Can You Stop Ex-Employees from Stealing Your Business?

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Yes and no.

The employment relationship should always be documented.

Hiring accountants in Sydney to prepare an employment contract is the best option. A good employment engagement letter can also suffice in certain circumstances, but it may not be good enough when something goes wrong.

If you want to restrict your employees from doing something after they have left your business, you require a covenant in restraint of trade (sometimes referred to as a “non-compete” clause) in the employment contract.

Traditionally, employers couldn’t include covenants in restraint of trade in their employment contracts, as it was considered contrary to public policy. However, the law has developed over the years to recognise these clauses as valid, provided they are justified in the circumstances. An employer may impose restraints on ex-employees if it is directed at protecting the business’s goodwill following the employee’s departure.

The employer must be able to demonstrate that the restraint:

  • is required to protect the employer’s legitimate business interests, such as confidential information, goodwill, customers, a stable workforce or commercial interests, and
  • includes no more than is reasonably necessary to protect those interests.

So what does ‘reasonably necessary’ mean?

This will be determined when the contract is made and is judged on the surrounding circumstances, including the length of the restraint, the area of the restraint and what the employee is restrained from.

Restraints regarding customers, clients, employees and confidential information are likely to be upheld, and restraints against the competition (eg. working for a competitor) are less likely to be upheld.

Restraints will also be viewed based on how the employment contract was terminated. For example, if an employee is made redundant following a company restructuring, a non-compete clause is unlikely to be reasonable.

Similarly, restraints that prevent employees from applying skills and knowledge acquired during employment will not be upheld. This is due to the principle that a person should not be excluded from earning a living.

This issue is part of employment law, so we suggest you get further legal advice to restrain ex-employees from protecting your business.

*Correct as of July 2015

*Disclaimer – Kreston Stanley Williamson has produced this article to serve its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas in this article, you must seek advice about your circumstances. Liability is limited by a scheme approved under professional standards legislation.

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