In the case of Egon Zehnder v Tillman the High Court has set out useful guidance for non-compete covenants:
- Do you need a non-compete covenant? For many client-based roles, covenants preventing dealing with clients should be sufficient. If these are difficult to police or there is a threat to confidential information, then a non-compete can be justified.
- It is not sufficient merely to state that a departing employee must not work for a competitor. This would be far too wide for example in a large company involved in many sectors. The employee should only be restrained from competing against areas of the former employer in which he or she was directly involved.
- Conversely, it is not always necessary to limit the employee only from carrying out a similar role to the one undertaken for the former employer. It has sometimes been thought that if an employee joins a new company having had a career change and, for example was leaving client broking to go into HR, then the covenant should not bite. Two recent High Court cases have now pointed out that the employee will be in possession of confidential information regardless of his or her role and this justifies the non-compete prohibition.
- Ensure that either the covenant, or a clause elsewhere in the contract, allows the employee to own a small investment holding, no more than 5%, in a competitor.
By all means add a non-compete clause to your covenants as a deterrent but unless it follows the above rules, it will not be valid.