Australia non-compete clause is a common feature of employment contracts. These clauses restrict employees from working for a competitor or starting their own business in a similar industry after leaving their job. Moreover, non-compete clauses can help employers protect their confidential information and trade secrets.
How Do Non Compete Clauses Work?
The Australia non-compete clause, also known as the ‘restraint of trade clause,’ restricts a person’s capacity to compete, work for a rival company, use information, and recruit workers and customers in a competing business for a specific amount of time. An employment contract, release deed, business sale agreement, or contractor’s agreement may contain a restraint of trade clause.
A non-compete agreement that goes beyond what is supposedly required to safeguard a company’s legitimate economic interests may not be enforceable in the context of employment.
What Are Legitimate Business Interests?
In Australia, an employer’s legitimate business interests is an interest that is reasonably necessary for an employer to protect its trade, business, or goodwill. Some examples of legitimate business interests that a non-compete clause may protect include:
- A former employer’s confidential information. Employers have a legitimate interest in protecting their confidential information, such as trade secrets, customer lists, and pricing data. A non-compete clause can help to prevent former employees from using this information to compete with their former employer.
- Customer connections. Employers also have a legitimate interest in protecting their customer connections. Having a non-compete clause in an employment contract can stop ex-employees from contacting or stealing clients from their previous job.
- Employee relationships. Employers may also have a legitimate interest in protecting their employee relationships. Thus, former employees may not be able to recruit or hire the staff of their former employers by a non-compete agreement.
It’s crucial to remember that not all non-compete agreements that safeguard reputable company interests will be upheld. When deciding whether the clause is enforceable, the courts will also take its reasonableness into account.
However, a clause that is too broad or too long may be found to be unreasonable and unenforceable.
The Restraints of Trade Act 1976 (NSW)
The Restraints of Trade Act 1976 (NSW) is a law in New South Wales, Australia that governs the regulation of restraint of trade clauses. Restraint of trade clauses are often found in employment or shareholder agreements.
Moreover, it protects business interests such as:
- client information,
- intellectual property,
- employees, and
- trade secrets
by restricting the behaviour of previous employees or shareholders.
The Act mainly:
- defines restraint of trade as a restraint created by contract or by the rules of an association;
- provides guidelines for assessing the reasonableness of restraint of trade clauses and determining their enforceability; and
- allows the Supreme Court of New South Wales to read down an invalid restraint of trade clause.
Under the Restraints of Trade Act 1976, the enforceability of a restraint of trade clause depends on the wording of the clause and the context of each case. The court will consider various factors in determining the reasonableness of the restraint. This includes the legitimate interests of the business and the extent to which the restriction is necessary to protect those interests.
Some types of restraint of trade clauses include:
- Non-competition clauses. These clauses prevent a former employee from competing against the company.
- Non-solicitation clauses. These clauses prohibit a former employee from soliciting clients or employees of the company.
- Confidentiality clauses. These clauses require a former employee to maintain the confidentiality of sensitive information.
Furthermore, enforceability of restraint of trade clauses can be contentious and may result in disputes. Thus, this Act provides a legal framework for assessing the reasonableness of these clauses. It also aims to ensure that they protect the legitimate interests of the business without unreasonably restricting the activities of employees or former directors.
Factors That Determine the Reasonableness of a Non-compete Clause
Here are some factors that courts will consider when determining the reasonableness of a non-compete clause:
- The nature of the employer’s business. The more sensitive the information or relationships that the employer is trying to protect, the more likely a non-compete clause will be enforceable.
- The length of the non-compete clause. Shorter clauses are more likely to be enforceable than longer clauses.
- The geographic scope of the non-compete clause. A clause that restricts the employee from working in a particular industry or geographic area may be more likely to be enforceable than a clause that restricts the employee from working in any industry or geographic area.
- The employee’s position and seniority. Employees who have access to confidential information or customer connections are more likely to be subject to a non-compete clause than employees who do not have this access.
- Whether the employer has provided consideration for the non-compete clause. If the employer has provided the employee with some form of consideration, such as a signing bonus or increased salary, the non-compete clause is more likely to be enforceable.
If you are asked to sign a non-compete clause, it is important to carefully review it and seek legal advice before signing. You should also be aware of your rights under the law, and be prepared to challenge a non-compete clause that is unfair or unreasonable.
Case Law on Australia Non-Compete Clause
Allied Mills Pty Ltd v Miners [2013] NSWSC 1117
In this case, the NSW Supreme Court did not grant an injunction to Allied Mills to disallow its former National Sales Manager from assuming the role of a grain procurement manager with a New Zealand competitor.
The rationale for such a court ruling is that the “likelihood of genuine harm” to Allied Mills was “remote and tangential” and that post-employment restraints in NSW would not be breached by Mr. Miners in assuming such a role in New Zealand.
Rich v BDO Kendalls [2007] QCA 147
BDO filed an injunction against Mr. Rich and claimed that he breached the restraint clause in his partnership agreement with BDO. The restraint clause barred Mr. Rich from working with BDO clients, was broad in scope, and had several time options ranging from one to three years after Mr. Rich retired as a partner.
As partners share the firm’s assets and goodwill, the court found that a constraint against all of the firm’s clients, not simply the ones Mr. Rich represented, was appropriate.
Talk to an Employment Lawyer About Employment Agreements and Contracts
If you are facing legal issues regarding non-compete clauses, employment lawyers can provide the following services:
- Advise on the enforceability of a non-compete clause.
- Represent clients in court if a dispute arises over the enforceability of a non-compete clause.
- Provide legal guidance to clients on their rights and obligations under a non-compete clause, as well as advise on any potential legal risks associated with the clause.
- Negotiate with employers on behalf of clients to modify or remove non-compete clauses that are unreasonable or overly restrictive.
JB Solicitors can provide these legal services to clients facing legal issues related to non-compete clauses, from advising on enforceability to representing clients in court.
Contact us today.
