“I want to get another job or start my own business, but I have a non-compete clause in my contract. Is it really enforceable against me?” asked the employee.
“We’ve trained our employee and they are a key part of the success of our business, can I enforce their non-compete clause so they don’t ruin my business” asked the employer.
At Prosper Law, we often hear these questions from employers and employees. There is a big difference between an employee stealing business and staff away from their employer and leaving a shell in their wake, and an employee simply wanting to work for someone else doing what they are trained to do.
The enforceability of post-employment restraints is cause for anxiety for both employers and employees. On the one hand, business owners want to protect the business they have worked hard to build and on the other hand, workers want to be able to choose who they work for without legal threats or litigation.
The unhelpful answer to the question of enforceability is ‘it depends’. Being armed with what enforceability depends on can avoid anxiety, prevent legal issues and avoid unnecessary cost.
Non-compete clauses are not automatically valid
Enforceability is important because if a clause isn’t enforceable then it’s not worth the paper it’s written on. That’s why employment lawyers draft non-compete clauses carefully; otherwise, the clause is more of a deterrent than a restraint.
It all comes down to this – is what the restraint is trying to prevent both reasonable and necessary to protect the legitimate business interests of the employer? Employers are sometimes surprised to hear that the starting point is that they are not enforceable and that they bear the onus of proving that the non-compete is reasonable and necessary to protect their business.
Employers must prove that the clause is:
- necessary to protect a legitimate business interest, and
- reasonable because it goes no further than what is necessary to protect that business interest
What is a legitimate business interest?
Employers that merely seek to avoid competition through the use of a non-compete are likely to be disappointed. That’s not a legitimate business interest and it’s the reason why the starting point is that they are not enforceable (because competition is good for society).
A legitimate business interest is something specific and particular to the business. For instance:
- Confidential information, but employers still need to prove that the confidentiality clause alone does not provide enough protection and stopping an employee from competing with the business is the only practical way to achieve this
- Customer relationships, but only if the restrained employee held that relationship or had an influence over it
- Proprietary property (such as intellectual property) that the business has invested in and contributes to the overall success of the business
A non-compete clause will only be necessary if it’s the only practical way of protecting the business interest the employer has identified.
We’ve spoken to employers who are feeling aggrieved at the prospect of having someone who poses a real threat to their business competing with them. But when asked what it is that they’re wanting to protect, they have responded that they don’t want someone competing with them. Unfortunately, that’s not a good enough reason to argue the clause should be enforced.
Evidence is essential to successfully enforcing the clause
After an employer is able to identify the legitimate interest, the next step is to prove it. This is because enforcing a non-compete clause requires applying to Court and necessarily requires evidence.
Here’s how this evidential burden has played out in the real world:
- In Just Group, the employment contract listed 50 companies that the employee could not take up employment with. The employer did not produce any evidence to show that those businesses threatened its legitimate business interests and why they were selected. The employer’s opinion was not enough, and the Court declined to enforce the clause
- In OAMPS Insurance Brokers, the employer was unable to prove that the employee had a sufficiently strong connection with certain clients that the employer sought to prevent the employee dealing with after their employment ended
A look at what is reasonable and necessary to protect legitimate business interests
A non-compete clause is reasonable if it strikes a good balance between protecting the employer on the one hand and not being oppressive or unfair to the employee on the other hand.
If all that’s needed is for the employer’s intellectual property, such as business manuals, price lists, sensitive customer data, to be protected, an intellectual property and confidentiality clause can achieve this. On the other hand, if the employee’s relationship with business-critical customers is so strong that other clauses in the contract can’t disconnect this relationship, enforcing a non-compete may be the only practical way to achieve this.
Below are some examples of what might be considered reasonable or unreasonable.
Employsure Pty Ltd v McMurchy and Employsure Pty Ltd v Kumaran [2021] NSWSC 1179
Employsure successfully pursued two former senior employees and their new employer, ELMO Software, for breaching post-employment and loyalty obligations after the employees moved to a competitor.
