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Restraint of Trade on Managerial Positions

Reading time: 9 mins

Employers set various employee restrictions to avoid legitimate impediments and losses and to protect their businesses and commercial assets. Restrictions should follow the law and consider both the employer’s interests and the employee’s rights. If an employee breaks their work contract, the employer can enforce a clause that limits their ability to work elsewhere.

Currently, there are various restrictions that can be imposed after leaving a job. These can include rules that prevents sharing secret information learned at work, or contacting old customers. Rules prevent employees from competing with their previous employer after their job ends. These rules are in place for a certain period.

In this article, we will discuss the restraint of trade for employees holding managerial positions and how this differs from ordinary employees.

What is restraint of trade?

A restraint of trade is a restriction in an employment contract. It is a legal concept that refers to the limitations that can be imposed on an employee’s activities after they leave their employer. These limitations seeks to protect the employer’s legitimate business interests, such as confidential information, customer relationships and goodwill.

However, restraint of trade clauses are not automatically enforceable. They must be reasonable and necessary to protect the employer’s interests, without being injurious to the public interest or the employee’s right to work.

The fairness of a restraint clause depends on several factors. These factors include the duration of the clause, its scope, the geographical limitations, and the negotiation process. The courts will decide whether a restraint clause is valid and enforceable based on the circumstances of each case.

Restraint of trade

How restraint of trade for employees holding managerial positions differs from ordinary employees

Employees in managerial positions make significant contributions to a company. They are responsible for leading a team of employees to meet goals and achieve performance metrics. Their work is unique and allows them to access private information and the employer’s valuable knowledge to achieve the company’s goals.

With the level of confidentiality that managerial employees have access to, restraint of trade is likely to be applicable to them. However, for ordinary employees, while still relevant, the focus on protecting trade secrets may be less pronounced.

Moreover, Courts scrutinize restraints on managerial employees more rigorously. The restraint must be reasonable to protect legitimate business interests (e.g., confidential information, goodwill, client connections). Reasonableness is also assessed for ordinary employees, however, the threshold may be lower. Courts consider factors like the employee’s role, industry norms, and the specific circumstances.

Managerial Employees higher-level responsibilities often involve strategic decision-making, financial planning, and business development. Hence, their restraints may be more extensive. Ordinary Employees duties are usually more operational or task-oriented. As a result, restraints may be narrower and tailored to specific job functions.

Further, Managerial Employees often have direct relationships with key clients or major stakeholders. Their restraints may explicitly prohibit soliciting or dealing with those clients post-employment. However, client interactions for ordinary employees may be less significant, so restraints related to client poaching are less stringent.

How is restraint of trade applied in AECI Australia Pty Ltd v. Convey case

AECI Australia Pty Ltd v. Convey is a case about Nigel Convey who was a senior manager at AECI Australia Pty Ltd which was based in QLD. He left his job at AECI because he received a job offer from Incitec Pivol Ltd.

Nigel Convey accepted the job offer. He resigned on resigned on 13 March 2020.

Mr. Convey’s employment agreement with AECI required that he give three months’ notice of termination. On March 18, 2020, AECI’s lawyers told Mr. Convey he had to give notice and stay employed until June 12, 2020. However, amongst other things, he was required not to attend work during that period, not to represent AECI in any way, and not to contact any actual or prospective customers. In effect, he was placed on “gardening leave”.

The Employee’s new employment with IPL is to commence on 13 July 2020.

Hence, AECI then filed for an interlocutory injunction against Mr. Convey to be restrained from engaging in any conduct in contravention of his obligations under his employment agreement.

The first restraint sought to prevent the employee from engaging in similar business within Australia for 12 months or, if unenforceable, 6 months with any business mentioned in the contract. The second restraint sought to prevent the employee from soliciting, interfering with, or attempting to entice away an AECI Australia material or habitual customer.

Restraint of trade

Issue: Whether AECI established a prima facie case to sue against respondents’ breach of Restraint of Trade clause.

Ruling: No. The High Court finds that:.

  • The restraint was found to be too wide, extending beyond AECI’s legitimate business interests.
  • The balance of convenience did not favor granting injunctive relief.
  • AECI failed to establish a likelihood of suffering the injury which would follow consequently upon actual misuse of confidential information from the restraint it imposed upon the respondent.
  • Moreover, AECI had delayed nearly three months in bringing this application, not filing until 8 June 2020 despite knowing since 13 March 2020 that the Employee had accepted an offer of employment with IPL. During that period, with appropriate directions, the court could have heard and determined the matter.
  • The delay period was from April 2020 to June 8, 2020, when the proceeding started. The delay in this case is a factor that the court will consider when deciding whether to grant the relief requested. This supports the court’s decision to dismiss the application.

Case key points

  • Restraint clauses should be clear and reasonable to be enforceable. They must be specific and written in a straightforward language.
  • Proof and Initial Case: AECI didn’t give enough evidence to prove Mr. Convey broke the rules. This shows how important it is to have strong evidence in court cases. The court requires evidence to support a request for a temporary court order.
  • Trustworthy proof is crucial in legal cases. The person seeking the order must show evidence that supports their case. This highlights the importance of reliable evidence in legal proceedings.

Frequently Asked Questions on Restraint on Trade

What is the important Elements for a Restraint of Trade Clause?

a.     Restraint Area – that the clause only prohibits the Employee from doing any activities in a nominated location that affects the interests of the parties;

b.     Restraint Period – that prohibition only operates for a particular period commencing on the date of termination; and

c.      Actions subject to restraint.

Legitimate interests include protecting confidential information and maintaining good relationships with customers to prevent harm to the employer.

The main reason why employers use restraint of trade clauses is to protect their legitimate business interests from unfair competition or damage by former employees. These interests may include:

– the goodwill of the business, such as the reputation and loyalty of customers, suppliers and partners;

– the confidential information of the business, such as trade secrets, strategies, formulas, processes or data;

– the human capital of the business, such as the skills, knowledge and experience of employees.

Employers can prevent ex-employees from causing harm to the business by creating rules for them to follow after they leave. These rules can restrict the use of their knowledge and influence. By setting these rules, employers can protect their business from potential damage. Ex-employees must adhere to these rules to prevent any negative impact on the company.

On the other hand, employees may also benefit from restraint of trade clauses in some situations. For example, an employee may negotiate a higher salary or a better severance package in exchange for agreeing to a restraint of trade clause. An employee can use a restraint of trade clause to negotiate better terms with a new employer.

In Australian employment law, a managerial position typically refers to a role that involves significant decision-making responsibilities and oversight of employees or company operations. These positions often involve strategic planning, business development, and resource allocation.

About the Author

Angelie Opalla
Angelie joined Prosper Law in 2022 as a Senior Paralegal, assisting with legal documents. Admitted to the Philippine Bar in 2023, her experience spans across firms in the Philippines and the US.

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