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Yes, non-competes are enforceable, if they are reasonable. Employers should state the non-compete clauses clearly and precisely in the employment contract.
What is a non-compete?
A covenant not to compete, also called a ‘non-compete’, is a clause included in an agreement, between an employer and employee, whereby the employee agrees not to work in competition with the employer.
They aim to protect an employer’s customers, suppliers and employees from being poached by an ex-employee. Covenants not to compete also prevent confidential, proprietary information and trade secrets of an employer from being used by an ex-employee for their benefit.
Covenants not to compete are normally effective both during the course of employment and after the end of an employment relationship. Post-termination non-compete is common in Hong Kong.
Should I include a non-compete?
There are many factors you should consider on whether it is appropriate to insert a non-compete clause to the employment contract, including:
- Industry standards
- an employer is in client-facing industries and industries where businesses depend on customer loyalty, should consider adding non-compete clauses
- Employee seniority
- If the employee is especially senior and plays a central role within the company, a non-competitive agreement may be more enforceable.
- Exposure to confidential information and trade secrets during the course of their employment
What should be included in a non-compete?
A non-compete clause should contain a restraint period, which indicates how long a non-compete clause should be effective. An employer should consider the following factors to decide the length of the restraint period:
- State of the employment market
- the longer it may take to replace an employee the longer your solicitation agreement should last for.
- How long an employer’s confidential information will remain ‘confidential’.
- Industry-standard
Normally, the length of the restraint period is less than 6 months.
There are other considerations an employer must consider when drafting a non-compete clause, including:
- Geographical area
- non-competitive agreements should have reasonable geographical constraints, so the employee could finding work elsewhere
- Compensation
- especially during the restraint period, as it will be harder for the employee to find work
- Scope
- it should be justifiable based on the specific interest of the company seeking to protect its interests.
When are non-compete enforceable
Non-compete clauses are only enforceable if they are reasonable in duration (not more than 6 months), scope, and geographical area for protecting the legitimate interest of the employer.
For example, a non-compete clause preventing an employee from working in the same industry for 24 months after termination of the contract is likely not enforceable, as it is too large in scope and too long in duration, and is not justifiable to protect the legitimate interest of an employer.
Key takeaways
- A non-compete clause prevents an employee from competing with the employer’s firm post-employment
- When deciding whether or not to insert a non-compete clause, an employer should consider industry standards, employee seniority and the employee’s exposure to confidential information
- When drafting the employment contract, an employer should consider the length, geographical area, scope and compensation of the non-compete clause
- Reasonable non-compete clauses will be enforceable