The Court found:
- Mr McMurchy breached both his contract and fiduciary duties by working for ELMO while still employed at Employsure, and by recruiting Mr Kumaran to join him.
- ELMO was held accountable for knowingly encouraging and assisting those breaches.
- A 9‑month restraint was enforceable for Mr McMurchy, reflecting his seniority and access to sensitive strategic information.
The same restraint was too broad for Mr Kumaran, whose role did not justify that level of restriction.
HiTech Group Australia Ltd v Riachi [2021] NSWSC 1212
Mr Riachi moved to a new employer. HiTech argued that the new role was with a competitor and relied on a non-compete clause. Mr Riachi argued he was junior, had no real client relationships and that non-solicitation undertakings adequately addressed the risk.
Although the Court considered the restraint was not obviously invalid, it doubted the reasonableness of a 12-month period and ultimately dismissed the interlocutory application.
The employee’s interests were taken into account when the Court exercised its discretion in deciding to refuse to grant the injunction.
Can you afford to fight?
Enforcing restraint clauses is expensive. Employers will bear the burden of proving persuading a Court that the restraint should be upheld and a rough starting cost to recover loss and/or obtain an injunction is $70,000. This cost can increase rapidly.
Employers need to ask themselves whether the potential enforcement costs outweigh the damage the former employee is said to have caused. It is also important to factor in what else this money can be spent on to limit the potential damage, such as investing in strengthening customer relationships. We often caution employers that, even after spending this money, a Court might not rule in the employer’s favour, and they may be ordered to pay a portion of the employee’s legal fees.
Defending claims is also an expensive exercise. Employees that know they face legal action should assess whether there is a compromise they can offer or whether temporary, alternative employment is a better option. After all, if the objective is to receive an income, then a temporary adjustment to employment may be a better avenue than paying legal fees and ultimately being ordered by a Court to stop work or trading.
What’s more, employees may be prevented (through an injunction) from starting a new job until the Court decides whether or not the clause is enforceable. This happened in Verint Systems (Australia) Pty Ltd v Sutherland [2019] NSWSC 882, where the Court decided that because the enforceability of the non-compete was arguable, it was reasonable to prevent the employee from starting his new job until (at least) a final decision was made.
Frequently Asked Questions
If I have a non compete clause, can I ignore it and do things that are prohibited anyway?
We don’t recommend simply ignoring your employment obligations and doing things that are clearly in breach and going to cause concern for your employer. However, you should also avoid jumping to conclusions and assuming those things are prohibited. Our best guidance is to seek legal advice, but as a general rule of thumb:
- pay greater attention to your contractual obligations if the employer takes an aggressive approach, has pursued employees in the past or is litigious
- the more your intended conduct will impact your employer’s business, the greater the care that needs to be taken
If I am made redundant, does the non-compete still apply?
Non-compete clauses don’t simply fall away because of the circumstances in which employment ends, but courts are often more sympathetic to employees terminated without cause.
Being prevented from working for a competitor can seem unfair if you’ve just been made redundant and the best thing to do is to try and negotiate a partial release from the non-compete clause.
Does the potential 2027 ban mean I can ignore my current clause?
If the new laws are enacted, you may be able to ignore your current non-compete clause. Some clauses will continue to be enforceable provided certain rules are met. However, the exact way in which the 2027 ban on non-compete clauses will operate is still subject to change and you must seek legal advice before you choose to ignore any current contract terms.
Can I use the same boilerplate non compete clause for all my employment contracts?
Most employment contracts are prepared as templates and are not role-specific. While there are some general rules around drafting restraint clauses, the most risk averse approach an employer can take is to hire a lawyer to tailor employment contracts for a particular role type. Ultimately, whether you as an employer should rely on templates depends on what your objective is.
If the aim of including a non-compete clause is to have a deterrent effect, it’s enough to reuse the same boilerplate clause. But if you want to increase the chances the clause will be enforceable, tailoring each clause and contract is the best way to achieve this.
About the Author
Farrah Motley
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