What is a non-compete restraint?

A non-compete restraint is a contractual clause designed to protect a business's interests by limiting a former employee’s ability to work for competitors, set up competing businesses, or solicit customers after leaving employment. In Queensland, these clauses are commonly included in employment agreements and must be carefully drafted to ensure they are enforceable under Australian law. If a non-compete restraint is found to be overly restrictive, it may be struck down by the courts.

This guide outlines the key elements of an enforceable non-compete clause and explains how such clauses can be tailored to protect a business's goodwill without infringing on a former employee’s right to earn a living.

What is a Non-Compete Restraint?

A non-compete restraint allows a business to protect its goodwill by restricting former employees from engaging in competing activities once their employment ends. On the other hand, Queensland law recognizes that employees must be able to earn a living. Striking a balance between these two considerations is critical for a valid non-compete clause.

In fact, under Queensland law, any restraint of trade clause is considered illegal unless it is genuinely designed to protect the goodwill or legitimate interests arising from the employment relationship. For this reason, non-compete clauses must be carefully crafted to ensure they are enforceable.

Key Elements of an Enforceable Non-Compete Clause

In Queensland, courts carefully scrutinize non-compete clauses and will only enforce them if they are reasonable and necessary to protect the business's legitimate interests. The following elements must be carefully considered:

1. Protection of Goodwill and Legitimate Interests

   • The clause must be aimed at protecting the business's goodwill, such as its relationships with customers, confidential business information, and proprietary methods. Without a legitimate interest to protect, the clause will be invalid.

2. Reasonable Geographical Limits

   • The geographical scope of the non-compete restraint must be reasonable in relation to the business’s operations. For instance:
     • A restraint preventing a café employee from opening a competing café within a 1 km radius may be considered reasonable.
     • In contrast, for professionals such as dentists or accountants, a 10 km restraint may be justified.
   • A clause that covers too wide an area is likely to be struck down as unenforceable.

   Click here to see an example where the geographical scope of a non-compete clause was too broad.

3. Reasonable Time Limits

   • The duration of the non-compete restraint must also be reasonable. Depending on the industry, courts may enforce restraints for a period ranging from six months to two years. Longer restraints are scrutinized closely and may be deemed unenforceable if considered excessive.

4. Non-Solicitation of Clients

   • A non-solicitation clause may prevent a former employee from soliciting or servicing clients of the employer after leaving. This can include:
     • Direct or indirect solicitation of clients or customers
     • Engaging in business dealings with clients of the former employer
   • Non-solicitation clauses are typically viewed as more enforceable because they are narrower in scope than full non-compete clauses.

Court Considerations and Validity of Non-Compete Clauses

Queensland courts evaluate non-compete clauses based on their reasonableness and necessity. The court's primary considerations include:

• Nature of the Business: The broader the business's market, the wider the geographical area a non-compete clause may cover.
• Duration of the Restraint: Shorter time periods (six months to two years) are more likely to be enforced.
• Employee’s Role: Senior employees with access to sensitive information and key clients may be subject to stricter restraints compared to junior employees.
• Tailored Restrictions: The clause should be specifically tailored to the business’s needs, rather than being a blanket restriction that applies to all employees.

A carefully drafted non-compete clause will provide a business with the necessary legal protection without infringing on the employee’s rights. Employers can confidently rely on these clauses to prevent former employees from unfairly competing or using business secrets after leaving.

Why Include a Non-Compete Clause?

Including a non-compete clause in an employment agreement is essential for any business looking to protect its competitive edge. Such clauses can:

• Safeguard the business’s relationships with clients
• Protect proprietary information and trade secrets
• Prevent unfair competition
• Add value to the business, making it more attractive to investors or potential buyers

However, to ensure enforceability, these clauses must be carefully drafted to reflect the specific nature of the business and be proportionate in scope.

Conclusion

A well-drafted non-compete restraint allows businesses to protect their goodwill and intellectual property while maintaining compliance with Queensland’s legal standards. By ensuring the clause is reasonable in both geographical and time constraints, and carefully tailored to the business’s needs, employers can safeguard their interests while complying with the law.

Consult a legal expert to ensure your non-compete clauses are enforceable and aligned with both Queensland and Australian federal law.