Drafting employment contracts

Managing | Staff

By Guest Author

Have you ever considered what might happen if your star employee leaves and takes your business with them? If you don’t have the right contracts in place, you’re risking just that.

Picture this, Stephanie sets up a business with two of her friends, Jayne and Cheryl.  Stephanie’s business has grown in two years into a national business employing over fifty employees.  One day Cheryl, terminates her employment and within two months is in contact with Stephanie’s major clients and decides to set up a competing business.  Within six months, most of Stephanie’s competitors and staff have moved to Cheryl’s thriving business and Stephanie’s once profitable and highly successful business is forced to shut its doors. This may seem unfair, however, without properly drafted employment contracts this is a real reality.

If you risk losing business in the event that your key employees leave, I strongly recommend that you consider including well drafted restraint of trade clauses in all employment contracts.

Without a restraint of trade clause, when an employee quits, they can basically walk out the door and canvas clients and customers and set up a competing business. Now is the time to review your business practices and ensure all employees have properly drafted employment contracts, because if you don’t there may be no business to protect.

While employees are employed they are bound by the common law duty of fidelity and good faith.  This duty applies during the course of the employee’s employment, but becomes limited after termination.


Employers must attempt to bind an employee from the outset of the relationship.  There is no hard and fast rules that employers can follow to ensure that a restraint of trade covenant will be held to be reasonable.

The general rule is that a restraint is only enforceable if it is “reasonable”.  A court will balance the employer’s desire to protect their legitimate proprietary interest with public policy considerations, which protects a person’s right to earn a living in whatever lawful manner they chose.  Each case is considered on it’s own facts and circumstances.

The onus of establishing that a restraint is reasonable as between the parties lies on the person seeking to enforce the restraint.  The onus of establishing that the restraint is contrary to public interest lies on the person seeking to validate the restraint.

The Restraint Clause

The restraint of trade clause should include:

  • The extent of the restraint on an employee’s activities;
  • The geographical area within which such activities are restricted; and
  • The duration of such a restraint.

All of which must be reasonable having regard to the individual employer’s need to protect it’s legitimate business interest.

Employers need to provide instructions about the particular interest they seek to protect and the proper identity of the party whose business is being protected.

The court gives considerable weight to what parties have negotiated in their contracts, but a contractual consensus cannot be regarded as conclusive, even where there is a contractual admission as to the reasonableness.  The validity of the restraint is to be tested at the time of entering into the contract and by reference to what the restraint entitled or required the parties to do rather than what they had intended to do or have actually done.

In New South Wales, the common law principles have been modified by the operation of s 4(1) of the Restraint of Trade Act which provides: “A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.”  What this means is that the Act allows the severance of an excessive and unreasonable restraint to the extent that it goes against public policy.  For example, if a restraint of trade clause provides that an employee is restrained for a period of twelve months, the Act allows the court to read down the term to ensure it is not against public policy and reduce it to six months if this is what the court deems reasonable in those particular circumstances.

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