What is a Non-Compete Clause and Should My Business Have One?

Workplaces are competitive places where capable, talented people are highly sought after and valued as employees. Many can be entrusted with highly sensitive information as part of their roles. To pre-empt the situation where such an employee leaves to join a rival organisation, or start their own business, many companies insist on a ‘non-compete’ clause in the employee’s contract.

Otherwise known as a ‘restraint of trade’ clause, such a provision in an employee’s contract seeks to prevent that employee from using the access and expertise gained in their role to compete directly against the company should they leave. It is essentially a way for a company to protect its commercial interests, particularly in the following areas:

  • confidential information;
  • intellectual property;
  • know-how;
  • trade secrets;
  • goodwill.

While non-compete clauses are perhaps most common in employment contracts, they are also used in franchising arrangements (to prevent, for example, one party from operating a business in a similar location), in sale-of-business agreements (where someone who sells a business is prevented, for a period, from operating a similar business), or in business contracts where one party is privy to confidential information or intellectual property of the other party.

What is involved in using a non-compete clause?

It should be noted at the outset that non-compete clauses in employment contracts can only be enforced if they are considered ‘reasonable’ to both parties and protect a genuine interest of value, such as those listed above.

Also, where the clause leads to a dispute – such as an employee who challenges its terms – the responsibility for proving that the non-compete provision is reasonably necessary belongs to the party benefiting from the clause, i.e. the employer.

The time period covered by a non-compete clause can vary from a few months up to 12 months or longer, but the longer the period, the less likely it is the provision will be seen as reasonable in the event of any dispute.

Non-compete clauses generally operate to restrict three main areas:

  1. Prevent an employee in a company with in-depth knowledge of that company from taking a similar position in a similar, rival company for a period of time.
  2. Prevent a former employee from ‘poaching’ his or her former colleagues to join them, should that employee be leaving to start a rival business.
  3. Prevent an employee from soliciting businesses or individuals that may have previously been clients or customers of the business, should they leave to start a rival operation.

As the above indicates, non-compete clauses should be quite specific about which areas of the business a company wishes to restrict in an employee contract and they need to be detailed at the outset  in the agreement between the parties.

Areas of disagreement and enforceability

Disputes about non-compete clauses will generally arise over whether the provision is enforceable as fair and reasonable, or whether it unfairly restricts a party from taking part in the open job market or undertaking a business activity. As mentioned, time periods or areas in which the contracted party can operate (Within the state? Within the country? Internationally?) can also be characterised as unreasonable depending on how widely they are constructed.

In order to avoid a court striking out a restraint as unreasonable, restraints are often drafted in a  “cascading” fashion – from the maximum restraint time and area down to the least acceptable. If the court assesses some of the restraints as unreasonable, given the interest of the employer to be protected, then there should still be some restraints remaining to be enforced.

In summary, there are a number of important questions to be asked before drawing up and asking an employee, a franchisee or business partner to sign a contract that includes a non-compete clause.

If you have any questions raised by this article, consult Harris Lieberman Solicitors – we have widespread experience advising clients on non-compete clauses. Contact us today on (02) 6051 5100.