When should startups use restraint of trade clauses in employment agreements?
Restraint of trade clauses are employment agreement provisions that restrict certain activities after employment ends. They are designed to protect legitimate business interests such as confidential information, customer relationships, and key staff connections. They are often used alongside confidentiality and intellectual property (IP) clauses, which provide broader and more direct protection for a company’s assets.
For startups, people are often closely connected to customers, product development, and commercially sensitive information. As a result, founders frequently consider whether post-employment restrictions are appropriate and, if so, what type of restraint best fits the role.
What do confidentiality and IP clauses protect?
Before considering restraints, startups should ensure they have strong confidentiality and IP protections in place.
A confidentiality clause prevents employees from using or disclosing sensitive business information obtained during their employment.
An IP clause clarifies that intellectual property created in the course of employment belongs to the employer. This can be particularly important where a startup’s value is tied to software, technology, content, product development, or proprietary processes.
In many cases, these protections address the primary risks associated with an employee’s departure.
What types of restraint clauses are common?
Non-solicitation clauses
These prevent a former employee from approaching the company’s customers, suppliers, or employees for a specified period after leaving.
They are commonly used where employees have strong relationships with customers or influence over staff.
Non-dealing clauses
These restrict a former employee from doing business with certain customers, regardless of who initiated the contact.
They are often used where customer goodwill is a significant business asset.
Non-competition clauses
Non-competition clauses are the most restrictive form of restraint clause. They prevent a former employee from working for or establishing a competing business for a defined period and geographic area.
Because they are the most restrictive form of restraint, they generally require the strongest justification.
Reasonableness and enforceability
Whether a restraint is enforceable depends on its particular circumstances. Generally, a restraint must go no further than is reasonably necessary to protect a legitimate business interest.
Factors that may affect enforceability include the employee’s role, their access to confidential information, the nature of customer relationships, the duration of the restraint, and its geographic scope. Restrictions that are broader than necessary are less likely to be enforceable.
For this reason, restraints are often more appropriate for senior employees, founders, key sales personnel, or others with access to highly valuable information or relationships.
Practical takeaways
For most startups, confidentiality and IP provisions form the foundation of employment-related asset protection. Restraint clauses may provide additional protection where an employee has access to particularly valuable information, customer relationships, or goodwill. The appropriate type and scope of restraint will depend on the employee’s role and the interests being protected.
FAQs
Are restraint of trade clauses standard in employment agreements?
They are common in many employment agreements, particularly for senior employees and roles involving confidential information or customer relationships.
Are restraint of trade clauses always enforceable?
No. Their effectiveness will depend on the circumstances and whether the restriction is reasonably connected to protecting a legitimate business interest.
Do all employees need restraint clauses?
Not necessarily. The appropriateness of a restraint depends on the employee’s role, responsibilities, and access to business-sensitive information.
Can an employer rely solely on confidentiality obligations?
In some cases, confidentiality and IP protections may adequately address the risks associated with an employee leaving. Whether additional restraints are appropriate depends on the nature of the business and the employee’s position.
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Special thanks to Partner Alastair Espie for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
