Everything you need to know about non-compete clause

Business owners are usually concerned about being betrayed by their employees using confidential information against their business.  In this Business Kitz article, we’ll explain how non-compete clauses work in Australia.

What is a non-compete clause?

A non-compete clause, often known as a restraint of trade clause, prohibits an employee from starting a competing company for a set period of time. A clause like this exists to avoid unfair competition. The use of both confidential and general information that could be used against a business with whom a party is no longer in a contractual agreement is banned by the existence of this clause. The majority of business contracts include restraint of trade clauses.

Where are these clauses found?

Existing workers who are involved in the daily operations of a company may have access to confidential business information. A non-compete clause protects a company’s interests by prohibiting the party from using sensitive knowledge.

These clauses are present in the majority of commercial contracts, including:

  • Employment agreements: In this context, they prohibit an ex-employee from working for competitors, starting a firm in the same industry, or utilising confidential information.
  • Sales of company agreements: This is intended to restrict the seller from launching another business in the same field for a set period.
  • Franchise agreements: Prevents a franchisee from establishing a competitive firm in the same place.

What activities can a this clause restrict?

As previously stated, a non-compete provision in a contract is necessary for protecting an employer’s legitimate economic interests. Therefore, this clause can restrict the following activities:

  • Non-compete: This clause prohibits one party from competing with another.
  • Non-solicitation: this clause prohibits a party from approaching individuals such as employees, clients or suppliers that may have had a relationship with the business previously. 
  • Recruitments: inhibit a party from hiring essential corporate personnel, such as senior workers or managers.

How to enforce this clause?

In Australia, non-compete clauses are only enforced if they are found to be reasonably required to safeguard the goodwill of the firm that benefits from this clause. It is the obligation of the party seeking to enforce the clause, to demonstrate that the restraint of trade protects a real and valuable interest.

A court will evaluate the limitation against the party seeking to enforce the non-compete clause, and they may take into account factors, such as the:

  • geographic region where the non-compete clause applies. For example, how near is the competitive company to which an ex-employee is currently employed?;
  • actions that the clause intends to restrict, for example, you can prohibit former workers from soliciting current employees, or can forbid the use and sharing of information both during and after employment; and
  • period for which the provision applies, an employer cannot expect an employee to comply with non-compete restrictions indefinitely; thus, the agreement must include a realistic time limit.

If a party’s attempt to enforce a non-compete agreement is considered unreasonable, the court may remove parts considered excessive. As a result, a modified version of the clause may be enforceable.

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Legal advice

​​If you want to safeguard your business interests, you must include a non-compete clause in your contract. Furthermore, before writing or entering into a contract, you should carefully analyse any non-compete restrictions to ensure that they are acceptable, as a court will look to balance your clause interests. However, it is critical to note that a non-compete provision may not be appropriate in all situations and or businesses.

If you need legal advice or assistance in creating a non-compete agreement, our sister company, Legal Kitz, can provide you with legal advice. You can request a free 30-minute consultation with their experienced and highly qualified team via our website.

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