7 Things To Know About A Non-Compete Clause

June 3, 2022    Employment Lawyers
7 Things To Know About A Non-Compete Clause

A non-compete clause, also termed a restraint of trade clause, is included in contracts. Usually, these provisions are found in the sale of business agreements, employment agreements, franchise contracts, and agreements where one party can access another party's intellectual property and confidential information. This blog discusses some crucial matters regarding this type of clause.

 

A Non-Compete Clause: What Are Its Purposes?

 

Whenever two parties are involved in a specific contract and share confidential information, one party may exploit the other to obtain competitive benefits. A non-compete agreement is a non-competition agreement that formalises the two party's relationship and offers legal protection when a contract breach occurs.

 

When the non-compete clause stays valid, an employee of a company is not allowed to start any business that may help them obtain an unfair competitive advantage against the company where they were employed previously.

 

The person can obtain the advantage by using confidential information like trade secrets. A non-disclosure agreement is used to ask employees to keep confidential information private when they work for a particular company and after they leave. This information may include supplier lists.

 

While a non-competition contract addresses intellectual property and confidential information, a non-disclosure agreement specifically defines confidential information.

 

A Non-Compete Clause: How Do People Use It?

 

When employees of a company handle its daily operations, they are likely to have access to sensitive data, IP of the business, and trade secrets. In addition, companies also disclose confidential information to outsourced service providers who offer important services for active operations.

 

A non-compete agreement helps a company protect its interests by preventing any party from using this information for a negative cause and engaging in particular competitive activities.

Following are some examples where a contract may have a non-compete clause:

1. Employment Contract:

The authority may impose restrictions on senior employees employed in a managerial position, making them unable to move into future job positions in the HR industry for a temporary period. This period may be for six months.

 

2. Franchising Contract:

If there is a franchise operating a cafe business, it will not be able to open a cafe within two kilometres of the franchise's original location.

 

3. Sale of Business Contract:

If a vendor of an accounting firm wants to open a new accounting firm after the sale of their business, they can only do it once three months have passed since the sale.

 

4. Manufacturer Contract:

When a manufacturer is employed in a food production firm, they are not allowed to produce similar products for other companies.

 

A Non-Compete Clause: Possible Restricted or Competitive Activities

Activities that are restricted are as follows:

5. Non-Compete:

Under a non-compete clause in Australia, a party cannot run into competition with another party. We have already discussed this clause.

 

6. Non-solicitation:

According to this clause, a party cannot solicit individuals and businesses that might have had a relationship with the company previously. This clause is usually applicable to customers or clients.

 

7. Recruitment:

While this clause is similar to the previously discussed clause, it is mostly about internal soliciting. Under this clause, a party cannot solicit important people like managers or senior employees of a business.

 

A Non-Compete Clause: Things To Do Before Inserting It

 

Before you insert a non-compete clause, you must define the specific business areas you want to protect as an employer. You can review multiple options and formats to draft a clause. In the final step, get the agreement checked by one of the top employment lawyers in Australia.

Keep in mind some important tips regarding the following aspects of a non-compete agreement:

 

Confidential information:

  • Find out the specific types of sensitive information that have protection.
  • Identify the information that may not be considered confidential.
  • Regarding protecting the proprietary information, you have to think about the obligations you are bound to.
  • Check whether any confidential information needs to be disclosed.
  • Evaluate the types of circumstances that may result in a conflict of interest.
  • Also, do not forget to think about information on the ownership of the concepts developed during the employment period.

Remedies:

  • Determine how you will settle issues if anything like a conflict of interest arises.
  • Check what remedies will be available to the party who has sustained injuries. Also, consider the limitations of these remedies.

Notice:

  • If any agreement breach occurs, you will be required to send a notice outlining the responsibilities. You have to set specific guidelines in this regard.

Incorporation:

  • If you do not include the non-compete agreement in the employment contract, you have to emphasise the language of incorporation.

