When Can’t I Enforce a Non-compete Clause?
Considering using a non-compete clause in your employment agreements? Ensure your business has the best protection ensuring your clause isn't unenforceable.
Considering inserting a non-compete clause in your next contract? Worried that you won’t be able to enforce it? It is important that your non-compete clause is effective otherwise the protection you could have gained because of it, becomes void. Read on to learn when your non-compete clause will be unenforceable.
What Is a Non-compete Clause?
A non-compete clause is a clause that is inserted into employment contracts. Fundamentally, a non-compete clause acts as a restriction on certain activities after the conclusion of employment. A non-compete clause will restrict your employee directly competing against your business within a specific geographic scope for a period of time after they cease their employment with you. They can also act to protect confidential information about your business. Furthermore, they can prevent your former employees from taking your client to their new employment or business. You are required to have a legitimate business purpose or reason to utilise a non-compete clause.
What Determines When I Can’t Enforce a Non-compete Clause?
Fundamentally, you are required to have a legitimate business purpose to enforce a non-compete clause. Moreover, this must be demonstrable business interest as there is a general public policy interest in not restricting people’s future employment. Basically, given the circumstances, they have to be considered ‘reasonable.’
Chiefly, you will not be able to enforce a non-compete clause if it is not proportional to the business interest you are trying to protect. The court will consider the nature of your business interest and whether there are alternative measures that can achieve the same purpose but are not as restrictive upon your former employees. Non-compete clauses will not be effective if they cover an unreasonably wide area, for example preventing your former employee working anywhere else in the world in the same industry. Furthermore, they will not be enforceable if they are too long-lasting. Also, they will not be effective if their only purpose is to prevent someone from working. Moreover, a non-compete clause will not be effective if there is insufficient consideration from your employee in signing the agreement.
What Can the Court Do About an Unenforceable Non-compete Clause?
If the court deems your non-compete clause unenforceable then they have several options in response to it. Firstly, they could void the clause completely, meaning it is unenforceable in its entirety. Alternatively, they could vary it to make it more reasonable. For example, reducing the clause from twelve months to six months. Fundamentally, it will depend on your circumstances to determine how the court will respond to an unreasonable clause.
Therefore, make sure your non-compete clauses are reasonable to ensure that they are enforceable. Ensure you get the maximum protection possible by these clauses by making them reasonable and serving a legitimate business purpose. Furthermore, get in touch with an employment lawyer for assistance in creating one and ensure you can get advice relevant to your circumstances.
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.