While not all employment contracts will contain non-compete or confidentiality clauses, those businesses that deal with intellectual property and other sensitive proprietary information may include these clauses in their employment contracts. These clauses are legal if they are crafted properly and protect a legitimate business interest. However, a non-compete clause or confidentiality requirement cannot be overly burdensome on the employee. If it is found to be overly restrictive the Courts will most likely find it is invalid.
What constitutes a properly crafted non-compete clause? Before a business attempts to insert a non-compete clause in their employment contract, it is important to understand the legal parameters of attempting to limit the employment of a departing employee. If the clause is too broad or overly restrictive, the clause can be found to be invalid as being overly-restrictive. The following factors must be properly incorporated for a non-compete clause to be valid against an employee.
- The clause can apply only to employees who may have access to proprietary or sensitive business information
- The clause will not extend beyond a reasonable time
- An employee’s ability to make a living will not be overly burdened
- The type of information an employee can be restricted from divulging will apply only to the period within which they are actually employed, or for a reasonable period following leaving their employ
- It is imperative that the clause protect a legitimate business interest
How does a non-compete clause protect a business owner? As a business owner, you may have worked hard to develop a unique business niche that you need and want to protect. Therefore, it is permissible for a business owner to make a reasonable attempt to protect their intellectual and physical business property. There are several ways in which a non-compete clause can protect a business owner. Some of these include;
- Protecting sensitive information
- Business strategies
- Financial information
- Marketing research
- Employee training materials
- Protecting against employee solicitation
- Restricting the hiring of a current employee by a departed employee
- Restricting an exiting employee from started a competing business within a defined geographical area
- Preventing an employee from securing a job in the same industry within a reasonable distance from the previous employer
It is highly recommended that prior to inserting a non-compete clause an employer carefully define the areas of their business they need to protect. In addition, it is wise to review several formats and options for drafting a non-compete clause and, finally, it is highly recommended the clause reviewed by a solicitor. If an employer feels the need to include a non-compete clause in their employment contracts, they can include the following types of clauses to protect and define the following;
- Confidential Information
- Identify the types of confidential information that is protected
- Identify the types of information that is not considered confidential
- Explain the employee’s obligations with regard to protecting the proprietary information
- Describe, if any, the type(s) of confidential information that can be disclosed
- Discuss the types of circumstances that might create a conflict of interest
- Include information pertaining to who holds ownership of concepts developed during the period of employment
- Define how the parties will settle their differences should a conflict arise i.e. the right to sue, mandatory mediation etc.
- Clarify the types of remedies that will be available to the injured party and their limitations
- Set guidelines and steps for the parties to give notice of a breach of the non-compete clause and responses thereto
- If the non-compete clause is separate from the employment contract, the language of incorporation may be necessary
Lastly, it is important to draft and implement a non-compete clause or confidentiality clause that is enforceable. In order for the clause to be enforceable, it must meet all of the legal requirements without overstepping its bounds. It is absolutely necessary your non-compete clause does not;
- Encompass to great of a geographic area – the Court will frown upon forcing an employee to travel too far to engage in their chosen profession
- Does not overly restrict the activities of a departing employee – the employee must still be free to engage in activities that allow them to make a living
- Is not extended beyond a reasonable time – for example; 6 months
- Will not significantly interfere with an exiting employee’s right to make a living – a company is not permitted to restrict an employee to the extent that they cannot make a living
If a non-compete clause creates an undue hardship to the departing employee, the employee will have the right to sue the employer for the unreasonable limitation on their right to earn a living. Being embroiled in this type of lengthy litigation process can only harm both the x-employee and the business owner. Hence, it is highly recommended that if you anticipate using a non-compete clause, or confidentiality agreement, it be properly drafted and reviewed by a solicitor who specializes in this area of business and contract law.
If you find yourself in need of assistance with this, or any other legal issue, please contact the law offices of Owen Hodge Lawyers. At Owen Hodge, we are always happy to assist clients in understanding the full ramifications of any and all of your legal needs. Please feel free to call us at your earliest convenience to schedule a consultation at 1800 770 780.