What is a Non-Compete Clause? (from Employee and Employer’s Perspective)
Learn about non-compete clauses and how they can affect both the employer and employee. Understanding a non-compete clause is beneficial when entering into and negotiating an employment contract.
You have successfully made it through the interview stages and you’ve received your letter of employment. It’s the week before you start your new job and you’ve just been sent your employment agreement. Reading through the contact you come across the ‘non-competition clause’. You’re stumped: you understand it’s preventing you from doing something in the future, but what does it actually mean?
What is a non-compete clause?
In general, a non-competition, or non-compete clause is a post-termination provision that comes into effect after an employee has left the business of their employer. It can be included in an employment contract as a paragraph or it can be a completely separate document, depending on how cautiously and thoroughly an employer wishes to prepare for when an employee leaves their business.
It can restrict individuals and organisations that sign it from engaging in business in particular markets and can prohibit you, as an employee, from providing your services in that market within a particular geographical area for a particular period of time.
It yields different results depending if you are an employer or an employees.
For employees, non-compete clauses usually target three key areas:
- the geographic scope of where you can or cannot work;
- the scope of your services, roles, and skills that can or cannot be used for creating or assisting a competing business;
- the duration of the clause that determines the period of time until the provisions of the clause apply to you.
When signing a new employment agreement, the last thing you may be thinking about is what happens after you leave the business.
However, an employment agreement containing a non-compete clause should be considered carefully as it can have long-lasting implications for your career. The breach of this clause can lead to costly court action. It is worth knowing that as an employe, you can negotiate the specifics of a non-compete clause before signing the contract with your employer.
As an employer, it would be fairly devastating if your star employee was to turn around and either work for your competitor or even become your competition by opening a business of their own. The inclusion of this clause for you, protects your business from the potential of an employee using the information and skills you provided them to gain competitive advantage and create a competing business against you. An employer can use it to protect sensitive processes, technologies, and other trade secrets and confidential information such as customer/client lists, business practices, upcoming products and marketing plans. Bear in mind that the clause must work to protect the legitimate business interest of you as an employer.
Those of you in a particularly competitive field, it is common for employer to ask their prospective employees to sign non-compete agreements.
What’s the scope of a non-compete clause?
The clause forms a part of the common law doctrine of ‘restrain of trade’ that aims to protect the interests of the employers but in many instances the court may find a non-compete agreement to be invalid or unenforceable. That can be either because it is too constricting or because of other technicalities.
If you need further assistance in drafting a non-compete agreement or clause, contact a Lawpath consultant on 1800LAWPATH to learn more about employment agreement.
Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.