How effective are non-compete clauses in Employment Contracts?

You’re in the business of making fast cars ─ how do you make them go faster? One approach is to take key employees from a competitor which is what happened in Formula 1 racing when Aston Martin poached Dan Fallows, Head of Aerodynamics at Red Bull, along with other key staff from his team.

Red Bull took the matter to court to hold Fallows to the terms of his contract until 2023. The dispute was settled in 2022.

The case for restraints

Much like in the Red Bull – Aston Martin case, employers become concerned that when employees leave to go to a competitor they will take their IP, clients, and/or other team members with them. In Australia, non-compete and non-solicitation clauses are standard in employment agreements for many employees to protect against these very concerns.

However, employee and pay equity advocates object to the existence of non-compete clauses, as they restrict employee and pay mobility and may prevent legitimate competition between businesses.

Australian courts have sought to balance these interests by adopting the position that non-compete clauses are generally not enforceable unless they are limited in scope, duration, and geographical area, and they must be tailored to the specific circumstances of the employment relationship.

The Government is currently considering banning non-compete clauses from Australian employment contracts, following in the footsteps of certain states in the US, and as is being mooted in the UK.

This could fundamentally alter the way that businesses can impose contractual restrictions on those who hold valuable confidential information and influence.

What should employers do now?

Employers should:

• Ensure that they are not over-reliant on non-competes to protect their interests. Apart from being difficult to enforce, it is feasible that they may be prohibited in the future, given the Australian Government’s recent announcement
• Review employment agreements to ensure that the clauses on confidential information and post-employment restraints – including non-compete restrictions – are robust, particularly in how they speak to poaching clients and employees.
• Ensure that a step is included in the offboarding process to remind exiting employees about their post-employment obligations, and the possible consequences of breaches, in order to minimise the risk of any accidental or deliberate breaches of those obligations.

Overall, the impact of non-compete clauses on competition and wages can be complex and depends on the specific circumstances of each case. It’s important to consider both the potential benefits and drawbacks of non-compete clauses when evaluating their use.

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