If you have ever handed a new hire an employment agreement with a clause saying they cannot work for a competitor after they leave, there is a reasonable chance that clause is worth very little. Restraint of trade provisions are among the most commonly included, and most commonly unenforceable, terms in Australian employment contracts. They are often copied from a template, stretched far beyond what the law allows, and relied upon to scare departing employees rather than to actually protect anything. If you are a founder or business owner building a team, it is worth understanding what a valid restraint actually looks like, and why getting it wrong can leave you with no protection at all.
What Is a Restraint of Trade Clause?
A restraint of trade clause is a contractual term that limits what an employee can do after they leave your business. Typically, it will try to stop the employee from joining a competitor, poaching your clients or staff, or setting up a competing business for a defined period and within a defined area.
On paper, the intention is reasonable. You invest time and money in your people, they build relationships with your clients, and they gain access to your confidential information. It makes sense that you would want some protection when they walk out the door.
The problem is that courts approach these clauses with scepticism. The starting position under Australian law is that restraint of trade clauses are void unless the party relying on them can show they are reasonable in the interests of both parties. That burden of proof sits with the employer, not the employee.
The Four Most Common Ways These Clauses Fail
After reviewing many employment agreements, the same problems come up again and again. Here are the four most common ways a restraint of trade clause falls apart:
1. The time period is too long
Clauses that attempt to restrain an employee "permanently" or for an extended period, such as two or three years, are highly unlikely to hold up. Courts look at what is genuinely necessary to protect the employer's legitimate interest. A period of three to six months is often defensible for senior roles. Twelve months becomes much harder to justify. Anything longer is generally unenforceable.
2. The geographic scope is too wide
Trying to stop someone from working in "the whole of Australia" or even "the whole of Victoria" is almost always going to fail unless the business genuinely operates across that entire territory and the employee had meaningful reach across it. A realistic geographic limit, such as a particular city, suburb radius, or defined region where the employee actually worked and built relationships, is far more likely to be upheld.
3. The scope of restricted activity is too broad
Clauses that try to stop an employee from working for anyone who "may be or is" a competitor, or who "does or may do" similar work, cast the net so wide that they are essentially trying to prevent someone from working in their chosen field. That is not a legitimate interest the law will protect. The restriction needs to be targeted at specific, identifiable risks, such as working directly with named clients or in a narrowly defined role.
4. Confidentiality obligations are confused with restraints
Many agreements blur the line between keeping confidential information secret and restraining trade. These are two different things and they need to be drafted separately. A confidentiality obligation prevents someone from misusing your business's private information. A restraint of trade clause limits where they can work. Mixing them up can undermine both. If protecting confidential information is your primary concern, a well-drafted confidentiality clause may do more work for you than a restraint ever could.
What Makes a Restraint of Trade Clause Enforceable?
For a restraint to stand up, it needs to satisfy two things. First, there must be a legitimate interest that genuinely requires protection. Protecting trade secrets, confidential client relationships, and key business knowledge are examples of legitimate interests. Simply wanting to stop a former employee from competing with you, on its own, is not.
Second, the restraint must go no further than is reasonably necessary to protect that interest. Courts assess this across three dimensions:
- Time: How long does the restriction last? A shorter period is more likely to be reasonable.
- Geography: Where does the restriction apply? It should match the employee's actual territory or client base.
- Subject matter: What exactly is the employee restricted from doing? The more targeted and specific, the better.
A restraint that is too wide in any one of these dimensions risks being struck down entirely. In some Australian states, courts have limited power to "read down" an overly broad clause to make it enforceable, but you should not rely on that as a safety net.
What This Means for Your Employment Agreements
If you have an employment agreement with a restraint of trade clause that was pulled from a generic template, there is a real chance it would not survive a legal challenge. That matters because a former employee or their lawyer will often know this, and the clause that you thought was protecting you may have no teeth at all.
Here is what founders and business owners should do:
- Review your existing agreements. If you have restraint clauses in your current employment contracts, have a lawyer check whether they would actually hold up. If they would not, either fix them or remove them.
- Match the restraint to the role. A senior sales manager with access to your entire client list warrants a different level of protection than a junior team member. Tailor the clause to the specific employee and what they actually know.
- Draft confidentiality separately. Make sure your confidentiality obligations are clearly separated from your restraint provisions, and that both are properly drafted. These are different problems and need different solutions.
- Get the basics right from the start. When you are hiring for important roles, using a solid, well-structured employment agreement makes it much easier to include enforceable protections rather than trying to patch things up later.
Start With a Solid Employment Agreement
The most practical way to protect your business when hiring is to start with an employment agreement that has been drafted with these issues in mind. A good template will give you a clear structure for including restraint and confidentiality provisions that are actually designed to work, rather than copied from somewhere questionable on the internet.
Mode.law's Employment Agreement (Full or Part Time) is built for Australian businesses and gives founders a solid foundation for hiring full-time and part-time employees. It is designed to be practical and legally sound, so you can adapt it to your specific situation with confidence.
If protecting confidential information is your main concern, it is also worth looking at a dedicated confidentiality agreement to sit alongside your employment terms.
For more legal documents built for Australian founders and business owners, explore the full Mode.law document library. Whether you are hiring your first employee or reviewing agreements across a growing team, having the right documents in place from the start is the simplest way to protect what you have built.