5 Things To Know About A Non-Compete Clause (2021 Update)
Concerned about a former employee taking advantage of confidential information? Learn about how a non-compete clause can protect your business.
A non-compete clause (otherwise known as ‘non-competition clause’) will prevent an employee from opening a competing business for a certain period of time. Most often, it forms part of an employment agreement, which an employee agrees to before they start working at your business.
One of the biggest fears business owners have is employee betrayal. The thought of an employee using the information and skills you have provided them with to start a competing business can be harrowing. However, there are ways you can protect your business. In this article, we’ll explain how non-compete clauses work and 5 crucial things you should know about them.
Table of Contents
- What is a Non-Compete Clause?
- 5 Important Things to Know
What Is A Non-Compete Clause?
A non-compete clause is a provision contained in an employment contract that comes into effect after an employee has left your business. Above all, it’s a method of ensuring a level playing field with competitors. This clause is a means by which you can prevent an employee from starting a business that:
- Uses your business’s confidential information
- Solicits your clients and/or customers
Once your employee signs the contract, they are prohibited from providing services within a specific geographical area, for a particular period of time. In other words, it’s a tool that enables businesses to have one less worry on their mind when it comes to strategy and hiring.
5 Important Things to Know
1. It’s easy to insert into an employment contract.
You can include a non-compete clause as a paragraph in an employment contract, or in a completely separate document. A properly drafted non-compete clause may effectively prevent employees from joining rival organisations and also starting competing companies. Furthermore, the law will ensure, upon the termination of employment, your employee will not use confidential knowledge to your detriment.
Rod is hiring a product manager for his education-technology startup. He knows the space is competitive and the new employee will have access to confidential information (ie. go-to-market product ideas for next quarter). He sits down with an employment lawyer to insert a non-complete clause into the new employee’s employment contract to ensure that his ideas remains confidential.
2. You must have a legitimate business interest to protect
Be aware you cannot unreasonably impose a restriction that has the effect of stopping an employee from earning a living. Therefore, if you intend to restrict an employee, you must have a legitimate business interest to protect. For example, protection of confidential information, customer connections or stable workforce. Otherwise, your restraint may be regarded as unreasonable if you only seek to prevent an employee from working with a competitor.
Georgia runs an event management company that has 6 employees. However, 3 of which are referrals from one member of staff. Georgia recognises that the referring employee may take the 3 employees with her if she leaves. Hence, she inserts a non-compete clause into the original employee’s employment contract.
3. A non-compete clause can cover an employee’s use and disclosure of information both during and after employment
You can validly restrain your employees from taking a position where it would give rise to an incentive for the employee to disclose confidential information or take advantage of your customer relations. Examples of confidential information include:
- Business strategies
- Sales run sheets
- Brand plans
- Market research data
- Client proposals and presentations
- Training and education material
However, if your employee only has access to non-confidential information in the course of their employment, a non-compete clause may not be reasonable to protect your business interest.
4. A non-compete clause can prevent your employee from recruiting your clients
If you have regular clients/customers, then a non-compete clause will preserve your relationship with them. How frequent you contact your client/customer and the nature of your business interest will determine what period is reasonable for a restraint. Keep in mind that although you have a non-compete clause, it is not impossible for your clients/customers to move to your former employee’s business if they find out he or she moved there.
Jason runs a private tutoring company. He employs 6 student tutors and assigns specific clients to them. As such, to legally enforce his rule that student tutors who leave aren’t allowed to poach his clients. He inserts a non-compete clause into all of the current and future hires’ employment agreements. Effectively, he has prevented current employees from recruiting his clients in future.
5. A non-compete clause can prevent former employees from soliciting your current employees
You may want to ensure your former employees do not engage or solicit your staff after termination of employment, particularly if your former employee has “a significant customer connection interest”. A properly drafted non-compete clause will impede former employees from taking your clients/customers and current employees. However, if it is not drafted well, it can have an opposite effect and impair the lifeblood of your business.
Thus, a non-compete clause can provide your business with protection from former employees competing against your business. However, it is important to understand that a non-compete clause may not be reasonable in all circumstances and/or industries. To ensure your non-compete clause gives you sufficient legal protection, contact a employment lawyer for relevant legal advice.
Lachlan is an intern at Lawpath as part of the content team. He is currently studying a Juris Doctor at the University of Sydney. Lachlan has a keen interest in corporate law and commercial litigation.