31 July 2025
By Joseph Kelly, Kelly Workplace Lawyers
What are non-compete clauses?
It is not uncommon for employment contracts to contain a provision whereby the employee agrees not to work, after leaving the employer, in a particular type of work within a stated area for a stated period of time.
Such agreements, being in restraint of trade, are held by the courts to be prima facie void. As such, restraint clauses will only be enforceable if they are found by the Court to be reasonable.
What makes a restraint clause “reasonable”?
‘Reasonableness’ will be established where:
- the employer has an interest to protect (such as confidential information or a unique form of goodwill) and the restriction imposed is no wider than this interest;
- the stated area of restriction is no wider than that in which the employer’s interest might be affected; and
- the period of the restriction is no longer than is needed to protect that interest.
In considering the three points listed above, the reasonableness of the restraint must be considered both from the point of view of the parties and also with reference to the public interest. This then becomes a two part test:
- Reasonable between the parties: Reasonableness is determined by its effect in practice. It is judged at the time the parties entered into the contract, taking into account, as far as possible, probabilities and future contingencies and is a question of law to be decided by the court.
- In the public interest: Because restraint clauses are prima facie void, it is up to the employer to first establish that the restriction is reasonable between the parties. If the employer is able to establish that the restriction is reasonable, it is then up to the employee to establish that an otherwise reasonable restraint is contrary to the public interest. Again, this is a question to be decided by the Courts.
How likely is it that the clause will be enforced?
The courts have traditionally been reluctant to enforce restraints of trade imposed on employees, because of the relative inequality of bargaining strength between employers and employees. As a result, if a restrictive clause is in any way unreasonable, the courts will most likely declare the whole clause void unless the unreasonable part is completely severable by the ‘blue pencil’ test; that is, if the unreasonable part were to be crossed out by a blue pencil, the remainder of the clause would be both reasonable and readable, and able to stand alone. For this reason many restraint of trade clause have a range for the area of restriction (eg a) 1 kilometre, b) 5 kilometre and c) 10 kilometre from the employer’s business) and a range for the length of time for which the restriction is to remain in effect (1 year, 2 years, 5 years etc).
On the whole, the Courts recognise an individual’s right to work and will not support clauses that try to unreasonably undermine this right.
Clauses that restrict an employee from poaching clients or other staff are more likely to be enforced.
So in short, the Court will most likely allow you to set up the Michael Scott Paper Company, but not allow you to hire Pam and Ryan.
What if I have questions?
Non-compete and restraint clauses are very complex and subject to constant judicial change. You should always speak to a lawyer about whether the clause in your contract is enforceable or not.
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