Non-Compete Agreement with Employee

What is a Non-Compete Agreement with Employee?

A Non-Compete Agreement with Employee is a useful document which many businesses use with their employees or other individuals with access to their sensitive business information. The business may use the Non-Compete Agreement to prevent the employee from soliciting the business's clients, recruiting the business's staff, or using the business's sensitive information to open a competing business.

Non-Compete Agreements are used most often in highly competitive industries, such as technology development, sales, and marketing. For example, a Non-Compete Agreement might be used when an employee is being hired to work at a company and the company wants to ensure that if the employee leaves, they do not use their access to business secrets to start a competing company.

As the name suggests, a Non-Compete Agreement with Employee is specifically designed for use in employment matters. A general Non-Compete Agreement may be used in other (non-employment) matters.

What is the difference between a Non-Compete Agreement and a Confidentiality Agreement?

A Confidentiality Agreement (also often referred to as a Non-Disclosure Agreement or NDA), is often confused with a Non-Compete Agreement. Many businesses like to prepare both documents at the same time, although they serve quite different purposes.

In simple terms, a Non-Compete Agreement protects against unfair competition, whereas a Non-Disclosure Agreement protects against disclosure of confidential information. For example, a Non-Compete Agreement could prevent a former employee from soliciting the employer's clients, or opening a competing business. On the other hand, a Non-Disclosure Agreement could prevent the employee from sharing the employer's confidential information with anyone.

For further information, see the legal guide What's the Difference Between a Non-Compete Agreement and a Non-Disclosure Agreement?

What is the difference between a Non-Compete Agreement and the non-compete clauses in many business contracts?

Many standard contracts do include clauses dealing with competition and restraint of trade. For example, these sorts of clauses are often included in an Employment Agreement, Remote Work Agreement, and Business Sale Agreement.

However, a standalone Non-Compete Agreement usually goes into more detail than those standard contracts do. It also helps to make it clear that the business takes these issues very seriously. Therefore, even if a business has a standard contract that deals with competition and restraint of trade, they often choose to also use a Non-Compete Agreement.

Is it mandatory to have a Non-Compete Agreement?

No, but if a business thinks there is a risk of unfair competition, then a Non-Compete Agreement is a critical tool to help manage this risk.

What is not allowed in a Non-Compete Agreement?

The doctrine of restraint of trade is relevant to non-compete agreements. Under this doctrine, a post employment restraint will only be enforceable if it is reasonably necessary to protect the legitimate business interests of the employer (such as confidential information, client relationships/client lists, trade secrets, or business goodwill). A restraint that simply tries to restrict competition, without protecting a legitimate business interest, is unlikely to be enforceable in Australian courts.

Courts tend to approach the matter from the starting point that employees should have the right to sell their own labour (ie. they should be able to go out and find another job). If the employer wants to restrict this right, then it is up to the employer to prove that the restraint is necessary to protect a legitimate business interest.

It is also important that a Non-Compete Agreement does not breach Australia's laws regarding "anti competitive" or "cartel conduct". Under the Competition and Consumer Act 2010 (Cth) ("CCA") if several businesses that operate in the same market come to some kind of agreement about how they will do business, there is a risk that this agreement could constitute conduct which is considered "anti competitive" or "cartel conduct". However, the CCA provides some exemptions for agreements between employers and employees, especially when the agreement relates to matters such as remuneration, conditions of employment, working hours or working conditions.

But a Non-Compete Agreement with Employee should still be carefully prepared to avoid any terms that could be seen as price fixing, output restrictions, market sharing, bid rigging, exclusive dealing or other conduct which substantially reduces competition in the market. Most non-compete clauses or non-compete agreements with employees do tend to focus on protecting the business's legitimate interests (such as client relationships and confidential information, or preventing the solicitation of the business's employees). However, employers should still be carefull not to include restrictions that go beyond what is reasonably necessary to protect their legitimate interests.

If a business engages in "anti competitive" or "cartel conduct" in breach of the CCA, then significant penalties could apply.

If the parties have any concerns at all about whether or not they are going to be affected by these laws, they should strongly consider obtaining legal advice. Further information is available on the website of the Australian Competition and Consumer Commission.

What can be the duration of a Non-Compete Agreement?

A Non-Compete Agreement should state how long the restrictions apply for. However, there is no mandated timeframe for a Non-Compete Agreement. It just needs to be reasonable. A Non-Compete Agreement can be struck down by a court if it is found to be unreasonably restrictive.

