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Non Compete Clause in Employment Contracts

Reading time: 20 mins

A non-compete clause aims to restrict employees from competing against their employer during or after their employment. You might also refer to them as restraint of trade clauses, non-solicitation clauses or post-employment restraint clauses.

Employers use non-compete clauses to protect their business interests. The clauses can prevent employees from using their insider knowledge to benefit a competitor or start a competing business. The clauses can also prohibit employees from engaging in activities, industries, or locations outlined under these clauses.

Employers must have a clear understanding of how to implement and enforce their non-compete clauses. Non-compete clauses that are unclear or poorly written may not provide the legal protection you desire. They may also be unenforceable. Having a valid non-compete clause can protect your business and make it easier to bring action against an employee.

This article covers all aspects of non-compete clauses.

Key takeaways

  • It can be difficult to get a court outcome on a non-compete clause
  • An experienced employment lawyer should expertly draft non-compete clauses
  • Employers in NSW are more likely to enforce non-compete clauses that prevent employees from competing with them
  • An employee must be careful when they leave their job to work for a competitor or start their own business. Non-compete clauses could be enforceable
Farrah Motley holds degrees from the Queensland University of Technology in both law and accounting. Farrah is a registered Australian Legal Practitioner and has been pracising employment law for over a decade

Non-compete clauses under Australian law

Australia’s common law traditionally upholds the enforcement of non-compete clauses where the restriction is reasonably necessary to safeguard an employer’s legitimate business interests.

When evaluating the fairness of a restraint, courts will evaluate its material, geographical, and sector-specific limitations on the individual.

What is the purpose of a restraint?

An employer may incorporate a non-compete clause to achieve one or more of the following:

1. Limit an employee’s ability to work for a competitor or operate a competing business

Throughout an employment relationship, employees are likely to have gained valuable knowledge and skills. A non-compete clause can prevent an employee from using their knowledge to the detriment of their employer after they leave their job.

These clauses can also restrict employees from working for a competitor or starting a similar business.

2. Prevent employees from poaching clients

A non-compete clause can assist in deterring employees from stealing a business’s past, current and potential clients. Customers may still opt to buy products or services from an ex-employee. An effective clause may help prevent employees from doing this.

3. Prevent employees from poaching staff or suppliers

A non-compete clause can prevent former employees from soliciting current employees. A properly drafted clause will ensure an employer has enforceable legal rights against such employees. These rights help if former employees solicit existing employees.

Key components to drafting a non-compete clause

Not all non-compete clauses can be legally enforceable. We recommend consulting with an employment lawyer when creating non-compete clauses. This will help ensure that you can enforce the clauses.

Employers will need to understand the realities of restricting an employees income-earning activities. This is a key factor before attempting to include a non-compete clause in an employment agreement.

When considering your non-compete clauses, the following questions will help frame the drafting of the clauses:

  1. What activities do you want to stop the employee from performing?
  2. How long do you want to restrict the employee from performing these activities?
  3. Do you want to prevent the employee from undertaking business worldwide or only within a specific geographical area?
  4. Are these restrictions necessary and appropriate to protect your legitimate business interest?
  5. What exactly is the interest you are trying to protect?

There are no set rules when enforcing a non-compete clause. Rather, each case depends on its own facts and circumstances and the wording of the particular clause.

Employers frequently structure non-compete clauses in a “cascading” manner, especially outside New South Wales. This drafting style offers different restriction options, from broad to narrow. It can also help mitigate the unreasonable parts of the clause by providing options.

Other considerations when drafting your non-compete clause include:

non competition clauses

1. Is the clause 'reasonable'?

Reasonable non-compete clauses are more likely to be legally enforceable. To be ‘reasonable’, the clause should not overly restrict an employee’s ability to earn an income. Further, it should only be what is reasonably necessary to protect the employer’s legitimate business interests.

Access to confidential information is not enough to prove that a non-compete clause is reasonable.

See our article for the meaning of the term ‘reasonable’.

What is an unreasonable non-compete clause?

Employers should not use a non-compete clause to stifle competition. Competition is an important part of public policy and key to the principles of a market economy. 

A clause is considered unreasonable if it prevents someone from using their professional skills or running a business. In other words, the clause should not be too broad and should not prevent an individual from obtaining an income.

Courts are able to set aside unreasonable non-compete clauses. A series of overlapping restrictions is more likely to uphold a non-compete clause. ‘Step clauses’ or ‘cascading clauses’ are another term for these. These clauses often lead the court to accept the least broad scope of the non-compete clause.

Therefore, a modified version of the clause may be enforceable. That is, after the court has decided which combination of cascading criteria is appropriate.

