What are non-compete clauses and how do they work? We will tell you as well as the biggest risk of using them!
Non-complete clauses in the contract. What are they? And how do they work? Well, stick around and I’ll tell you.
Hi, I’m Simon from The Contract Company. Contracts for Australian businesses, that’s what we do, all day, every day and sometimes overnight, lucky us.
What Non-Compete Clauses Mean
A non-compete clause is an agreement between two parties wherein one party agrees to not be employed or engage in a similar business of the other party nor poach/steal the other party’s clients or staff for a defined period of time.
Well, a non-compete clause, is a contractual clause that parties agree to, where one party agrees not to do certain things in the future.
Let’s use an easy example. Let’s say you, as an employer run a software development business, and you hire a gun software developer. You may want to try and restrain or stop that software developer, from using knowledge and skills that they gain working for you, with someone else [in a similar business].
So in other words, let’s say, they’re developing a banking application, you may wanna stop them, using those skills that they’ve developed in relation to that banking application with other businesses, in the future.
So non-compete clauses, usually have two elements. Usually, there’s a component, that stops them or restrains them from being engaged with businesses, who are the same as your business.
And the second element usually, is they have what’s called, a non-solicitation clause, which basically says, “That they won’t try and poach your current staff “or staff that have been engaged in the business “for say a year.” Or perhaps a clause that they won’t also try and poach your current clients.
2 Elements of a Non-Compete Clause
So that’s usually when they have two components, (1) stop them doing certain things [for similar businesses] in the future. Secondly, stop them poaching or stealing your clients, or your employees.
Now the issue with non-compete clauses are, you’d be thinking maybe, “Great, we’ll stitch everyone up “with the non-compete clause.” Doesn’t work like that.
If your clause is too unreasonable, and then it’ll be found to be invalid. So the real skill with non-compete clauses, is to make them sufficiently broad to protect you, but not too broad to be invalid.
In other words, well, the things they take into account when determining if it’s too broad, is the geographical area. So, are you trying to stop someone in all of Australia, or just New South Wales, or just Sydney.
What is the restraint conduct? How broad is that defined? And have you specified the restrained businesses, that they can’t be involved with?
So, the broader the clause is, the better it sounds for the employer. But, the more likely they are to be invalid.
So you gotta be very careful with them. Anyway, that’s the quick and dirty on non-compete clauses, I hope that helps.
If you have any questions, please don’t hesitate to contact us, simon#contractcompany.com.au, or call 1900-355-455.