade clauses enforceable in NSW?
They can be, but they start from a position of being presumed void. A NSW court will enforce a restraint only to the extent it is reasonably necessary to protect a legitimate business interest, considering its duration, geographic area, and scope. The Restraints of Trade Act 1976 (NSW) allows a court to read down an overly broad restraint and enforce the reasonable part, rather than striking it out entirely, which is unusual compared with other states.
How long can a restraint of trade last?
There is no fixed maximum, because it depends on what is reasonable for the role and the interest being protected. A restraint of a few months is often reasonable, and up to around twelve months can be justified for senior or client-facing roles. Restraints lasting several years are much harder to enforce and frequently fail. The key question is how long the employer genuinely needs to protect its interest, not how long it would like the employee restrained.
Can my employer stop me working for a competitor?
Only if a valid, reasonable restraint applies to your situation. An employer cannot stop ordinary competition simply because they’d prefer you didn’t join a rival. They can restrain you where doing so is reasonably necessary to protect a legitimate interest, such as their client connections or confidential information, and the clause is reasonable in duration, area, and scope. Whether your particular clause achieves that depends on its wording and your circumstances, so it’s worth getting it assessed before you move.
What happens if I breach a restraint of trade?
If the restraint is enforceable and you breach it, the former employer can apply to a court for an injunction to stop you, and can claim damages for losses caused by the breach. Injunction applications are often urgent. Because the consequences can be significant, and because many restraints are narrower in practice than they appear, it’s better to get advice on your position before you act rather than after.
Get Advice on Your Restraint of Trade
Restraint of trade disputes turn on fine details of drafting and circumstance, and the consequences of getting it wrong, an unenforceable clause for an employer, or an injunction for an employee, are significant. Whether you’re enforcing, defending, or just trying to understand a restraint, early local advice makes a real difference.
Hills Solicitors has advised Maitland and Hunter Valley employers and employees since 1894. We’ll assess your restraint, explain where you stand, and help you act with confidence. To learn more, see our employment contract disputes service.
Book a consultation with our employment law team today, or call us on (02) 4933 5111. Check our FAQ page if you have any questions.
