Small and medium-sized businesses often rely on non-compete clauses to protect their competitive edge when employees leave. However, Australian courts take a cautious approach to these clauses, balancing employers’ interests with employees’ rights to earn a living. Knowing this, is it worthwhile including a non-compete clause in an employment contract? 

What is a non-compete clause?

A non-compete clause, also known as a restraint of trade clause, is a contractual provision that restricts an employee from engaging in certain competitive activities after their employment ends. These clauses are designed to:

• Protect confidential information and trade secrets.
• Safeguard customer relationships.
• Prevent employees from leveraging their knowledge to benefit competitors.
• Maintain the employer’s market position.

However, problems occur when overly broad clauses are utilised increasing the risk that they are unenforceable.

The legal framework

Australian enforceability hinges on common law principles and the restraint of trade doctrine. Courts prioritise public policy, which favours open competition and an individual’s right to work. Under common law, non-competes are presumed void unless the employer proves:

1. Legitimate Interest: The clause protects a genuine business interest (e.g., trade secrets, client connections).
2. Reasonableness: The restriction is no broader than necessary in duration, geographic scope, and activities prohibited.

The Fair Work Act 2009 does not explicitly regulate non-competes, leaving enforcement to courts.

Key Factors Affecting Enforceability

1. Duration
   • Shorter periods (3–6 months) are more likely upheld.
2. Geographic Scope
   • Limits should match the business’s operational reach. A nationwide ban for a local café is unreasonable.
3. Prohibited Activities
   • Clauses must specify restricted roles/industries. Blanket bans on “any competitive activity” fail.
4. Employee’s Seniority
   • Executives with access to strategic data face stricter enforceable restraints than junior staff.
5. Public Interest
   • Courts may void clauses harming industry competition or community services (e.g., healthcare).

What’s the alternative?

Naturally, businesses need to be able to protect themselves so it’s important to consider options other than just non-compete clauses which allow you to protect your business.  Clauses that add layers of protection while not placing onerous restrictions on a departing employee are important to include as either a complementary clause alongside non-competes or as an alternative if a non-compete could prove to difficult to impose. 

In most instances, it would not be deemed unreasonable to include the following clauses to an employment contract:

• Non-Solicitation Clauses: Prohibit poaching clients or staff.
  

• Confidentiality Agreements: Protect sensitive data without restricting employment.
  
  
• Garden Leave: Particularly important for those in very senior roles, or with access to highly confidential information, paying their salary during their notice period to keep them away from competitors or to protect confidential information.

Best practice ways to protect your business

At HR Staff n’ Stuff, we work under the assumption that everything is OK until it isn’t.  What we mean by that is it’s fantastic to think that you have a loyal and trustworthy team, but you absolutely need to plan for a time that things may turn sour.  It doesn’t mean it will, it just means you have a framework in place to protect your business should a difficult situation with an ex-employee arise.

Consider the following:

1. Tailor clauses to the role
   Avoid generic templates. A sales assistant’s non-complete clauses should differ from a CEO’s.
   
   
2. Use cascading clauses
   Include “step-down” provisions (e.g., 12 months, then 6 months, then 3 months if contested) to allow courts the ability to enforce a narrower term.
   
   
3. Focus on protection
   Frame restraints around legitimate business interests, not deterrence.
   
   
4. Communicate early
   Discuss restraints during hiring to set expectations and reduce disputes later.

The future of non-complete clauses

The use of non-compete clauses is being examined with many not holding up under scrutiny in the court system.  While they may seem an important mechanism for protecting your business, critics argue that they stifle job mobility, wage growth and innovation. The Australian Government is currently looking at whether reform is required as part of a Competition Review which may result in legislation that impacts how, or if we use them in the future.  Naturally, we will keep you informed should any changes come into effect. 

Non-compete clauses remain a valuable tool for Australian businesses seeking to safeguard their business interests. However, their enforceability hinges on careful drafting that balances employer protections with employee rights. By ensuring that these clauses are reasonable, necessary, and tailored to specific circumstances, businesses can reduce legal risks while maintaining competitive advantages.

Need help?

If you’re unsure about your employment contracts – whether you need to review your current ones, create new versions or simply have questions - contact the HR Staff n’ Stuff team and we can chat about your current needs.