The success of someone’s business depends largely on their employees. Every day, they work towards the success and future prosperity of your business. 

However, hearing of an employee setting up a competing business can be a serious threat to that success. After working closely with you and having access to certain data, it’s likely that they know your trade secrets, confidential information and business strategies. 

This knowledge, if not properly protected, could help their business compete with yours. If you want to protect your business from competition, read on to learn more. 

My Employee Is Setting Up A Competing Business – What Do I Do?

Whether or not your employee can set up a competing business will  depend on the Employment Contract of the specific employee. 

This Employment Contract can and should include a series of legal mechanisms that protect your business. So, if your employee is setting up a competing business, your first step is to look over your Employment Contract with them and check for any protections here. 

One of the most common ways to protect your business from competition in your industry is to insert a Non-Compete Clause in your contract when it is first drafted (this could also work as a separate contract known as a Non-Compete Agreement). 

For the purposes of this article, agreement and clause will be used interchangeably. 

So, what exactly does a Non-Compete clause do?

What Is A Non-Compete Agreement?

A Non-Compete Agreement is a contract that will prevent employees from either:

  • Setting up a competing business
  • Working for an existing competitor

The effect of this clause and its scope will depend on how you draft it. 

Why Do I Need A Non-Compete Agreement?

Any business needs to look out for competition so they can perform well. However, this competition becomes much more risky when it is coming from an employee who has had access to your confidential information. 

This is because they would know your strengths, weaknesses and the processes you use. The last thing you want is for this information to fall in the wrong hands. So, a Non-Compete Agreement ensures lessens the risk of this happening. 

Confidential information covers information that could be used to compete with the business. This could include Intellectual Property, trade secrets, client lists, internal policies and other relevant workplace processes.  

What Does A Non-Compete Agreement Usually Include?

A Non-Compete Agreement will usually contain clauses that address the location and duration of the restriction. 

In other words, it should specify the location within which an employee is prohibited from setting up a competing business. For example, a Non-Compete Clause can set out that the employee cannot set up their business within 10 kilometres from yours. 

It might also specify that the clause will have effect for 12 months. 

In addition, you could add the nature of business activities which will attract the Non-Compete Clause. 

Example
If you run an online clothing store, and one of your former employees now wants to set up a business in your region, they may be subject to a Non-Compete Clause. 

Your clause might prevent the employee from setting up any clothing store within 10km of your region for 2 years. If your former employee chooses to set up within 10km, but ends up running a salon, the Non-Compete Clause may not apply to them and you cannot interfere with their business. 

This is because your clause restricts employees from setting up clothing stores, so other types of stores are allowed. But, of course, this depends on how you draft the clause in the initial stages. 

Hence, it’s wise to seek the help of an expert lawyer when drafting Non-Compete Clauses to protect your business. 

Non-Compete Clauses can also cover the non-solicitation of clients and staff. This is an especially important part of non-compete agreements. As employees are representatives of your business, it is likely they will develop close relationships with clients. These clients are a key source of business revenue, so it’s crucial that you have measures to protect your client lists, too.  

This risk is extremely common across various industries, but a Non-Compete allows the employer to control and minimise this risk in regard to what aspects of the business are most crucial to its profitability. 

Enforcing A Non-Compete Clause

To be properly enforceable, a Non-Compete Clause must be reasonable in protecting the business’ legitimate business interests.This requirement applies to all aspects, including the location, time, type of business activity and non-solicitation aspects.

A Non-Compete Clause will be unreasonable where it is more restrictive than necessary to protect the employer’s legitimate business interests. 

To avoid the clause being struck out, it should be specifically tailored to the employee’s role. The more high level the employee, then generally speaking, the more restrictive the clause can be. 

Because of this requirement, these clauses are often ‘cascaded’. These are known as cascading clauses

Generally, a cascading clause will provide several alternative periods in the same clause. So, for example, a clause in respect of time length might read “the restraint period is 12 months, or if that duration is held to be invalid or unenforceable, 6 months”. 

This provides some extra security for your business in case the clause is construed against your favour initially. 

How Else Can I Prevent Competition?

There are many other ways competition can be prevented.

Trade Secrets

A trade secret can include any confidential information of value to your business performance. Think of things like McDonald’s Big Mac Sauce, or Coca Cola’s recipe. 

Unlike other intellectual property rights, trade secrets are protected by keeping them a secret, and are not registered (for example, trade marks can be registered with IP Australia). 

The protection of a trade secret will cease if the information is made public, and trade secrets do not prevent other people from independently inventing and commercialising the same product or process.

Confidentiality Clause 

Though there are several ways you can protect inside information, one of the most common ways is by inserting a Confidentiality Clause in your Employment Contract. This can minimise the risk of employees using your own information to compete against you. 

This clause is also an opportunity for you to define ‘confidential information’. The definition and scope you choose  will depend on your business and your relationship with your employees, but could include things like your client database or your business’ proprietary information. 

A good tip is to keep the definition of ‘confidential information’ broad to protect as much of your business as possible, especially if your employees are likely to work for you for some time and learn the ins and outs of your business model.

Patents

A patent is a right that is granted for any device, substance, method or process that is new, inventive and useful.

If you have something that is unique to your business and your business alone, you could apply for a patent to protect it. It must be something that is new and unique.

There is now only one type of patent. A standard patent will last for 20 or 25 years, and must be new, have an ‘inventive’ step, and be applicable in a certain industry. Before a standard patent can be granted, the application will be examined by Intellectual Property Australia to make sure it meets legislative requirements. 

Depending on the circumstances and the type of protection you are applying for, examination can take from six months up to several years.

Register A Trade Mark

As a more general protection, you might decide to trade mark a distinctive aspect of your business like the name of your brand. This is not a specific protection against an employee setting up a competing business, but a blanket protection of your business name, a logo, or a slogan. 

Once registered, this trade mark will continue for 10 years. For more details on registering a trade mark and the associated steps with this process, see this article. 

Copyright

Depending on your business type, copyright might serve as an appropriate mechanism for preventing employee competition. However, not everything can be protected by copyright. 

Firstly, an idea itself cannot be protected. It must be in material form. For example, a set of unspoken business practices alone cannot be copyrighted. But if written down in a manual, this may well be possible. 

The idea or creation that you are trying to copyright must be your own original work. Finally, only certain works can be copyrighted. By and large these are artistic in nature. So, for example, films or music. 

If it meets the requirements of the Copyright Act, the item will be automatically protected. If you would like more information about how copyright might protect your business against employee competition, reach out to one of our expert copyright lawyers

Non-Disclosure Agreement

Put simply, a Non-Disclosure Agreement (NDA) is a way to restrict people from disclosing information to third parties. This is similar to a confidentiality agreement in that it protects important business information like trade secrets. 

In an employee-employer relationship, an NDA will prohibit your employee from disclosing any confidential information you provide them. 

This sort of agreement is more suited to high level employees involved in handling sensitive information. 

Key Takeaways

Employees by nature will know your business better than most. This is why it is crucial to make sure they don’t misuse their knowledge against you. 

Thankfully, there are several useful ways you can protect your business (not just from employees, but from the industry generally, too). 

These methods are not necessarily mutually exclusive. For instance, you can include a confidentiality clause in your employee agreement but still patent or copyright aspects of your business.

For more information about what methods will suit your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.

About Sprintlaw

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