For example, if an employee who is a chef wants to quit their job and immediately start working for a competing restaurant that is located right next door to their current employer, this might have a negative impact on the employer's business, and it might be reasonable for the employer to try to prevent it. However, if the employee wants to immediately start working for a similar restaurant that is located in a different state, this might not affect the employer's business, so it might be unreasonable for the employer to try to prevent it. Alternatively, if 10 years after leaving the employer's restaurant, the employee starts working for a competing restaurant that is located next door to the current employer, this also might not affect the employer's business, so it might be unreasonable for the employer to try to prevent it.

Non-Compete Agreements that are unreasonable are unlikely to be enforceable under Australian law. A restraint will only be enforceable if it imposes no more restrictions than are necessary for the protection of the other party's legitimate business interests. Typical timeframes for Non-Compete Agreements range from a few months to a few years. Or the term could be related to the duration of the relationship between the parties (for example, for the duration of an employment relationship, and then for another one year after that).

When should a Non-Compete Agreement be signed with employees?

It is generally best practice to sign a Non-Compete Agreement with an employee before the employee starts work. It is usually done at the same time as signing the employment contract. However, in some cases it can be signed later in the employment relationship.

If the employer wants the employee to sign it at or near the end of the employment relationship, they may need to provide some additional compensation or benefits to encourage the employee to do so, and to ensure the agreement is valid.

What are the prerequisites of a Non-Compete Agreement?

Before signing a Non-Compete Agreement, both the employer and the employee should take the time to review it and make sure they understand it. They should also have the opportunity to obtain legal advice if required.

What has to be done once a Non-Compete Agreement is ready?

Once a Non-Compete Agreement is ready, both parties should review it and then sign it. They should both keep a signed copy for their own records.

What must a Non-Compete Agreement with Employee contain?

A Non-Compete Agreement outlines the duration of the non-competition, the geographic location where the employee must avoid competition, and the covered subjects, industries, and activities that the employee must not engage in while the Agreement is in force.

The Non-Compete Agreement contains the following essential elements:

• Parties involved -- The names and addresses of both the non-competing party (employee) and the protected party (employer).
• Duration of Agreement -- The period of time during which the employee must not compete with the employer. To be enforceable, this time period must be reasonable given each of the party's business interests. Courts are generally hesitant to limit a non-competing party's access to economic activity, so the shorter the time period, the more likely it will be enforced in court.
• Geographic range of Agreement -- The geographic area in which the employee is prohibited from engaging in competition with the employer. To be enforceable, this geographic area must be limited to the area where the employer operates and has its market. The geographic area must be as narrow as possible to reasonably meet the goals of shielding the employer from competition.
• Specific activities and subjects included in non-competition -- A thorough description of the activities and industries the employee must not engage in under this Agreement. The prohibited activities should be limited to those that are essential to the employer's business practices.
• Compensation -- Form and/or amount of compensation the employee will receive in exchange for entering into the Agreement. To be enforceable, the employee must receive some form of compensation, also known as consideration, in exchange for entering into the Agreement. This compensation can take various forms, such as a monetary payment, a promotion, or alternative benefits like stock options.

This Agreement also offers optional clauses that would prohibit the employee from behaviour such as soliciting the employer's customers and clients or inducing current employees of the protected party to leave their jobs and come work for the non-competing party.

Which laws are applicable to a Non-Compete Agreement with Employee?

Non-Compete Agreements are subject to the common law doctrine of restraint of trade.

Under this doctrine of restraint of trade, a post employment restraint will only be enforceable if it is reasonably necessary to protect the legitimate business interests of the employer (such as confidential information, client relationships/client lists, trade secrets, or business goodwill). A restraint that simply tries to restrict competition, without protecting a legitimate business interest, is unlikely to be enforceable in Australian courts.

Courts tend to approach the matter from the starting point that employees should have the right to sell their own labour (ie. they should be able to go out and find another job). If the employer wants to restrict this right, then it is up to the employer to prove that the restraint is necessary to protect a legitimate business interest.

The Competition and Consumer Act 2010 (Cth) ("CCA") also contains provisions dealing with anti-competitive or cartel conduct. Most standard non-compete agreements between employers and employees do not breach these provisions of the CCA. However, employers should still be cautious if the restraints in their agreement could have the effect of substantially reducing competition in the market.

The Australian Competition and Consumer Commission provides further information.

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