Non compete clauses restrict employees from competing against their employer. A non compete clause often goes beyond prohibiting the use of confidential information and intellectual property. The aim is to stop an employee from using their skills and experience to the employer’s disadvantage.
It’s important for employers to understand that not all non-compete clauses are enforceable. Clauses that are unclear or poorly written may not be enforceable and therefore will not protect an employer.
Employees must also understand that while some non-competes may not be legally enforceable, many are.
In this article, our employment contract lawyer discusses the ins and outs of non-compete clauses in Australia.
An employer may include a non-compete clause in their employment contracts for a number of reasons. We often see employers take a scatter-gun approach rather than considering what it is that they are seeking to protect.
Employees may gain valuable experience and skills and develop business relationships throughout their employment. A non-compete clause can prevent an employee from using their knowledge to disadvantage their employer after they leave their job.
Set out below are some of the key things that non-compete clauses aim to prevent.
The main purpose of a non compete clause is to prevent an employee from:
An employee can use knowledge of the employer’s business, products, services, deals and other confidential information. This knowledge may:
Customers are generally free to buy goods and services from anyone they choose. A departing employee may be able to poach a customer if they have developed a strong relationship.
Non-compete clauses are more likely to be enforceable against employees in customer-facing and senior roles. Regular contact with customers means that the employee has had more opportunity to build those relationships and use them to entice the customer away from their employer.
The loss of skilled and experienced employees can have a negative impact on businesses because of:
An enforceable non-compete clause can prevent former employees from joining them to work for a competitor.
Not all non-compete clauses are legally enforceable. We recommend consulting with an employment lawyer when drafting a non-compete clause.
When considering your non-compete clauses, the following questions will help frame the drafting of the clauses:
We have described things you should consider when drafting your non-compete clause below.
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.
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.
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:
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.
Certain criteria are more likely to render a geographical limit reasonable, such as when the restraint:
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:
For example, this may include a specific list of clients that a senior employee must not contact.
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.
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.
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.
The below cases demonstrate the approach taken by the Australian courts in validating non-compete clauses in employment agreements:
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:
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.
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:
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 seeking to enforce a non-compete clause should seek employment legal advice.
A lawyer may recommend:
If your employment contract has a non-compete clause, breaking it could have serious consequences. Consequences can include:
Employment law lawyers can help discuss prospects and options.
Successful enforcement in a different State or Territory will depend on:
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.
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