Can my employer use a restraint of trade to prevent me from working for a competitor?

We have previously written a brief overview on the enforceability of restraint of trade clauses in employment contracts in our blog “Is a Restraint of Trade clause in my employment contract fully enforceable?”

Today’s blog focuses on one particular kind of restraint, the “non-compete” covenant.

What is a non-compete covenant in an employment contract?

For the purposes of this blog, a non-compete covenant is an obligation contained within a contract of employment that expresses itself as preventing an employee from working for one or more alternative employers or a certain class of them or establishing a competing business of their own.

The clause may or may not also specify that the non-compete covenant only applies:

• within a particular geographical location; and/or
• for a particular period of time following the employee’s departure.

GET ADVICE FROM AN EMPLOYMENT LAWYER:  1800 659 114

Can my employer enforce the non-compete covenant?

Under the general law, a non-compete covenant is presumed to be void because they are against public policy. A canonical explanation of why they are presumed void is that they make:

“The general public suffer… it is in the public interest that a [person] should be free to exercise [their] skill and experience to the best advantage for the benefit of [themselves] and all those who dire to employ [them].”

Morris (Herbert) Ltd v Saxelby [1916] 1 AC 668, at 699 (Atkinson LJ)

Though the presumed invalidity of non-compete covenants remains deeply ingrained in the common law, gradual developments, particularly over the last twenty years, have carved out general principles in which a non-compete will be valid and may be enforced provided they are directed at a limited number of legitimate interests and reasonable.

Determining the validity of a non-compete covenant

Whether a non-compete covenant is valid is assessed by the court at the time the contract was entered into: McMurchy v Employsure Pty Ltd [2022] NSWCA 201 at [40] (Gleeson JA). For a non-compete covenant to be valid:

1. First, the employer must have a “legitimate interest” that the clause seeks to protect. legitimate interests include:

• goodwill; and
• confidential information.

2. Second, the non-compete covenant must be reasonable in the sense that it goes no further than is reasonably necessary to protect the employer’s legitimate interest.

What might be considered a “legitimate interest”?

For the employer to have a ‘legitimate interest’ in the restraint, the nature of the employee’s role and their rights and obligations under the employment contract must at least contemplate them acquiring confidential information or their being employed in a position involving the generation or attachment of their employer’s goodwill.

For example:

• A person employed in a position where they will be a human interface between their employer and commercial suppliers or end customers may suffice for ‘goodwill’.
• A person employed in a position where they may be exposed to commercially sensitive information which, should it be used by a competing enterprise, may give them an unfair commercial advantage; then, that would suffice for establishing the employer’s legitimate interest in ‘confidential information’.

The non-compete covenant must go no further than reasonably necessary

In relation to the second element, that the clause be “reasonable”, relevant considerations of validity may include:

• the period of the restraint;
• the geographical area;
• the nature of the industry the employee works in; and
• again, the nature of the employee’s role.

In relation to each of the above indicia, what is reasonable is tethered to the nature of the legitimate interest.

For example:

• To protect goodwill and trade connections, it must be borne in mind that personal connections and human knowledge tend to diminish through time;
• An employer who engages in trade within one geographical location generally has no interest in preventing an employee from utilising their skills in a different location; and
• An entry-level role is of a fundamentally different character when it comes to commercially sensitive information than senior management.

Reasonableness is entirely linked to the facts of each specific case. If you are concerned about the potential implications of a restraint in your employment contract, it is best to seek advice from a lawyer before making a decision which may result in a breach of your contract.

GET ADVICE FROM AN EMPLOYMENT LAWYER:  1800 659 114

Enforceability of a non-compete covenant

If a non-compete clause was valid when made, the question becomes whether it may be enforced against an employee in a particular situation. Unlike the assessment for validity, which is considered at the time the parties entered the agreement, considerations of enforceability are assessed at the time an employer seeks to enforce it.

The court has an inherent jurisdiction to refuse enforcement of a restraint. Established grounds include:

• where an employer has not moved quickly to enforce the restraint;
• enforcement would harm persons who are not parties to the contract;
• enforcement may cause undue hardship on an employee.

The enforcement of restraints is a highly fact-specific inquiry in which seeking tailored legal advice can be extremely important.

Enforceability of a restraint of trade after a dismissal?

As a general proposition, an employer who has wrongfully terminated an employee may not rely upon the terms of a non-compete in the employment contract. The Victorian Court of Appeal has comprehensively considered this issue in the case of Crowe Horwath (Aust) Pty Ltd v Loone [2017] VSCA 181; 54 VR 517 at [193].

Key takeaways if your employment contract has a restraint of trade clause

• Non-compete covenants are routinely enforced in Australia, either informally between the parties or through the courts.
• The express terms of a restraint may deter employees from accepting work which they may have been able to undertake.
• Whether a restraint is valid and whether it may be enforced in a particular situation – is generally both factually and legally complex. For this reason, expert legal advice should be sought from an employment lawyer if a dispute has arisen over a non-compete you are a party to.

Contacting Hall Payne Lawyers

You can contact us by phone or email to arrange your consultation; either face-to-face at one of our offices, by telephone or by videoconference consultation.

Phone: 1800 659 114
Email: general@hallpayne.com.au