What is a Non-Compete Agreement?
A non-compete agreement is a legal clause preventing an employee from competing with their employer after leaving the company. It also prohibits disclosing proprietary information or trade secrets to others during or after employment.
These agreements often specify a time frame during which the employee cannot work for a competitor after employment ends. Employers use non-compete agreements to protect their market position. Employees, contractors, and consultants may be required to sign them.
Key points:
- A non-compete legally restricts competition with an employer after employment ends.
- Employees must not disclose trade secrets.
- These agreements define the duration, geographic limits, or market restrictions.
- They can limit job opportunities in the employee’s field after leaving the company.
How a Non-Compete Agreement Works
Non-compete agreements are executed at the outset of the employer-employee relationship, granting the employer authority over specific actions of the employee, extending this control even beyond the termination of that association.
These agreements contain explicit clauses barring the employee from joining a competitor after their employment concludes, irrespective of whether the separation is due to termination or resignation. At times, these agreements even restrict employees from joining competitors, regardless of their role not involving the disclosure of trade secrets.
Contractual stipulations might include the duration of the employee’s commitment to the non-compete agreement, geographical limitations post-employment, or the specific market in which they can seek work. These agreements might also be referred to as a “covenant not to compete” or a “restrictive covenant.”
Non-compete agreements aim to prevent employees from leveraging insider knowledge to initiate a competing business post-employment, securing the employer’s standing within the market.
Components of a Non-Compete Agreement
Non-compete agreements lack standardisation, yet they often share similar restrictive elements. Components commonly found in these agreements include the following.
Duration
Specifying time frames, such as six months or one year, within which the agreement remains active. Prolonged durations can severely limit an employee’s ability to secure new employment post-departure.
Geography
Some agreements account for geographical limitations, barring former employees from working in specific areas for a designated period.
Scope
Non-compete agreements delineate the nature of work or services prohibited for ex-employees, encompassing unique business information, methodologies, processes, and proprietary practices.
Competitors
While not exhaustive, these agreements define the competitive landscape within which the employee is restricted, providing a general overview of industries or businesses off-limits to them.
Damages
Employers outline the damages they can seek in case of a breach, specifying the compensation entitled to them if the employee violates the agreement.
Some employment law solicitors note that Australian common law and the Competition and Consumer Act 2010 (Cth) guide employers with how to structure their non-compete provisions.
When and Why to Use a Non-Compete Agreement
Businesses leverage non-compete agreements to safeguard their intellectual property, trade secrets, proprietary methodologies used in their product or service creation, or to uphold their competitive edge.
Without contractual safeguards concerning information dissemination to rivals, numerous businesses risk losing their competitive edge. Former employees could lawfully apply knowledge acquired from one employer to benefit a new one. Furthermore, ex-employees might potentially apply when they learned at a former employer to build their own business .
Should such information reach competitors, a company’s position within the market and industry could be jeopardised, thus rendering non-compete agreements an indispensable facet of the hiring procedures for many enterprises.
Industries Where Non-Compete Agreements are Used
Non-compete agreements are prevalent in the media industry. For instance, a television network may hold valid apprehensions that a highly regarded meteorologist could attract viewers to a competing station within the same region. This scenario is often deemed reasonable grounds for implementing a non-compete agreement across most jurisdictions. Other sectors where these agreements are commonly encountered encompass:
- Financial services
- Corporate management
- Manufacturing sector
- Information technology
Legalities
Non-compete agreements have been a contentious issue in Australia.
A study of former workers, administered by the e61 Institute, revealed that up to 50 per cent of them were given some job-hunting restrictions after stepping down. Another 22 per cent see non-compete clauses as a hurdle to finding work in other companies that may not be direct competitors of the one they just left.
In March 2023, Assistant Competition, Charities, and Treasury Minister the Hon Andrew Leigh sought the ACCC’s advice on the actual competition impact of non-competes to further guide the government’s response if possible. He postulated that the presence of non-compete and “no-poach” labour protocols may have hampered an employee’s chance to go for more lucrative job opportunities, citing wage data from November 2022 stating that when accounted for inflation, Australians earned only $18 more a week than they used to ten years before.
A May 2023 short survey by the ABS on restraint clauses found 46.9 per cent of Australian employers as having used certain combinations of restraint-of-trade clauses in their labour contracts. When categorised by types used, the survey tagged non-compete clauses at 20.8 per cent overall, behind non-soliciting clients (25.4 per cent) and non-disclosure clauses (45.3 per cent).
