'A person can't often be restrained from earning a living in a job or any industry where they've developed significant skills and experience'
A recent survey found that one-half of Australia's workforce is covered by some form of post-employment restraint.
Broken down, 22% are subject to a non-compete clause, while another 26% are under a non-disclosure of confidential information agreement.
There are also employees who said they signed agreements that restricted poaching of clients (16%) and co-workers (7%), according to analysis from E61 Institute of a McKinnon survey among 3,000 respondents.
But non-compete clauses can be a technical and tricky area of law, according to Victoria Quayle, senior associate in Coleman Greig Lawyers’ employment team, because the starting point is that restraints of trade are not enforceable.
“They are only enforceable in certain circumstances,” she said.
“In New South Wales we've got this Restraint of Trade Act and they will only be enforced to the extent that they do not go against public policy. So in New South Wales and elsewhere, a person can't often be restrained from earning a living in a job or any industry where they've developed significant skills and experience. But that aspect has to be balanced with what's called the legitimate business interests of the employer.
“So [restraints of trade] are only enforceable to the extent that they are reasonable. And what is reasonable is the protection of the business interests of the employer.”
What is a non-compete clause?
When an employee is offered a job, their employment contract may include a non-compete clause. This clause in a contract is a type of restraint which seeks to continue an employee's obligations to their employer after the employment ends, Quayle told HRD Australia.
“They try to limit the employee from competing with their former employer after the employment has finished and during the employment.”
The McKinnon survey shows how popular these clauses are — and that’s especially true when it comes to more senior employees, she said.
“The purpose of the non-compete clauses is to protect business interests of the employer, such as intellectual property, confidential information, and it's goodwill,” she said. “And more senior employees are more likely to be dealing with those things. If, and when, those employees leave the employer, they are the sorts of people that would have an unfair advantage if they were to start competing with their former employer because they have had access to those things.”
For example, these senior leaders have often had very close relationships with customers and know all about the business relationships, Quayle said.
“Very senior people will often be the face of the company so it would be unfair to the employer to allow that employee to leave having acquired all those things, which are considered the employer’s property and then to compete,” she said.
Limits of non-compete clauses
The key starting point for employees is the employment contract, Quayle said.
“If there's a restraint in that employee’s contract, you look at that clause. And if, say, a court looks at that clause, it considers whether that restraint is reasonable in protecting the employers’ interests. And if it is reasonable, it will uphold the restraint and it will be enforceable. But if it goes further, or if it's not reasonable, then it won't be enforced.”
In 2021, two employees received a hefty penalty from the Equity Division of the Supreme Court of New South Wales after establishing a competing business while still working for their employer.
Non-compete clauses are often limited where an employee may be prevented from working for a period of, say, three, six or 12 months, she said. And they’re often limited by location as well.
“It could be Australia, New South Wales, the world,” Quayle said. “But often the narrower locations are more likely to be enforceable. Because preventing me from working internationally is going to be unreasonable in 99% of the circumstances.”
These clauses are also more likely to be enforceable when it comes to the particular area of work.
“[Employers] often say ‘You can't work for 12 months in Sydney, in this particular area or for these group of companies’,” she said. “And it's often a similar industry as the former employers. So they're limited in this way. And the more you limit them in those clauses, the more likely I think it is that a court will find that that is reasonable.”
How HR leaders should respond to a possible breach
For HR teams, the contract document is really important, Quayle said.
“[It’s about] ensuring that those restraint clauses have been tailored to your organisation and the particular things that you're trying to protect,” she said. “For most companies, that'll be confidential information. And that your confidentiality clause is as good as it can possibly be and the term ‘confidential information’ is properly defined.”
While this relates to the beginning of the employment, Quayle added that HR teams should also have some sort of rigor around when employees leave.
“For instance, ensuring you have got a good exit interview and checklist,” she said. “Ensuring that they've returned all of the company property, which would include confidential information.”
If an HR team member suspects that an employee is acting in breach of their non-compete clause, they should seek legal advice, Quayle said.
“These sorts of things can often be resolved early,” she said. “What we’d usually do is we’d write to the former employee, outlining the breach of the restraint and seek that they enter into some undertaking that they will not breach the restraint and they will continue to comply with their contract because they are bound. And it often resolves at that point.
“If it doesn't, it can end up – if the employer wants to pursue it – in the Supreme Court, which is a very urgent application and so it's expensive for everyone. And no one really wants that outcome, which is why it often resolves at that first letter.”