See our article for restraints of trade relevant to independent contractors.

2. Is there a sliding scale for the geographical limit?

In our experience, narrow and specific geographic limits are more likely to be enforceable. Whereas, the larger the geographical limit in a non-compete clause, the less likely it will be legally enforceable.

This will mean considering the fairness of the restraint area. Questions you might ask include:

  1. What does your business do and what industry does it operate in?
  2. Where are your past, current and potential customers located?
  3. How will the restraint affect an employee’s ability to generate income?

Importantly, too many options or multiple restraint areas in the clause can make it invalid. Employees may not know the location of the restraint area. This can make it difficult for them to follow the restraint.

What is a 'reasonable' geographical area for my clause?

Certain criteria are more likely to render a geographical limit reasonable, such as when the restraint:

  • protects a business, such as customer relationships, but does not seek to prevent competition in the local area; and
  • does not prevent the former employee from deriving an income from their profession.

As above, courts are more likely to enforce narrow and specific geographical limits. However, courts may enforce broader geographic limits in some cases, such as those that apply to senior employees. This is particularly so if the company can demonstrate that the:

  1. broad geographical limit is necessary to protect a business’s highly confidential information; and
  2. other restrictions in the non-compete clause are narrow and clear.

For example, this may include a specific list of clients that a senior employee must not contact. The employer may restrict the senior employee from working for competitors or offering certain products or services to clients. An employment agreement can list these restrictions.

4. Is there a sliding scale for the length of time the restraint is in force?

An employer must include a reasonable limit of time for enforcing the clause. As such, a non-compete clause that has no end date will be invalid.

The non-compete clause should only last as long as needed to protect the employer’s business interests. The meaning of ‘reasonable’ changes depending on the business. Determining what is reasonable requires careful thought about the clause’s details and situation.

What is a ‘reasonable’ length of time for a non-compete?

A reasonable time period for a non-compete clause usually ranges from 1 month to 12 months. The time period chosen depends on the nature of the work and the industry.

If an employee worked for only 3 months, a non-compete clause that restricts that employee for 2 years may be unreasonable.

Non Compete Clauses in Employment Contracts

5. Are the restricted activities clearly outlined?

The employment agreement should define ‘Restricted activities’. This will ensure the employee understands they must not engage in these activities when their employment ends. A clear definition of ‘restricted activities’ helps to ensure the clause is legally enforceable.

Restricted activity can include working for a rival company. It can also include being part of the management team of a rival company.

A non-compete clause may not be valid if it stops an employee from working in a different industry.

For example:

A non-compete clause for a salesperson should outline the sales tasks they cannot do after they leave. The agreement should clearly state the tasks that are off-limits to the salesperson. This helps to prevent any potential conflicts of interest or competition with their former employer.

However, if the salesperson switches to a different role at a competitor, their previous sales information loses its value. The restricted activities in the agreement are unlikely to capture the new role. In this case, the non-compete clause may be unenforceable.

Risks of failing to include a valid non-compete clause

Businesses may face danger if they do not draft a clause correctly. An employment agreement without a non-compete clause can also put businesses at risk.

Without a valid clause, employees can poach clients and staff from the business or operate a competing business. Additionally, there will be no restrictions on the industry or location of the competing business.

This causes significant problems for businesses. This is particularly true when businesses rely on foot traffic in a specific location. Lower demand for products or services also presents a challenge.

A non-compete clause may have a deterrent effect on previous employees. The clause is a way for employers to notify their employees that starting a competing business will be in breach of their contract. The clause does not stop employees from actually breaching the employment contract. However, it allows the employer to take legal action against the employee in such cases.

Case law examples

The below cases demonstrate the approach taken by the Australian courts in validating non-compete clauses in employment agreements:

1. Austal Ships v Clay

In this case, the Supreme Court of WA granted an injunction in favour of the employer, Austal Ships. The injunction prevented a former acting head of production from moving to a competitor.

The court considered that:

  • the new employer was a direct competitor against the former employer;
  • Austal Ships noted it had just lost a bidding process;
  • the employee had current knowledge of confidential operations at Austal Ships and confidential information about current tenders, including costs;
  • this information would give an unfair advantage to a competitor; and
  • a real risk existed that the employee might reveal confidential information.
  • revealing the confidential information would harm the employer’s interests.

In light of the above, the court determined that Austal Ships’ non-compete clause was reasonable. The injunction restricted the employee from working with a competitor for six months. 

This case considered a non-compete clause in NSW. SAI Global requested an injunction to stop their former employee from working for a competitor’s subsidiary.

