What is a Non-Compete Agreement?
A Non-Compete Agreement is a formalised agreement commonly made between an employee and employer where the employee agrees to not enter into competition with the employer when they leave the company.
By signing a Non-Compete Agreement, an employee agrees not to work for a competitor during their current employment or after their employment ends, within certain limitations.
You can create a Non-Compete Agreement for several different arrangement types, including:
- Employment/Service: a non-compete for an employee or contractor
- Purchase/Sale: a non-compete for commercial negotiation
- Invention: a non-compete for the disclosure of intellectual property
What is the purpose of a Non-Compete Agreement?
Whenever two parties share sensitive information, there is potential for one party to exploit the other to gain a competitive advantage. This no competition agreement formalises the relationship and provides legal remedies in the event of a contract breach.
During the time indicated in the non-compete clause, the employee is prohibited from markets or starting businesses that might cause the employee to gain an unfair competitive advantage against their former employer. The employee might gain an advantage by exploiting trade secrets or other confidential information.
A Non-Disclosure Agreement asks employees to keep sensitive information, such as supplier lists, private while they work for a company and potentially indefinitely after they have left. Although a Non-Competition addresses confidential information and intellectual property, a Non-Disclosure Agreement is more specific when defining what constitutes confidential information.
How do you write a non-compete clause?
If you are hiring someone with a Non-Compete Agreement, there are a few things to consider. When crafting a non-compete clause, keep the following in mind:
- Keep your restrictions reasonable: Be reasonable with your restrictions and how long you hold your ex-employees to them. Consider reasonable geographical restrictions in your clause.
- Consider your industry: Will you provide industry-specific training to your employees or give them access to trade secrets that would give their future employees an advantage? If not, there might not be grounds for a non-compete.
- Contracts should offer consideration: Are you offering something (such as an Employment Contract) in exchange for signing a non-compete? It may be difficult to ask a current employee to sign this contract without providing some form of compensation, such as a bonus or additional vacation days.
- Avoid ambiguity: Vague clauses are difficult to uphold. Be specific when creating your non-compete. It’s unlikely that a court will uphold broad, vague restrictions.
- Make sure it is necessary: Non-Compete Agreements are meant to protect businesses. The court might ask a company why a clause is necessary for its protection if a former employee challenges the non-compete.
Provide information on both you (the organization/individual) and the other party, including details like a specific job description. These details should make it clear why it is reasonable for the other party to have restrictions.
Decide the terms of your non-compete clause, including:
- The length of the restrictions
- Where the employee is restricted from competing
You can also choose to insert a non-solicitation clause. A non-solicitation agreement prevents the employee from inducing other employees or contractors from leaving the employer to work in a competing business or from interfering with the employer's relationship with other employees in general. This means that the employee cannot invite the employer's staff to move to another workplace.
You and the other party must sign the agreement. You might also wish to have a witness sign the document.
Complete LawDepot’s template to finalise a non-compete clause in Australia. Your Non-Compete Agreement is customised for your circumstances and region.
How effective is a Non-Compete Agreement?
Courts may not enforce a non-compete clause if:
- the effect could be harmful to the public (if it restricts commerce and depresses the local economy)
- the scope is broader than necessary to protect the employer
- the restriction would cause undue hardship on the employee (too difficult for the employee to find a new job)
- the agreement has unreasonable time or geographic restrictions
For example, consider a worker at a telecom provider. The company includes a clause in the Employment Contract> that restricts the employee from working for a competing provider for a certain amount of time. Courts may consider the restriction reasonable for a top-level executive with access to lots of information about the company, such as business plans or financial information. However, even in that case, courts may consider it unreasonable if the contract completely restricts working in the telecom industry if the employee leaves the company.
However, courts generally consider a non-compete to be a legally binding document. A judge should uphold the contract, as long as it isn’t too broad or restricting.
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