Employment Contract

Employment Contracts – Do You Really Need A Non-Compete?

Non-compete clauses are often included by employers in employment contracts, but it’s less clear whether those employers have any intention of enforcing them. Non-compete clauses are not always easy to enforce (and enforcement can be expensive), however the inclusion of such clauses in circumstances where they are not reasonable or where an employer doesn’t really want to enforce them can cause employees a large amount of stress and angst when wishing to move roles.

A non-compete is not intended to be used as a tool to make employees stay with your business, but rather to make sure an employer is not damaged by a departing employee taking clients or other staff with them or setting up a competing business trading off goodwill established with the employer.

Employers should consider carefully what they actually require to reasonably protect their legitimate business interests and draft a reasonable clause that takes into account that the employee has a right to work and use skills that they have developed for themselves or another employer.

Non-compete clauses are most effective (and most readily upheld by courts) where:

  • the language is clear and specific to the role of the individual employee, rather than being a boilerplate restraint clause that applies to all employees across the board;
  • it is reasonable with respect to the protection of legitimate business interests, and does not become overly onerous;
  • the intent of the clause and how it applies to the employee is clear.

What should I consider when deciding on whether to include a non-compete?

Firstly, consider why you do not want the employee working for a competitor, and whether these reasons can be adequately addressed by a properly drafted non-solicitation provision or ‘no dealing’ provision, to prevent that employee from soliciting or dealing with clients, or a comprehensive confidentiality clause.

If the concerns cannot be properly addressed using a properly drafted non-solicitation or ‘no dealing’ provision, and you still wish to include a non-compete, factoring in the following will assist you to draft a more robust non-compete provision:

  • Consider and properly define what you consider a competitor to be, with reference to your business but also to the work that the employee is conducting in your business. If there are specific and key competitors that you have particular concerns about, consider naming them explicitly in the restraint clause;
  • Consider how much time the business needs for the non-compete period with reference to why the employee is being restrained. I.e., Do you need 3 months to strengthen client relationships in relation to a key account manager? Will the employee have highly sensitive commercial information regarding strategy for the company, if so, how long is that information ‘current’?;
  • Define the geographical area that the restraint applies to and ensure it is done with reference to why you need a non-compete. That is, if the employee is well known in the industry locally, and their opening up a competing business nearby would damage your business’ relationships with clients, then limit the geographical area of the non-compete to the area of concern;
  • Consider if the employee has been appropriately compensated for the non-compete, particularly if upholding the clause will stop or greatly hinder the employee from earning a living in their field of expertise after the end of their employment with your business. If the employee is that vital to your business that you do not want them to be able to work in your industry for a period of time after they leave your business in a wide geographic area, you should consider if they are remunerated appropriately and if so, reference this clearly in the employment contract. You may also want to consider entering into a deed with the employee when they leave to reinforce these obligations in return for payment of a settlement sum or consider utilising long notice periods for termination and ‘gardening leave’ provisions instead. Whilst this is an additional expense, and may not be necessary, if the damage the employee could do is substantial and you wish to avoid any disputes, it may be money well spent.
  • Make sure the employee’s contract stays up-to-date, and the restraints are updated to reflect any increases in seniority or promotions.

Why is it a problem to include a non-compete we don’t enforce?

Some employers include a non-compete clause when all they are really concerned about is non-solicitation. Doing so in circumstances where there is no intention to practically enforce the terms of a non-compete clause creates uncertainty for staff regarding what is and what is not allowed after they leave and may also water down the effectiveness of any other post-employment restraints (particularly if employees see that they are not being taken seriously by the employer).

Having an overly broad non-compete clause may also deter prospective employees, which is detrimental in a highly competitive job-market.

Are you being hypocritical?

Do you include non-compete clauses in all your employment contracts, but regularly hire employees from your competitors whose previous contracts contained similar clauses? If so, is that employee really going to think twice before moving to another competitor, notwithstanding that their contract with you contained a non-compete?

If you want employees to take their post-employment obligations to your business seriously, you should demonstrate this throughout their employment to establish a culture of what is acceptable. If you encourage (or do not discourage) new staff members from soliciting business from the clients of their former employer, or even poaching staff members, in breach of their contract, you are setting a bad precedent for the standards of behaviour you expect once that employee leaves your business.

Have you got the wording right?

Lastly, employers should make sure that their restraint clauses are up to date with applicable case law and contain all the required legal language to make sure that they are enforceable. This is particularly important if you have a cascading restraint clause, particularly where the governing law is outside of NSW. Courts can void clauses if they are uncertain, so it is important that the clause is clear in its intent and purpose, as well as being reasonable.

IMPORTANT NOTICE – The information contained in this article is not intended to be comprehensive. It is general in nature and is not intended to be used as a substitute for legal or other professional advice. You must seek specific professional advice tailored to your personal circumstances before taking any action based on this article.

Liability limited by a scheme approved under Professional Standards Legislation.

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