Almost everyone has signed an employment agreement or contract before. Usually, it’s an experience filled with budding opportunity. After all, employment is the gateway to a long and fulfilling career. However, for some people that agreement can gradually become a source of restriction. When it’s time to move on from a job, to starting your own business, there are plenty of obligations to navigate. There’s notice; you’ve got to give your employer plenty of that. Then there’s the financial side of things; you’ve got to make sure you receive everything you’re entitled to. But there’s one more obstacle that often catches burgeoning businessowners by surprise: the restraint of trade.
You might be surprised to know that restraints of trade are common in a vast proportion of employment contracts. Certainly, those terms don’t look too sinister when you sign them. But if you feel that it’s time to spread your wings in your chosen field, a restraint of trade can quickly clip them. Starting a business is the dream for so many innovators, entrepreneurs, and blossoming business leaders. So, having your progress halted by an old employment contract can feel like a major setback. As with so many contracts, though, you do have some options at your disposal. The first is awareness; be aware of your employment contract, and its terms. The second is professional legal advice, to help navigate the potentially shifting sands of entrepreneurship.
Coming to terms with the terms: every restraint of trade works differently
Not everyone is aware that most employment contract contain restraints of trade. Often, as a result, they are made aware by the threat of legal action from former employers. That can be very stressful, but there’s no need to panic. First, you need to get acquainted with the terms of your employment agreement; what exactly does it say? Every restraint of trade has the potential to work differently. They usually include timeframes for the restraint, and geographical areas of enforcement. Each restraint’s actual effects depend entirely on the way it’s worded, and its intended purposes. So let’s consider those purposes for a moment.
By and large, restraints of trade are designed to prevent employees going into immediate competition with their employers. As an employee, you have access to sensitive information about business operations. You also have frequent opportunities to network with clients, and develop rapport. In combination, those factors make you and your new business a potential threat to your previous employer. For that reason, most restraints of trade cover the following areas:
Dealing with customers of your old employer
A common feature of most employment agreements is a restraint on dealing with your old employer’s customers. It’s not hard to see why that is a priority for your employer. Customers or clients are the lifeblood of every business. As an employee, you drive the relationship between your employer and his or her customers. But when your employment moves on, your networks and insights do too. You know what drives the relationship between your previous employer, and his or her customers. For that reason, you wield the power to bring those customers with you. To protect themselves from that possibility, most employers will restrain you from dealing with their customers in a competitive way. And that protection is given by your employment agreement; specifically, by a restraint of trade.
Dealing with suppliers of your old employer
Some restraints of trade will even extend to your old employer’s suppliers. This is particularly common among businesses that rely on strong supplier relationships to flourish. For example, a lot of businesses in construction develop their buying power through strong supplier relationships. If you were to take that relationship with you, and start a business competing with your old employer, you would have an immediate advantage. However, restraints of this nature need to be drafted very precisely to have their desired effect. As a result, they’re not quite as common in employment agreements as some other restraint clauses. If you come across one, it might be challenging to establish its exact parameters. At Kafrouni Lawyers, we can help you establish the boundaries of your new business’s supplier relationships.
Employing your old colleagues: this is often a contentious matter
Arguably the most common restraint of trade is one against employing your old colleagues. A mass exodus of experienced employees could place your old employer on the backfoot. As a result, he or she will probably include a clause in your employment agreement to prevent that. Those clauses might be very specific; perhaps they expressly state that you cannot employ your colleagues for a certain period after leaving. Alternatively, the clause might be a little more relaxed; perhaps is states that you can’t ‘encourage your colleagues to resign’ for a certain period after you leave. In either case, the effect may be the same: a restriction on possible joint ventures between you and your co-worker. Of course, that depends on your agreement specifically. We recommend getting in touch, so that we can help you plot a course towards your new business proposition.
How about knowledge, experience, and contacts? Contracts vary on this point
Sometimes, employment contracts will try and restrain your future use of knowledge, experience, and even contacts. However, that is a pretty broad and ambiguous restraint. The law is all about specifics, and it’s hard to define terms like ‘knowledge,’ or ‘experience.’ That means different contracts can respond differently to this clause. Some might define those terms themselves, so that it’s clear what is being restricted. Other contracts might offer no definition, leaving it up to you to decide what your limitations are. Usually, restrictions of this nature are quite hard to enforce. Contracts have their limits; they can’t restrain you altogether from gainful employment in your field of expertise. Don’t be afraid to question your employment agreement, especially when it comes to restrains of trade like this. At Kafrouni Lawyers, we can help you navigate the complexity of your employment agreement.
Have you found yourself restrained by an employment contract? You’ve got options
There is always the possibility that certain restraints of trade might overreach a little. If you think that you’re upcoming business is being restrained in an unconscionable, or unfair way, you should seek legal advice. Restraints of trade exist in a complex field of law. They have to balance two important legal principles. Firstly, the law considers that people should be free to use their skills and experience to their advantage. Secondly, though, the law recognises the importance of observing, and enforcing covenants.
When those covenants are restrictive – such as restraints of trade – the law will enforce them carefully. To be enforceable, the covenant must prove that it protects a legitimate business interest. The protection that it seeks must also be ‘reasonably necessary.’ As you can see, circumstance is important when it comes to assessing restraints of trade. There is a fine balance to be struck. To assess that balance, and determine your position, you should consult an experienced business lawyer. At Kafrouni Lawyers, we are proud to specialise in business creation. As a part of that, we work closely with employment contracts, and restraints of trade, to determine your position, and the position of your emergent business. We can offer advice on contractual restraints of trade, corporations law, fiduciary duties, and confidentiality, to get your business up and running at its best.
Knowing the law is vital: restraints of trade span many fields of law
When it comes to knowing the law, history is important. The law today has evolved from historical legal principles. Those principles can give us a better insight into our legal position today. So what’s the legal background of contractual restraints? You’ve probably guessed that contract law is the backbone of employment agreements, and restraints of trade. But that’s not all there is to it. Another important legal principle at play is found in the legal field of equity: fiduciary duties. Fiduciary duties are designed to protect vulnerable parties, in different transactions or relationships.
A great example of a fiduciary relationship is the relationship between a director, and a company. As a part of the director’s fiduciary duties, he or she must act in the company’s best interests, above all else. The reason is simple: the director holds a position of power over the company, which makes the company vulnerable for exploitation. Consider the relationships between employers and employees in the same way. Employers are generally vulnerable, as their employees hold a position that affords them special insights into business practices. As a result, employees owe a duty – generally of good faith and fidelity – to their employers.
However, fiduciary duties are complex and often challenging to enforce. That’s why corporations law stepped in, and enshrined directors’ duties in legislation. The same happened to the duties owed by employees. But, rather than legislation, it was contract law that simplified the process. That is not to say that contractual restraints have free reign, though; they are limited too. So if you feel unduly restricted, get in touch with Kafrouni Lawyers to assess your position.
Disclaimer
The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.
Liability limited by a scheme approved under professional standards legislation.
