Non-compete Clauses and Agreements

What are non-compete clauses and agreements?

Non-compete agreements or non-compete clauses (also known as restraint of trade), are typically of three primary types:

• Non-competition and non-solicitation
• Exclusive service
• Garden leave.

What do they do?

In practice, these agreements or clauses exist to prevent employees and contractors from competing with an employer’s business both during and after the completion of their employment or engagement. They are generally set for a reasonable length of time and within reasonable geographic limits. In other words, you’d violate a non-compete clause or agreement if you took a job at say, the only lollypop company in Sydney, learned all you could while there, quit and then started your own lollypop company across the street!

They exist because employees and contractors often deal with an organisation’s confidential information in the course of their work from intellectual property, processes, procedures and client information. Because of the obvious sensitivity of this information it is, of course, natural for an employer to protect themselves against those whose intentions are not so noble.

How are they enforced?

As businesses are very different and the confidential information they contain is equally different, not every non-compete agreement or clause drafted by the employer will be legitimate and enforceable. They only become enforceable if they are genuinely necessary to protect the legitimate business interests of the employer.

So how do you determine genuine and legitimate interests?While exceptions can and do apply, the following factors are relevant in making a determination:

• The size and nature of the industry
• The nature of the employee or contractor’s role
• The scope, breadth and length of the non-compete
• The timing of the non-compete
• Future probabilities that could have been foreseen by the employer
• The effect of the non-compete on the employee or contractor’s ability to earn a wage
• The bargaining power of the contracting parties
• The effect on the employer’s business should the non-compete be held to be unenforceable.

Is it the same as a non-disclosure clause or agreement?

No. A non-disclosure clause or agreement means the employee or contractor agrees not to disclose things the company may consider to be proprietary or confidential, such as information about new products, technology, business plans, financial information and the like. It doesn’t mean you can’t work for a competitor, it simply means you can’t use proprietary or confidential information you learned or obtained from the former employer with a new employer.

What is fair and reasonable in a non-compete clause or agreement?

It is not unfair for an employer to ask an employee or contractor to sign a non-compete agreement. This said, the agreement or clauses should be carefully reviewed to determine if they are indeed reasonable.

If reasonable, it will generally be legally binding. So, for the employee or contractor, if it says you can’t compete against your former employer for a period of anywhere from one to as many as five years, a court is most likely going to say that’s a reasonable length of time.

Signing an agreement

For the employee or contractor, we recommend seeking legal advice on the inclusions in a non-compete agreement or clause. It is important you don’t sign anything you don’t understand, think is unreasonable or are not comfortable with.

Creating an agreement

For the employer, it’s important you protect your company interests so a fair and reasonable non-compete agreement or clause will ensure this happens.

For both the employee and contractor and employer, we strongly encourage you to seek legal advice in this area.

At LawBase we have extensive experience and can ensure both parties are protected with professional, tailored clauses and agreements.