Employee Setting Up A Competing Business? Your Legal Options In Australia

Finding out an employee may be setting up a competing business can be stressful. You’ve invested in training, shared know‑how and built client relationships - and now you’re worried that hard work could walk out the door.

The good news is there are clear steps you can take to protect your business, both while the employee is still employed and after they leave. In this guide, we’ll break down what counts as “competition”, the limits of what employees can do, and the practical actions you can take to manage risk and respond lawfully.

This article is written for Australian employers and managers who want plain‑English guidance and a clear plan. Let’s dive in.

What Does “Competing Business” Mean Under Australian Law?

There isn’t one single definition of “competing business” in Australian law. Instead, whether something is “competition” depends on your specific industry, your customer base and the overlap in products or services.

In practice, a competing business is any venture that offers the same or similar goods or services to the same target customers. Competition can be direct (same service, same market) or indirect (overlapping services that would reasonably divert your customers).

Key Legal Concepts To Know

• Duty of fidelity (while employed): Employees must act in their employer’s best interests during employment. This includes not diverting business opportunities, not soliciting your clients for themselves and not working against you on company time.
• Confidential information: Employees must not use or disclose confidential information and trade secrets without permission. This duty applies during employment and can continue after employment ends for truly confidential information.
• Intellectual property (IP): In many cases, IP created by employees in the course of their employment belongs to the employer. Your contracts and policies should spell this out clearly.
• Post‑employment restraints: Any restraint must be reasonable in scope, duration and geography to be enforceable. A restraint that simply stops someone earning a living will be hard to uphold unless it genuinely protects your business’ legitimate interests.

Can Employees Compete While Still Employed?

Generally, no. While someone is employed by you, they can prepare for a future business in their own time (for example, researching, saving money, drafting a plan), but they cannot actively compete with you.

Examples Of What’s Not Allowed During Employment

• Using your confidential information (pricing, client lists, proposals, processes) to set up or promote a competitor.
• Approaching your clients or suppliers to move their business to the employee’s new venture.
• Running a competing side business during working hours or using your systems, equipment or brand to do so.
• Diverting new leads or opportunities that belong to your business.

What May Be Permissible

Outside work hours, an employee may take preparatory steps that don’t harm your business (for example, investigating a business name, saving funds). The line is crossed when they misuse your resources or confidential information, solicit your clients or staff, or perform competing work during their employment.

This is why clear contract clauses and policies are critical. A well‑drafted Employment Contract should cover confidentiality, conflicts of interest, IP ownership and whether secondary employment needs your approval.

What If They Leave And Start Competing?

After employment ends, the employee is generally free to compete - unless you have enforceable post‑employment restraints and there’s ongoing confidential information at risk.

Post‑Employment Restraints (Non‑Compete And Non‑Solicitation)

Restraint clauses can restrict a former employee from competing, soliciting clients, poaching staff or using confidential information for a period of time and within a reasonable area.

• Non‑compete: Limits the former employee from operating or working in a competing business for a defined period and location.
• Non‑solicitation: Prevents targeted approaches to your customers, prospects or staff for a set period.
• Confidentiality: Continues indefinitely for true trade secrets and for a reasonable period for other confidential information.

Whether a restraint is enforceable depends on reasonableness. Courts look at the role, seniority, access to clients and secrets, the length and geography of the restraint, and whether the clause protects a legitimate business interest (like goodwill or trade secrets).

To improve enforceability, use tailored drafting with cascading options (e.g. multiple durations and areas). If you need tailored advice on enforceability or enforcement options, consider getting Restraint of Trade Advice early - timing matters for preserving your position.

Confidential Information And Trade Secrets

Even without a restraint, a former employee cannot use or disclose your confidential information and trade secrets. Pricing strategies, source code, client lists, proposals, formulas and unique processes are common examples - provided they are genuinely confidential and protected in practice.

Strong confidentiality clauses in the employment contract and a separate Non‑Disclosure Agreement with key partners or contractors can help demonstrate you treat the information as secret and valuable.

What About Garden Leave?

If you have a contractual right to direct an employee not to work out their notice in the business, garden leave can be useful to keep them away from live clients and fresh information while remaining employed and bound by duties. You can read more about using Garden Leave as part of a broader protection strategy.

Practical Steps If You Suspect A Competing Venture

If you suspect an employee is setting up a competing business (or already has), it’s important to respond methodically and fairly. Here’s a practical roadmap.

1) Preserve Evidence (Quietly And Lawfully)

• Secure relevant company records: CRM logs, email access logs, device sign‑in records, file transfer logs, and document histories.
• Check contract terms and policies: confidentiality, restraint, conflicts, device use and data security policies.
• Suspend automated access if risk is high, especially for departing employees or those on notice.

Make sure any monitoring or access is lawful and consistent with your policies. Managing access to company systems should also be proportionate and documented. Where appropriate, consider whether a temporary suspension pending investigation is justified - our guide to Suspending An Employee Pending Investigation covers the fairness and process considerations.

2) Clarify The Facts

• Invite the employee to a meeting to put concerns to them and hear their response.
• Ask focused questions about side businesses, clients approached, data handling and device usage, and future plans.
• Follow up in writing confirming any directions (for example, “do not contact client X” or “return device/access immediately”).

