Non-Competition Clauses in Employment Contracts – Read, Consider, Get Advice - Before Signing.

Published 09 June 2016 by Koffels Solicitors & Barristers

The prospect of a new job can be an exciting and positive experience but often when signing a new employment contract, people are not mindful of the restraint of trade or non-competition clauses that are often contained in the contract. Employers often include these types of clauses in an attempt to protect their business interests and client relations.

Restraint clauses usually require that once the employee has left their employment, that they do not take up employment with a competitor for a certain period of time and/or within a certain radius. Further, there may be clauses in the contract which restrict you from soliciting your former employee’s customers, clients or staff.

In the event you breach a non-competition clause, the employer may apply to the Court seeking an injunction against you, or an order for damages for income that may have been lost due to the breach.  

What you should be aware of is, that it is unlikely that a Court will uphold a restraint clause if the clause limits your ability to work in competition with your former employer.

Clauses that relate to specific restrictions such as trade secrets or contact with clients however, may be enforced. These clauses will usually only be upheld if they are necessary to protect a legitimate business interest, but an employer cannot seek to restrain ‘mere competition’.

The Court may uphold a restraint clause if the duration of the restraint is reasonable, say for 3 to 12 months, and is required to protect the legitimate business interest of the employer.  In the case of Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111 the Court upheld a restraint clause for a period of 2 years. The Court upheld the clause for the following reasons:

  1. The former employee had access to almost all of the employer’s confidential business information, such as sales and client retention strategies;
  2. The former employee was a key figure within the employers human resources consultancy;
  3. The former employer’s legitimate interest in protecting its client relationships;
  4. The former employee received shares in the business and payment for 21 months of the two-year restraint period, which the court considered a ‘reasonable commercial arrangement between the parties’.

It is also interesting to note that when drafting restrictive clauses in an employment contract, the effect of the restriction should not be too broad. In the event the court is asked to decide whether or not the clause should be enforced and the clause is too broad, the whole clause is deemed unenforceable and therefore not effective. If the clauses are drafted step by step or also known as ‘cascading’ clauses however, if the contract is contested, the Court can remove clauses that are too broad or unenforceable, and leave the relevant clauses still effective.

In the case of Wallis Nominees (Computing) Pty Ltd v Pickett [2013] VSCA 24, the Court stated “…the impugned part [of the clause] must be capable of simply being removed – as if simply crossed out with a blue pen;  a Court can remove words from the restraint clause but not rewrite it…”

If you are unsure about the impact of restraint clauses in your employment/employee contract, it is a good idea to obtain legal advice prior to signing.

Failure to be careful in the first instance can be a very costly mistake later.