 

A Non-Compete Clause: Enforcing It

 

When assessing a non-compete agreement, the court will check whether it is reasonable. They will only enforce it when their assessment confirms the clause's reasonability. They may consider three principal factors, including:

  • The activities that the clause wants to restrain.
  • The geographic region where the clause is applicable, and
  • Specified period for which the provision stays applicable.

 

While imposing the restrictions, the court will consider the party's business interests that want to enforce the non-compete clause. While enforcing it, another thing that is checked is whether the clause protects a genuine and valuable interest.

 

For example, if you want to enforce this clause, you have to prove that the clause has such an interest. It means that you have to prove the importance of the restrictions. Commercial interests that may be protected include:

  • IP
  • Confidential information
  • Trade secrets
  • Know-how
  • Goodwill

We have discussed preparing a non-compete agreement in the following section.

 

A Non-Compete Clause: How to Write It?

 

When hiring a professional for a non-compete agreement, you have to consider a few things. While drafting it, make sure you keep the following factors in mind.

Keep The Restrictions Reasonable:

We have already stated this condition. You must mention in the agreement the period for which the restrictions will be imposed on your ex-employees. Also, do not forget to take the geographical restrictions into account.

 

Consider The Industry:

You may offer industry-specific training to your staff or provide access to your confidential business information like trade secrets. In that case, it will be necessary to consider drafting a non-compete agreement. It is because when one of your employees opens a business, their employees may use those trade secrets, thus gaining a competitive advantage over you.

 

Contracts Should Have Consideration:

You may find it challenging to ask one of your current employees to sign a non-compete agreement without providing them with any compensation. It may be in the form of additional vacation days or a bonus.

 

Avoid Providing Anything Vague:

You must be specific when drafting your non-compete agreement. Remember that the court will not want to uphold any vague or broad restrictions.

 

Ensure The Non-Compete Is Necessary:

A non-compete agreement is used to protect business interests. If any former employee challenges it, the court may ask you to clarify key reasons.

 

You must provide essential information about both the parties involved. For example, when you sign in with one of your employees, do not forget to include information about their job. When you give these details, the court will understand why imposing restrictions on the other party will be necessary.

 

You may consider the following factors to determine the importance of a non-compete agreement:

  • Specific activities you want to prevent the party from carrying out
  • The period for which you want the party not to carry out such activities
  • Whether you want the specific party not to undertake such activities within a particular geographic region or throughout the world
  • Whether the geographic areas are reasonable to protect your business interests
  • The specific interest you want to protect with this non-compete agreement
  • Make sure the other party understands that the interests need adequate protection

 

You also have the option to incorporate a non-solicitation clause. Sometimes an employee may want to induce other contractors and employees to leave your company and work for another competing business.

 

But, when you have a non-solicitation clause, you have adequate protection against this type of breach. In addition to you, one witness may also sign the agreement. Remember that your non-compete agreement must be customised to your region and circumstances.

 

A Non-Compete Agreement: How Effective Is It?

 

You have to keep in mind that the courts will not enforce a non-compete clause if they find that:

  • The effect can cause significant harm to the general public economy.
  • The restriction will prevent the employee from finding a similar job in another company.
  • There is a broader range of scope.
  • The clause involves an unreasonable geographic area or time restrictions.

 

You may take a telecom service works as an example who has signed an employment contract with the company that prevents them from getting a job in a competing company for a specific period.

 

In that case, the court may treat this restriction as reasonable if it is for a top-level executive who can access plenty of confidential information about the company, including financial information and business plans.

 

However, if the telecom company restricts that employee to prevent them from working in the entire industry, the court will not deem the restriction reasonable.

 

Courts usually treat a non-compete agreement as a legally bound document. When the contract is neither too restricting nor too broad, a judge is likely to uphold the contract.

 

Why Us?

 

When it comes to preparing a non compete clause fair work, it is important to contact a professional lawyer who can check all the terms and conditions and give valuable advice.

 

Employment Lawyers Perth WA is a top-rated law firm in Western Australia that has been serving many clients over a long period. For any help, you may approach them.

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