The Competition Review will consider non-compete and related clauses within employment contracts, expected to restrict employees from switching to better-paying jobs or hindering job mobility and innovation.

What is a non-compete clause?

A non-compete clause within an employment contract prevents employees from working for a competing company or establishing their own competing business within a geographical area and for a period of time after the employee ceases employment.

Not all employers include a non-compete clause employment contracts, however there are certain industries where it is  common practice (i.e. legal, technological, or scientific).

Non-compete clauses are just one type of restraint of trade clauses. Other restraint of trade clauses includes client or co-worker non-solicitation and non-disclosure clauses. These clauses restrict what an employee can do with the relationships they have built during their employment and how confidential information obtained on the job can be used.

Example clause

Below is an edited version of a post-employment restraint clause the subject of consideration by the Supreme Court of Victoria (‘VSC’) in the 2002 case of Hartleys Ltd v Martin [2002] VSC 301. In this case, the plaintiff (Hartleys) sought injunctions against the former employee (Martin) for breach of contract.

Ultimately, the VSC determined the clause was suitable for the business’s legitimate interests and the injunction was granted.

Are all non-compete clauses valid?

Non-compete clauses are not subject to general controls on restrictive trade practices imposed by Part IV of the Competition and Consumer Act 2010. This is due to the exception in s51(2)(b) but the common law doctrine of restraint of trade can still apply. Under this doctrine, any undue restriction on a person’s capacity to engage in trade can be treated as invalid, even if the restriction has been accepted freely. A non-compete clause may be presumed to be unenforceable unless the employer can establish the clause is reasonable at the time the clause was agreed to. For reasonableness to occur, two elements must be present: first, the employer must show there is a legitimate interest in imposing the restraint and the scope of the restraint must be reasonably necessary.

A non-compete clause cannot be imposed merely to protect a business from competition from an ex-employee or to prevent a valuable employee from being employed by someone else.

Restraint, however, can be imposed where either:

• An employee has access to confidential information which goes beyond mere ‘know-how’ and that employee may be in a position to use that knowledge to the detriment of the employer; or
• An employee’s work involves contact with the employer’s customers and that contact may be used to entice those customers away to competing businesses.

Where an employer has a legitimate interest to protect, there must also be reasonability in its scope. For this, there must be three key elements: the duration of the restraint, the area which it is to have effect and the nature of the activities that are sought to be controlled. If a non-compete clause is too ambiguous, a court will prefer an interpretation that narrows its operation.

At common law, non-compete clauses are presumed to be against public interest and are therefore unenforceable unless it is reasonably necessary to protect an employer’s interests. To enforce a non-compete clause, employers will need to seek an injunction before the courts. Employers may first apply for an ‘interlocutory’ or an ‘interim’ injunction, pending a full trial of the claim. Only in rare circumstances, will such matters go to trial as the matters are usually settled with the interim order.