February 6th, 2013 | 1:00 pm

Thinking of starting a part-time business? Careful of that non-compete clause

filed under Expert Answers

Contributed by Nick Branch, Contact Law

Putting your professional skills to use in a personal sideline can offer great financial rewards, personal satisfaction and learning opportunities. What’s more, with increasing use of the internet and flexible working patterns, it’s becoming more feasible to combine your own business with full time employment. Before you get started however, you’ll need to consider the implications of non-compete clauses in your current employment contract.

What is a non-compete clause?

It is a form of restrictive covenant that restricts your ability to work in competition against your employer. It can apply both during your employment with the company in question, and for a period of time afterwards.

Non-compete clauses have two main purposes. Firstly, they enable your employer to avoid investing in training, only for you to use your skills to compete against them. Secondly, they prevent you from “poaching” staff, clients, or trade secrets when you cease working for your employer.

How are non-compete clauses enforced?

The process for enforcing a non-compete clause depends on the law of the country or state that governs the contract. In the USA, the UK, and other common law jurisdictions, the employer needs to apply for a court order known as an “injunction” to prohibit you from violating the agreement.

An injunction acts as a strong deterrent to prevent you from violating your non-compete agreement. This is because breaching an injunction can result in your being prosecuted for a criminal offense and fined or even sentenced to a term of imprisonment.

The employer may also be able to obtain damages if your breach of the non-compete clause causes them financial loss. The most obvious example would be if a client of your employer switches their business to you, resulting in your employer losing profits. Of course, in practice it is often difficult for employers to show a direct connection between breaches of a non-compete clause and financial loss to them.

Are non-compete clauses always enforceable?

Non-compete clauses are often legally invalid. Even where this is not the case, courts have frequently been reluctant to enforce them in practice. The rules on validity and enforceability of non-compete clauses vary significantly between jurisdictions. For example, in California, non-compete clauses are nearly always unenforceable whereas in Canada they are widely enforced.

Examples of situations where some (but not all) jurisdictions have found non-compete clauses to be unenforceable include:

  • Where the non-compete clause does not serve to protect a legitimate business interest of the employer, for example if it has been included just to deter you from quitting.
  • The activities that the clause prohibits you from doing; or geographical area and time period it applies to; are not clearly defined.
  • The clause is an unreasonable restriction on your ability to make a living (in practice this is more likely to be an issue after your employment has ended rather than if you are starting a sideline business);
  • Public policy reasons, such as where enforcement of the non-compete clause would give the employer a local monopoly in the industry in question.

In practice, courts in many jurisdictions have significant discretion about whether to enforce a non-compete clause. Therefore, you and your employers conduct and whether you have acted in good faith may be taken into account. For example, if you use confidential information belonging to your employer; solicit current clients of the employer or breach a fiduciary duty to the business, the court might be more willing to enforce the non-compete clause.

Non-compete clauses are almost always included in professional employment contracts. Although they may be difficult for the employer to enforce, an attempt by your employer to do so will almost certainly damage relations between you and could result in your being subject to costly legal action. Therefore, if you are subject to a non-compete clause, you should take advice from a qualified lawyer in your country or state before starting a part-time business.

Nick Branch received his LLB from The University of the West of England in 2004; he then went to work as a director of two businesses. Nick’s current expertise cover a range of legal areas like employment, commercial and family law. Are you thinking of starting up a part-time business? You can learn more about business law by visiting Contact Law.

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