Malcolm ZoppiSun Oct 15 2023

Non-Compete Clauses: Enforceability + Benefits

How To Protect Your Business Using Non-Compete Clauses.

What is an Employment Contract?

Employment contracts set out the terms and conditions of the employee’s professional relationship with the company and the employer.

The contract must include the following information:

– the employee’s job title and description

– the starting date of the employment relationship

– the employee’s wage/salary/compensation

– the hours/commitments of work

– the date on which the employee’s wage or salary will be paid

– the employee’s entitlement to paid holidays

– the employee’s entitlement to paid sick leave

– any other benefits the employee is entitled to, such as health insurance or a pension

– the length of the employment contract, if it is not indefinite

– the procedures for ending the employment relationship

How Can Employment Contracts Benefit an Employer?

The use of employment contracts can benefit employers in a number of ways. Firstly, employment contracts can help to minimise any misunderstandings and prevent any unwanted consequences from occurring.

This is because the contract will explain what exactly the employee’s commitment to their contracted work, duties and obligations are.  

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Moreover, such contracts protect the employers from disputes arising after the employment relationship ends. This can happen due to the contract incorporating a clear procedure for termination of employment, or incorporating a non-compete clause.

What is a Non-Compete Clause?

A non-compete clause is a clause in an employment contract that prohibits an employee from working with a direct competitor or setting up a company in competition with their previous employer. This is usually for a specified time frame and within a certain distance from the employer’s base. For example, if the employee agrees that for a period of two years after the termination of their employment, they will not compete in any way with the company, then they must get written consent from their previous employer to go against this. Instead, the legality of a non-competition clause will depend on the particular facts and circumstances of the case. In order to be effective, a non-competition clause must be reasonable in terms of the scope of the restriction and the duration of the restriction, that means that there are certain rules that need to be followed:

1.    It must protect a legitimate interest of the business, without unreasonably preventing competition within the industry. To do this the clause must be able to show that:

a.    What the clause is trying to protect is an advantage or asset inherent to the business that may be regarded as property of the business

b.    If the ex-employee was to use the property for their own benefit, it would be unfair to their previous employer. This can apply even if the ex-employee contributed to the creation of it.

2.    The extent of restriction of the non-compete clause must not go further than reasonably necessary to protect that interest. To be deemed reasonable, two key elements must be satisfied:

a.    The scope or duration / geographical limitations of this restriction is fair given the nature of the interest; and

b.    The drafting is tailored to the individual’s employment situation and must be reviewed regularly.

Therefore, each draft of a non-compete clause must be independent and case-specific.

What does “reasonably necessary” mean?

There are four main components that determine whether your non-compete clause is “reasonable” in nature:

–      Whether it is a “business interest”,

–      It’s duration,

–      The geographical limitation,

–      The specific employee situation.

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Is it a “Business Interest”?

–      Trade relationships are a business interest. This includes professional relationship between a business’s customers and their employees.

–      Business interest can also include confidential information and/or trade secrets.

Is the Duration of the Non-Compete Clause Appropriate?

–      To be deemed as reasonable, it means that the length of time which the employee cannot compete with their previous employer cannot extend further than the date on which the employee could harm the employer’s business.

Is the Geographical Limitation Appropriate?

–      To be reasonable, the extent of the geographic restriction must have a functional correspondence with the legitimate interest to be protected. For example, a worldwide restriction would not be reasonable for a business that only operations in Nottingham. However, for that same business it would be reasonable to put the restriction on Nottingham only.

What was the “Employee Situation”?

The employee situation is essential to the legitimacy of the restrictive covenant, as the level of knowledge / access to sensitive or confidential information will differ amongst the staff. For instance, a non-compete clause for a senior employee, who has access to various clients of the company and knows its trade secrets will be more restrictive than a first-week intern’s. The extent of restrictions must be fair and proportionate to the employee. To assess a non compete clause for your employee, you should ask questions such as: What were the duties of the employee? Were they onerous?

How can Non-Compete Clauses Benefit an Employer?

During the course of an individual’s employment they, naturally, will learn and hold various sensitive information regarding the business. Non-compete clauses can therefore be used as mechanisms to stop former employees from sharing said confidential information with competing businesses, in turn protection the company’s interests. For instance, trade secrets or market information of the original company, that may lead to lucrative dealings, cannot be shared to competitors.

In addition, non-compete clauses also diminish the level of competition with a specific market, as former staff members may not be able to start their own business after leaving the employer.

Moreover, non-compete clauses can also help employers enforce their intellectual property rights. For example, let us imagine an employee creating a product for a company he is employed at. Then, such work is copyrighted or trademarked. If the employee then departs from the company, the employer may be able to prevent the employee from using that work in competition against the company.

Finally, non-compete clauses can help employers maintain control over their workforce. By preventing employees from working for competing businesses, employers can limit the ability of their former employees to poach their current employees. This subsequently will minimise staff turnover, thus, ensuring the maintenance of a stable workforce. This stability will lower hiring process costs and help ensure a more cohesive and attractive working environment.

Conclusion

In essence, employment contracts and non-compete clauses are essential to protecting any employers’ interests. They both ensure that their staff members operate in a manner that is appropriate to the duties they have been tasked with, and protect the employers from litigation, increase in costs and loss of possible revenue.

However, non-compete clauses are not the only contractual instruments that may be used to protect your interests! Book a free consultation with GZ Legal to hear about other ways to protect you and your business! Let us put your mind at ease.

Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.

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Get the specialist support you need

Whether you require specialised knowledge for your business or personal affairs, Gaffney Zoppi can support you.