The employee offered an undertaking. In the undertaking, the employee agreed not to solicit SAI’s customers for six months before joining the competitor. The undertaking also offered that the employee would not use any confidential information from SAI.

Given the subordinate company of the competitor was not in direct competition with the previous employer, and the undertakings. The court found that it was highly unlikely that the employee would take secret information to the new role. As a result, the court did not enforce the non-compete clause and refused to grant the injunction for SAI.

In this case, an employee allegedly breached their post-termination obligations by disclosing customer information to their new employer. The employee argued that the customer information was accessible on social media and was not the employer’s confidential information.

However, the court found that the customer information contained details other than just the individual’s basic contact information. The employee also retained the financial information of the clients.

As a result, the court ordered an injunction in favour of the former employer and a claim for damages. The company successfully restrained the former employee from using or disclosing its client details.

This older case showed that courts do not always accept a non-compete clause at face value.

Tutty was a professional footballer in the NSWRL. The League Rules sought to prevent players from playing for another club without the permission of the current club. Tutty argued this rule constituted an unreasonable restraint of trade.

The court held the restraint was too restrictive on the right of a player to seek similar employment (in a professional club). Additionally, the League Rules were not a contractual agreement.

The court stated:

“Unreasonable restraints are unenforceable as it is contrary to the public welfare that a person should be unreasonably prevented from earning a living in whichever lawful way he chooses and that the public should be unlawfully deprived of his services.”

In this case, an employee moved to a direct competitor in the travel insurance industry. The employee was one of the most senior employees of AGA.

In the employee’s role, they had direct contact with key clients with contracts of up to three years. They were also privy to highly confidential information. In addition, they signed an employment contract that contained several non-compete clauses.

The court found that 12 months was a reasonable period to protect the employer. The non-compete clauses prevented the employee from working for a direct competitor in the travel insurance industry.

Government Review

In 2023 the Treasury released an ‘Employment White Paper’. The paper noted non-compete clauses can be obstacles for job mobility, innovation, and wage growth. This is especially true in certain industries where these clauses are most common.

The Treasury will explore non-compete clauses in the review and their impact on labour markets and the economy. The review will determine whether reforms might be necessary, aiming to enhance both competition and productivity.

The ABS released new data earlier this year showing that over 20% of Australian businesses use non-compete clauses. This restricts Australian employees from accepting new job opportunities.

We expect the Treasury to release a consultation document in April 2024.

Frequently Asked Questions

1. When does an employer have a legitimate business interest?

Business interests can include trade secrets, client relationships, and private company information.

Some instances where the court will consider that the employer has a legitimate business interest include:

  1. When an employee can access confidential data and potentially use it against their previous employer in a harmful way;
  2. If an employee talks to the employer’s customers and could use those connections to acquire those customers; and
  3. When an employee is in a position to solicit colleagues from his or her former employer.

The employee’s previous role is important in determining if any of the above situations apply. A non-compete clause is more likely to be reasonable for senior employees with trade secrets and customer details.

Courts will not enforce a non-compete clause if it is not necessary to protect the business’s interests.

Generally, legitimate interests of the employer include business interests or goodwill such as reputation, customer relationships, and the business’s technology.

Employers may not impose restraints that unfairly limit an employee’s ability to obtain an income. The employer must prove the clause is unreasonable and allows the employee to continue working.

An employment lawyer can carefully draft non-compete clauses to protect your business interests. This includes assessing the employer’s location, customers, and industry. They can also advise you on the likelihood of successful enforcement and recommend wording for a non-compete clause.

Employers should first attempt to discuss the restrictions with the former employee before seeking legal advice.

Failing that, speak to one of our employment law lawyers to chat through the next steps. The next steps may include writing a formal letter to the previous employee or commencing court proceedings.

If your employment contract has a non-compete clause, breaking it could have serious consequences. Consequences can include:

  • paying damages to your previous employer;
  • stopping your new employment or business for a certain period; and
  • other legal action.

Employment law lawyers can help discuss prospects and options.

Successful enforcement in a different State or Territory will depend on:

  1. whether you have a comprehensive non-compete clause in the employment contract;
  2. the type of work the former employee undertook for your business; and
  3. what the former employee is seeking to do post-employment.

For example:

If the employee held a senior position in Queensland and managed a large client for you in Western Australia. Then moved to a new role with a competitor in Western Australia and poached a large client. A well-drafted non-compete clause is likely to be enforceable here.

About the Author

Farrah Motley
Director of Prosper Law. Farrah founded Prosper online law firm in 2021. She wanted to create a better way of doing legal work and a better experience for customers of legal services.

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