Enforcable non-compete clauses in employment contracts

Employment contract non-compete clauses and redundancy

It is commonly believed that non-compete clauses cannot be enforced as they run contrary to the public policy of providing a sufficient and trained labour force (see Section 106 of the Industrial Relations Act 1996).

However there are ways of wording non-compete and other restraint clauses to protect your business and take action to enforce the clause if required.

A ‘reasonable’ non-compete clause

To be enforceable a non-compete clause needs to be deemed to be reasonable, in terms of duration and scope and in its attempt to protect the employer. A restraint should not be any more restrictive than necessary to protect the employer’s legitimate business interests.

It should also identify the relevant risk the restraint is protecting. For this reason the restraint clause may need to be tailored to the employee’s role. This could be with regards to:

1. Specific conditions

Are there specific circumstances under which the clause applies or does not apply? The clause may not apply if the reason for leaving is redundancy of the position.

The non-compete clause may only apply to certain roles or job titles. Has the employee’s role changed since the contract was signed? If an employer has not updated its agreements to reflect these changes then the clause may no longer apply.

2. Geographic area

Is the employee responsible for covering a certain geographic location? If so, a restraint restricting competitive activity in this location may be considered reasonable but a larger area may not. The larger the area the clause covers, the harder it is likely to be to enforce.

3. Mode

Does the restraining clause specifically cover online business, channel sales partners and other distributors and/or specific retail outlets?

4. Definition of competitor

Is competition defined in broad terms or are specific competitors named? If you are in the business of ‘left handed hammer retail’ then does the clause state competing businesses, retail competitors, tool retailers, hammer retailers and left handed hammer retailers?

The more specific the definition of the competitor is, the more reasonable the clause is deemed to be and therefore more enforceable.

5. Time period

How long would it take for the advantages of the employee’s personal connection with clients or knowledge of confidential information to be reduced, to the point that it would not be worthwhile protecting against in a competing business?

Bear in mind the risk of the former employee utilising the knowledge and relationships they have with clients may be reduced by hiring a replacement to build up the same goodwill over time.

The longer the duration of the restraint, the less likely it is to be considered reasonable.

6. Under which jurisdiction is the restraint to be enforced?

The choice of law between states and territories in Australia relating to restraint clauses is unlikely to make a major difference, although some differences may have an impact.

International employers may find that where an agreement has been entered into in an overseas jurisdiction the Australian court may apply the relevant laws of that particular state or territory. Alternatively it may be guided by the overseas law of the jurisdiction in which the agreement was entered into.

7. Are restraint clauses still valid when making redundancies?

There is no reason why a restraint clause could not still be valid when making redundancies if the restraint is reasonable. If the redundancy is a result of a specific division of a business closing down, then an employee soliciting clients at a new competing business in that niche could be deemed to not cause the original employer any damage.

Having taken into account all of the above aspects, how fair, reasonable and enforceable are the non-compete clauses in your contracts?

What this looks like in practice

Outlined below are two recent cases where the court has enforced the employer’s non-compete contract.

AGA Assistance Australia Pty Ltd v Tokody (2012)

In the case of AGA Assistance Australia Pty Ltd v Tokody (2012), the employee (Ms Tokody) was moving to a direct competitor in the travel insurance industry. She was one of AGA’s most senior employees.

In her role she dealt directly with key clients with lengthy contracts of up to three years, and was privy to significant confidential information. She had signed a contract containing various restraint clauses, including a non-compete clause. This restrained her from being employed by a direct competitor in the travel insurance industry.

The court found that 12 months was a reasonable length of time to protect her employer. They also observed that, if it can be shown the employer has failed to adequately protect its relationships after the employee has left then this may have an impact on any claim for compensation. However it does not have any impact on the enforcement of the restraint.

Freshfood Management Services Pty Ltd

In another case, a senior manager at Freshfood Management Services Pty Ltd resigned giving two months’ notice. His intention was to join Cantarrella Bros, a direct competitor in the fresh coffee industry. As a senior manager the employee had access to confidential information including sales and management information.

The employee sought judgement to avoid the restraint clause in his contract, preventing him from taking employment in NSW with a competitor for a period of 12 months after termination, under Section 106 of the Industrial Relations Act 1996.

The judge stated that Freshfood was required to demonstrate the reasonableness of the restraint clause as the general rule was that non-competition clauses were void at common law as being contrary to public policy, and were only viable if special circumstances made the restriction ‘reasonable’.

The judge found the 12 months restraint was unfair as it:

  • Was contrary to the public interest to deprive the community of the employee’s services;
  • Would impose a serious financial burden on the employee for no good reason; and
  • There was no threat to Freshfood for an extended period.

He also noted the restriction only applied to NSW but the fact the employee wanted to remain in Sydney was not unreasonable.

However the rest of the non-compete clause was found to be fair, with a reasonable restraint being six months from the date the employee gave notice and no longer had access to Freshfood’s sales, management, blend or technical procedure information.

Summary

The law around restraint and non-compete clauses is more ‘shades of grey’ than black and white.

However the above decisions demonstrate that a well drafted restraint prohibiting post-employment competition can be enforced.

Disclaimer: The information contained in this article is for general guidance only. It has been prepared without taking into account your own situation or needs. Glide Outplacement disclaim all and any guarantees, undertakings and warranties, expressed or implied, and shall not be liable for any loss or damage whatsoever arising out of or in connection with any use or reliance on the information in this article. The user must accept sole responsibility associated with the use of the information, irrespective of the purpose for which such use or results are applied. The information is no substitute for legal or financial advice.