Working with other businesses or contractors always comes with legal risks. One of these risks is that a contractor could leave working with you to set up their own competing business. There are several ways to protect your business from competing contractors. This article sets out the different legal documents that will help restrict your contractor from starting up their own competing business.

Non-Disclosure Agreement (NDA)

If you have not yet engaged the contractor, but want to have discussions with them before working with them, you can have them sign a non-disclosure agreement (NDA). An NDA is a contract between two parties where either or both parties will disclose confidential information to the other before entering into a more formal relationship. An NDA will prevent them from disclosing that information to anyone else and is especially useful when you:

  • are starting up a business; or
  • want to discuss ideas that are not yet public knowledge. 

Contractor Agreement

If you do find the right contractor and are happy to engage them after the initial discussions, you should enter into a contractor agreement. A contractor agreement will provide the framework for your engagement of the contractor. Importantly, it will contain clauses that you can use to protect your business. These clauses include:

1. A Restraint Clause 

restraint clause outlines how you can restrain your contractor from: 

  • engaging your clients directly;
  • starting up their own competing business; or
  • soliciting other employees away from the business. 

You should make sure that the contractor clearly understands what they are and are not allowed to do. You must ensure that the clause is reasonable and will not prevent the contractor from making a living after ending their work with you.

A restraint clause will often include some provisions beneath it. This table outlines some of these provisions: 

 

Provision

Explanation

Non-Conflict

“The Contractor may engage in other work provided it does not conflict with the business or obligations under the agreement.”

The nature of contracting work is that contractors do multiple jobs at once. Therefore, to restrict them to only work for your business could be unreasonable. However, to start up their own business in the exact same field while engaged by you could be a conflict.

Non-Compete 

“The Contractor must not directly, indirectly or inadvertently compete, enter into business arrangements with, work for or assist competitors.”

The contractor may have gained valuable knowledge while working with you that would assist them in setting up their own competing business. This clause will restrain them from using this information to their advantage.

Non-Solicitation

“The Contractor should not solicit other employees or contractors to leave their employment or solicit clients or suppliers of the business.” 

You do not want your contractor to take your client list or try to form relationships with your personnel. Therefore, you should outline that the contractor should avoid trying to lead employees, contractors, clients or suppliers to other businesses or to work with them directly. 

Restraint Period

The restraint period is the duration of the time that the contractor must follow the restraint clause.

It is common for the restraint period for after the contract ends to be provided in a cascading manner. This means that there are options of:

  • 6;
  • 12; and
  • 18 months.

This is because courts have found some restraint periods to be unreasonably long. By using a cascading clause, you are providing more options for the court to consider if you are ever in a dispute. You cannot restrain a contractor indefinitely.

Restraint Area

The restraint area is where the contractor will not be able to provide services. There must be parameters around what this area is. 

For example, it might be within a certain amount of kilometres from your business. 

The restraint area also has to be reasonable. 

For example, if you do not have a business presence outside of a certain state, it would be more reasonable to restrict the area to that state, not the whole of Australia.

2. Confidentiality Clause

confidentiality clause requires the contractor not to disclose or use any information gathered during their engagement as a contractor in an unauthorised way.

For example, if they have access to client lists, they are not to disclose this information to anyone.

You will need to outline specifically what information is confidential within the contract. It will usually include any information that is not already in the public domain. 

This includes material such as: 

  • business and marketing plans; 
  • tenders and expressions of interest;
  • profit and loss statements;
  • lists of suppliers; and
  • clients you have entered into a relationship with. 

Confidentiality clauses are easier to enforce than a restraint clause as it does not have the same restrictions around restraint period and area.

Other Ways to Protect Your Business

Registering your business name and logo as a trade mark is an effective way of protecting your brand’s intellectual property (IP). Merely registering a business name without a trade mark will not sufficiently protect your business name. 

A trade mark and business name have different purposes. Business name registration is required when you want to trade under a certain name. Trade mark registration gives you exclusive rights to the name and stops others using it. Registration of each will protect your brand in different ways. Therefore, it usually is the most advantageous to register both.

Key Takeaways

There are multiple ways to protect your business when engaging a contractor. You can ask them to sign an NDA before you have an initial discussion prior to engaging them. Then, they can sign your contractor agreement once you decide to work with them. You can also have a trade mark application prepared to protect your business name and logo. If you have any questions about protecting your business from exploitation by potential contractors, contact LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page. 

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Rowan ONeill

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