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Businesses often include non-compete clauses in their contracts, be it employment, sale of business or franchise contracts. This might be for many reasons, such as to protect their intellectual property (IP), customer base or financial details. This article will take you through three questions business owners should ask a lawyer about non-compete clauses. 

1. What is a Non-Compete Clause?

Firstly, you should start by asking a lawyer what a non-compete clause is. Knowing the ins and outs of non-compete clauses will help you understand the implications of including one in your contracts.

A non-compete clause refers to a provision that may feature in certain contracts. Common examples of contracts with such clauses are employment contracts, contracts for the sale of a business or franchise agreements. Essentially, non-compete clauses prevent other parties from using knowledge, skills or information they have acquired through their connection with your business in a way that threatens your business’ interests. 

For example, non-compete clauses in employment contracts often prevent previous employees from using retaining old customers at their new place of employment. Therefore, a business owner that employs lots of employees may find it useful to include a non-compete clause in their contracts. 

Similarly, a purchaser of a business might include a non-compete clause in the contract for the sale of a business. Indeed, a purchaser might use this to prevent the seller from establishing another similar business in the same location. This is because doing so would increase competition with the existing business. 

2. Do I Need a Non-Compete Clause?

A lawyer can help determine if you need a non-compete clause for your business. For example, your employees may have a significant connection with your business’ customers, access to your financial records, or extensive knowledge of your IP. In that case, it might be worth considering including one in your employment contracts should they go on to work for your competitors in the future. However, if you do not expect the employee in question to have access to confidential information, including such a clause might be unnecessary. 

Furthermore, if you decide you do want to include a non-compete clause, a lawyer will help you draft this clause in a way that will be enforceable. Courts only enforce non-compete clauses if they find them to be reasonable. Therefore, contracts can only have non-compete clauses if they serve a legitimate purpose of protecting the business’ interests.

3. What Should Non-Compete Clauses Cover?

The third question you should ask a lawyer about a non-compete clause is what the clause should cover. The reasons for using a non-compete clause will likely determine what the clause will cover. Again, a lawyer can help ensure you cover all necessary elements in a way that will be enforceable. 

In general, a non-compete clause should generally cover the following elements: 

ElementsExample
Applicable geographic location of the clauseA specific region or state.
Specific activities the clause seeks to restrainAn employer might wish to prevent their employees from retaining their clients and taking them to their new place of work.
Time length of clauseAn employer might prevent their employee from establishing their own business in the same field for a two-year period.

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Key Takeaways

Non-compete clauses might show up in a number of different contract types, including employment contracts, franchising agreements or sale of business agreements. Before including a non-compete clause in your contracts, you should consider: 

  • what a non-compete clause is;
  • if a non-compete clause is necessary for the given situation;
  • if it will protect a genuine business interest; and
  • what a non-compete clause should cover.

If you need assistance understanding non-compete clauses and how they can benefit your business, LegalVision’s experienced business lawyers can help. You can contact them on 1300 544 755 or by filling out the form on this page.

Frequently Asked Questions

What is a non-compete clause?

Non-compete clauses prevent other parties from using knowledge, skills or information they have acquired through their connection with your business in a way that threatens your business’ interests. Non-compete clauses often appear in employment contracts, contracts for the sale of a business or franchise agreements.

Should I include non-compete clauses in my contracts?

Whether you should include a non-compete clause in your contracts will depend on a number of factors. Notably, a non-compete clause should be protecting a genuine interest of your business. For example, you may want to include a non-compete clause in your employment contracts if your employees have a significant connection with your business’ customers. Similarly, it might be necessary if they have access to your financial records or extensive knowledge of your intellectual property.

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