What is a non-compete restraint?

A business is entitled protect its goodwill by preventing staff from dealing with its customers after their end of the period of service. On the other hand, a former employee can’t be prevented from earning a living and is generally entitled to compete with its former employer.

Thus there are two competing considerations. In fact, any “restraint of trade” is illegal unless it is for the bona fide projection of goodwill arising out of  employment or similar situation.

The courts have adjudicated many employment agreement “restraint of trade” or “non-compete” clauses over the years have been struck down for being unduly restrictive. What are the elements of a valid binding “non-compete” clause.

Click here to see an example of far too wide geographical area in a non-compete covenant.

An agreement not to solicit directly or indirectly or be engaged on behalf of the employer’s customers for a number of years (depending on the type of business) is usually reasonable and enforceable.

Likewise an agreement not to set up shop within a particular distance of the employer’s premises for a number of years, is also usually reasonable and enforceable. The distance (expressed as a radius) is dependent on the nature of the particular business. For a café, a distance beyond 1 km might be regarded as unduly restrictive and therefore void. However for a dentist, a distance of 10 km radius might be considered reasonable.

A carefully drafted non-compete clause can include an enforceable and worthwhile covenant that is not in danger of being struck down and can confidently be relied on even to prevent – by injunction – former employees from breaching their clear obligations.

An employment agreement with appropriate non-competition and confidentiality clauses definitely adds value to your business.

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Last updated: 29 January 2020