Minister Leigh’s consultation with the ACCC later led the federal government to unveil the Working Future Employment White Paper Roadmap, which aims to further address the problem. An Issues Paper by the Competition Review also sought public feedback on how the government should treat non-compete clauses or agreements going forward, with the public submissions closing on 31 May 2024.
Solicitors in Australia are also observing the US Federal Trade Commission’s April 2024 implementation of a nationwide ban on non-competes within an industry – the Final Non-Compete Clause Rule – on whether the Australian government can pick up pointers from it to structure similar measures.
Non-Compete vs. Non-Disclosure
Some may easily confuse non-comps with non-disclosure agreements (NDAs), but there are stark differences.
While NDAs typically don’t inhibit an employee from joining a competitor, they aim to restrict the disclosure of specific information deemed proprietary or confidential by the employer, like client rosters, core technology details, or data regarding ongoing product developments.
Pros and Cons of Non-Compete Agreements
There is much to weigh in when drafting a non-compete clause for your business.
Pros
Safeguarding trade secrets
These agreements shield employers against employees departing for rivals and disclosing proprietary information. Nonetheless, fairness should underpin these agreements, considering both the signing employee and the issuing employer.
Encouraging innovation
Non-compete agreements constrain the spread of ideas and information, fostering a competitive drive among businesses to innovate and stay ahead.
Facilitating employment alignment
Non-compete agreements aid in aligning employers with employees committed to staying in their roles or valuing trust with critical information.
Curbing workforce turnover
Implementing non-competes tends to limit alternative job options for employees, potentially reducing turnover. However, businesses relying on non-competes may need to invest in employee training and development, which benefits their professional growth and marketability.
Cons
Diminishing employee negotiation power
Employees under non-competes may find it challenging to seek better-paying roles or negotiate for improved compensation and benefits.
Lengthy job search period
Wait periods in non-compete agreements might hinder departing employees from swiftly securing meaningful employment within their specialised fields. This delay could even compel individuals to exit their industry entirely due to job scarcity post-agreement.
Limited social benefits
Non-competes typically favour the company’s interests, providing minimal social advantages for employees.
FAQs
What’s the effectivity term?
Typical durations for non-compete clauses range from six months to a year, though they can extend beyond this timeframe. Nevertheless, legally enforcing long-term non-compete agreements poses challenges for businesses. Some states refuse to uphold such agreements, considering them legally void.
Are There Workarounds?
Should an individual violate a non-compete agreement they’ve signed, there exists the potential for legal repercussions. The enforceability of these agreements is subject to varying state and territorial laws.
Are Non-Competes Truly Enforceable?
The legality and enforceability of non-compete agreements vary across Australian states and territories. NSW, in particular, uses its Restraints of Trade Act 1976 to stop enforcement of non-competes if they only aim to suppress competition and not protect a business interest.
However, stranger things have happened:
In 2012, the Queensland Supreme Court heard travel insurer AGA Assurance’s non-compete case against Ms Carole Tokody. The record stated that Tokody tendered her immediate resignation on 18 July 2011 after 11 years with the company, to join a competitor company she did not indicate. She officially left the company four days later and started at Cover-More Travel Insurance on October 24 that year – to the surprise of AGA management.
The problem was AGA rules required departees to tender three months’ notice, and their restraint agreements included a one-year non-compete after leaving.
The breadth of Tokody’s AGA experience as chief sales officer included working with clients that have several years’ contract durations and detailed access to sensitive information. She stressed that the restraint rules in her exit documents had the non-compete effective until January 22, 2012 – but a look at her LinkedIn profile states her CSO role was done in October 2011 – three months after she officially left. The Court ruled that AGA’s one-year non-compete term was sufficient to protect the company, and she was ordered not to work with Cover-More until 22 October 2012. Ms Tokody eventually moved on to open her own travel insurance provider, Crisis Cover.
Conclusion
A non-compete agreement or clause for a departing employee may be a chance for them to explore other career avenues. Depending on the terms listed, it will give them time to recharge before possibly attempting another run in their prime industry.
DISCLAIMER: This article is for informational purposes only and does not replace official business legal advice. AVANTE PARTNERS has no relationships with any company or individual mentioned. Please consult your corporate solicitor.
