For an employer, the training and skill that goes into moulding an employee to become the face of a company, the front line to the customer, and further entrusting them with vital information that makes or breaks your business is a lengthy and expensive process in business. But eventually, an employee may feel that the grass is greener on the other side. This can be in the form of better pay, a better location, and more responsibility or a variety of other factors. How do employers prevent the sheep in their flock from going to the pastures of the other farmer? The answer is a non-compete clause.
What Is a Non-Compete Clause?
A non-compete clause comes from the common law doctrine of Restraints of Trade that an employee can be subjected to. A non-compete clause is usually found within their employment contract which outlines that a former employee cannot work for a competition of the business and/or solicit current employees/customers from the original workplace. They come in many different shapes and sizes. Typically, a non-compete clause focuses on these three main elements;
- Specific activities and subjects in non-competition;
- Duration of this non-compete; and
- Geographic range of the non-compete.
The courts take a presumption that a non-compete clause that is post-employment is invalid and unenforceable, and it is up to the employer to prove that they are important to protect legitimate business interests to continue trading.
For example, a restraint of trade against a phone salesman from going to work with the direct competition across the food-court of a shopping mall for three months would be seen as reasonable. Why? Because the specific activity is similar to the original activity of the previous employment and the location and time of the non-compete clause is seen as reasonable to prevent customers from going to them.
He would also have specific knowledge in relation to the performance of his role and how you operate your business. This, in turn, protects the legitimate business aspects of the employer. However, that does not mean that this former employee could use these skills and travel further to another shopping centre and begin working there for the same competitor. The courts will look at the nature of the industry that you are operating in and the overall job mobility that you hold. A CEO of a Fortune 500 company would have a far harder time escaping a non-compete clause because of the level of their level of employment compared to an accountant in the same company.
Limitations of a Non-Compete Clause
To uphold a non-compete clause, an employer must demonstrate that the clause doesn’t restrict a former employee from earning a living. The non-compete clause is designed to protect the legitimate business interests of the employer, not to penalise an individual for trying his craft elsewhere. That being said, the courts will look at how your interests are affected by the former employee. Particularly, this can be seen by the niche skill sets of an employee. A good example is the skills of a watchmaker, the level of training and experience of a good watchmaker is far greater than that of a waiter. In comparison, the niche set of skills that the watchmaker possesses means that the courts will generally uphold a non-compete clause whereas they would be reluctant to do the same for the waiter.
Why is a Non-Compete Clause Important
A non-compete clause in a contract is important for an employer in ensuring that confidential information about their operation of the business, or technical knowledge be protected. For this to be true, the confidential information must not be available to the public and is unique to the employer. You wouldn’t be able to rely on the general nature of the role as a salesperson for upholding a non-compete.
Additionally, a non-compete clause may help prevent the loss of staff and/or customers that can be taken when an employee goes to a competitor or decides to open up a business as your direct competitor.
Further, non-compete clauses can help preserve your relationships with clients as it will prevent the former employee from directly taking client information that is strategic in forming these relationships. Additionally, it would for a period, prevent that employee from poaching your clients. Courts will generally uphold non-compete clauses for this specific purpose. However, it should be noted that although you have prevented the former employee from directly contacting clients, you do not have a restraint of trade with your customers. If they wish to do business with them rather than you, there is little you can do. But if that former employee during or after his employment began acting in his own interests to poach potential clients to another business then you may have an action against them.
In conclusion, non-compete clauses in employment contracts are important tools for helping prevent the loss of confidential information, employees, and your customer base. However, when drafting a non-compete that you would want to be able to rely on you need to ensure that the three main elements mentioned above are considered. This is evident by providing a reasonable time period that the non-compete would exist for. Further that the prohibited activities are only limited to those that are essential to the business and by keeping the geographic area that it affects only limited to the area where the original party operates and has its markets.