THE NON-COMPETE CLAUSE
What is a non-compete clause (NCC), and can your employer make you sign one?
About non-compete clauses
The NCC is often found in contracts today. It used to be reserved for high-level executives and top-secret industries, but is increasingly being used across many industries. In fact, most employment contracts now include some form of restraint clause.
The purpose of the NCC is to cover situations that might occur after you stop working with your current employer. It prevents you from directly competing with your former employer once you end your contract with them.
Why would my employer want me to agree to an NCC?
The purpose of an NCC is to prevent confidential information, intellectual property and expert knowledge of a specific business to be used by one party to compete with the business they no longer have a contractual agreement with.
Employment contracts may demand that an employee agree to a certain period of restriction from entering another role within the same industry, or within a certain geographical region.
Is the NCC always enforceable?
In Australia, an NCC in an employment contract can only be enforced if the court considers it a reasonable and necessary measure to protect the business interests of the party who requires the clause. Where the NCC is not deemed reasonable, the employee who is subject to the clause is no longer prohibited from seeking employment in a similar or competing business.
Can I challenge the NCC after signing it if I think it’s unreasonable?
A court must consider whether an NCC is reasonable, taking three main factors into account:
- the geographical area where the clause applies
- activities that the clause seeks to restrain
- the period the clause applies to.
If the court considers it reasonably necessary to protect an employer’s legitimate business interests in any of these areas, the requirements of the contract will need to be adhered to.
Is the NCC I signed enforceable and legitimate?
To be enforceable, the NCC must protect a legitimate business interest that can be valued. The party seeking to enforce the NCC has to prove this in order for the restrictions to be deemed reasonable. Commercial interests deemed valuable and requiring protection include confidential information, intellectual property, and trade secrets such as a product formula.
In some cases employers may threaten to enforce NCCs against employees as a scare tactic. However, most of these disputes do not end up in court. But it can be a stressful and daunting experience for employees who are looking to change their work situation.
Understand what you’re signing or seek legal advice
Employees shouldn’t sign an agreement they aren’t comfortable with or don’t fully understand, especially if the NCC is broad or vague in its terms. An employee has the right to refuse to sign an NCC, but this may result in the job offer being withdrawn or a job terminated.
It is worthwhile reviewing a contract carefully before signing it and obtaining advice so that you know where you stand. Often employers will roll out precedent clauses that are excessive and do not match the position or duties being performed. In these situations, there may be scope to negotiate to reduce the breadth of the restraint, the activities it seeks to restrict or its duration.
If you don’t understand the terms of an NCC in an employment contract, or you want advice on a contract you have already signed, we have made it easy to find a solicitor near you through our online Find a lawyer service.