3) Remind Them Of Their Obligations

• Direct the employee to relevant clauses (confidentiality, conflicts, IP, restraint, notice and post‑employment obligations).
• Where appropriate, issue a written direction to cease competing conduct immediately.
• Consider moving them to non‑sensitive duties, garden leave or suspension (consistent with contract and policy) while you investigate.

4) Decide Your Next Step

Depending on the facts and the contract, your options may include:

• Performance or disciplinary action for misconduct or breach of policy.
• Termination (with proper process) if the conduct is serious or ongoing.
• Negotiated exit with agreed handover, non‑solicit undertakings and return of data - often recorded in a carefully drafted Deed of Release and Settlement.
• Legal action for breach of confidence or to enforce reasonable restraints, if necessary.

Where a cooperative resolution is possible, an Employee Separation Agreement can help lock down practical protections (client handover, non‑solicitation, return and deletion of data) without escalating to litigation.

5) Protect Your Clients And Data

• Notify key clients of updated points of contact and reassure them about continuity of service.
• Rotate passwords and revoke unnecessary access immediately for departing staff.
• Audit devices for downloads or transfers and retrieve company property promptly.

What Contracts And Policies Help Protect You?

Prevention beats cure. The best protection is built into your hiring, onboarding and offboarding processes. These contracts and policies are your frontline tools.

Employment Agreements

Your Non‑Compete Agreement and your core Employment Contract should work together to set clear expectations. Tailor restraint clauses by role and seniority, include strong confidentiality and IP ownership provisions, and cover conflicts of interest and secondary employment approval.

Confidentiality And IP

• Confidentiality clauses: Define “Confidential Information”, set obligations during and after employment, and require return and deletion on exit.
• IP ownership: State that IP created in the course of employment belongs to the business, with moral rights consents where appropriate.
• Third‑party NDAs: Use a robust Non‑Disclosure Agreement with contractors, suppliers and collaborators who may access your know‑how.

Post‑Employment Restraints

Restraint clauses must be reasonable to be enforceable. Consider staggered options for time and area (for example, 12/9/6/3 months; Australia/state/metro radius), and restrict activities to what’s necessary (for example, non‑solicit of clients the employee actually dealt with in the prior 12 months). If you’re unsure about enforceability or strategy, seek early Restraint of Trade Advice.

Exit And Transition Tools

• Garden leave: Where permitted by contract, place the employee on garden leave during notice to protect relationships and information - see Garden Leave for how it works.
• Separation deed: Use a tailored settlement deed to secure undertakings, confirm restraint obligations, and document return and deletion of data.

Policies And Systems

• Acceptable use and data security policies: Set clear boundaries on device, email and data use, and require prompt reporting of suspected data loss.
• Offboarding checklist: Reclaim devices, revoke access, rotate credentials, and collect signed confirmations regarding data return and confidentiality.
• Client relationship map: Keep ownership of client relationships institutional (shared accounts, team coverage) rather than tied to a single individual.

FAQs: Common Scenarios We’re Asked About

Can I Stop A Former Employee From Contacting My Clients?

Often, yes - if you have a reasonable non‑solicitation restraint. Even without one, an ex‑employee must not misuse confidential information (like client lists). A well‑drafted restraint targeted at clients the person dealt with recently is more likely to be enforceable than a blanket ban.

What If The Employee Registered A Business While Still Employed?

Registering a business or company is often just a preparatory step. What matters is whether they actually competed while employed (solicited clients, diverted opportunities, misused your information) or breached your policies. Focus on the conduct, not just the registration.

Do I Need Proof Of Data Theft To Act?

You don’t need to wait for a catastrophic breach. If you have credible concerns, you can lawfully secure systems, remind the employee of obligations, and investigate. If there’s evidence of downloads or transfers, move quickly to preserve data and consider suspension consistent with your policies and the guidance on suspending pending investigation.

Is A Two‑Year Non‑Compete Enforceable?

It depends on the role, industry, and market. Two years may be excessive in many cases, but a cascading restraint with multiple shorter options can give you a better chance of enforcing a reasonable period. Tailoring is key.

Could We Resolve This Without Court?

Absolutely. Many matters resolve through a practical exit plan with agreed undertakings, documented in a Deed of Release and Settlement. This can be faster, cheaper and better for all involved than litigation.

Key Takeaways

• Employees can prepare for a future venture on their own time, but cannot compete while employed, misuse confidential information, or divert your opportunities.
• After employment ends, competition is generally allowed unless you have enforceable restraints and ongoing confidentiality to protect - reasonableness is essential.
• Move methodically if you suspect issues: preserve evidence, clarify facts, remind the employee of obligations, and choose a proportionate response.
• Stronger protection starts with the basics: tailored restraints, confidentiality and IP clauses in your Employment Contract, supported by a targeted Non‑Compete Agreement where appropriate.
• Use practical tools like garden leave, offboarding checklists and, where needed, a well‑drafted settlement deed to secure undertakings and protect data.
• Get early, tailored advice on strategy and enforceability - timely Restraint of Trade Advice can preserve your position and reduce risk.

If you’d like a consultation about managing a situation where an employee is setting up a competing business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.