What Are Exclusivity Clauses in Employment Contracts?
Exclusivity agreements in employent contracts try to balance the interests of the business while respecting the freedom of a person's right to work and earn a living. In this article, we'll look at how they work and when they can be unfair.
Exclusivity clauses are parts of an employment contract where the employee will agree not to work for other employers or compete with the business they work for (or previously worked for). One of the biggest benefits of being a skilled worker is that you’re very valuable! Employers will often recognise this and want to keep skilled workers all to themselves. It can also mean that they don’t want you setting up shop nearby and taking all their business. They do this by including exclusivity clauses in their employment contracts. They’re most often included in contractor agreements, but can also be used in any employment contracts.
How Do Exclusivity Clauses Work in Employment Contracts?
To understand how exclusivity clauses work, it’s helpful to have an example. One of the most common forms of exclusivity clauses is the ‘no competition’ clause. This simply means that an employer wants to stop an employee (or former employee) from competing with them. The clause will usually say something like this: “The employee will not directly or indirectly engage in any activity competitive with or adverse to the company’s business interests”.
Employers just want to protect their business, which is understandable. However, these ‘no competition’ clauses need to be reasonable. All exclusivity clauses need to be reasonable. If a court were to look at an exclusivity clause that was unreasonable, it would not allow it to take effect. These are usually unreasonable if they go too far in protecting the interests of the business. After all, the interests of the employee need to be protected too.
Unfair Exclusivity Clauses in Employment Contracts
Consider the following example. You work as an employee in the only human resource company in your area. When you were hired, you signed a contract that said you weren’t allowed to compete with this company while working there, or after leaving the company for 24 months and in a 20km radius.
Courts are very likely to consider this to be very unfair. Courts don’t like enforcing parts of contracts that are unfair like this. It is incredibly restrictive on you and only benefits the business by not allowing you to use your skills elsewhere when you decide not to work for this company. Exclusivity clauses like this should protect the interests of the business, but should also consider the freedom of the employee to work and earn a living. There needs to be an adequate balance. Both employers and employees should seek advice in the lawyer marketplace about anything they are unsure of.
Can Exclusivity Agreements Be Broken?
Let’s say you’re the person working for the human resource company in the earlier example. If you decided to break the agreement and start your own human resource company within the next 24 months and in a 20km radius, then you might find yourself caught up in the court system if your old employer decides to sue on the contract. At the end of the day, courts will not enforce a clause like this because it is unreasonable and prevents you from making a living. But this isn’t without lots of unnecessary court or dispute resolution costs. Therefore, they can be broken if they are very unfair. However, it’s important to seek legal advice before deciding to break agreements even if they are unfair.
Now consider if the agreement was fair and reasonable. For an exclusivity agreement to be fair, you should be given compensation. For example, if a business recognises your fantastic skills in coding, they might ask you not to code for any other business and pay you extra every month as compensation. This kind of agreement is much more reasonable. On one hand, your freedom to earn a living is respected. On the other, the business also gets exclusive rights to your skills.
Provided the compensation is relatively equal, this agreement is much more difficult to break. The best process in this scenario is to seek permission from the employer to break any exclusivity clauses. If permission cannot be gained, then it may be best to seek mediation or conciliation to resolve disputes. Contracts often contain provisions that outline how this can be done.
Exclusivity clauses in employment contracts restrict employees from competing with the business they work for. They protect the interests of the business. But they should equally respect the right for a worker to earn a living. Exclusivity agreements are unfair if there is a serious imbalance between these two interests. And in the same way, they are fair and enforceable if they are fair and suit the needs of both the employer and employee. If you need any advice on how to draft, interpret or negotiate exclusivity clauses, seek tailored advice on our lawyer marketplace.
Michael is a legal intern at Lawpath working with the content team. With an interest in contracts, intellectual property, and constitutional law, Michael is currently completing a Bachelor of Laws with a Bachelor of Commerce at Macquarie University.