Non-compete clause

What is a non-compete clause?

A non-compete clause prevents one party from competing with the other for a defined period after the contract ends. In employment contracts, it stops an employee from joining a competitor or starting a rival business. In commercial contracts, it restricts a seller from re-entering a market after a business sale or a departing partner from soliciting the firm's clients.

Courts treat non-competes with suspicion. They restrict a person's ability to earn a living or a company's ability to trade. The starting position in most common law jurisdictions is that restraints of trade are void unless the party enforcing them can prove the restriction is reasonable in scope, duration, and geography.

Relevant legislation

Non-compete law varies more by jurisdiction than almost any other contract term:

• UK: common law restraint of trade doctrine. Non-competes are enforceable only if they protect a legitimate business interest (trade secrets, client relationships) and go no further than reasonably necessary. Courts will not rewrite an unreasonable clause to make it reasonable; they void it entirely.
• US: state-by-state. California bans employee non-competes outright (Business and Professions Code § 16600). Other states like New York and Massachusetts enforce them subject to reasonableness, though many are tightening restrictions. The FTC proposed a federal ban in 2024 but enforcement has been blocked by litigation.
• Australia: restraint of trade doctrine similar to the UK, but courts have more willingness to sever unreasonable parts of a clause (a "cascading" or "ladder" approach) and enforce the remainder.

What to look for

Check the scope of restricted activities. "Shall not engage in any business that competes with the Company" is vague and likely unenforceable. Compare that to "shall not provide contract review services to clients of the Company." Specificity protects the drafter because courts are more likely to uphold a narrow restriction.

Check the duration. Six to twelve months is the typical range for employment non-competes. Two to three years may be acceptable for a business sale. Anything longer needs strong justification. A five-year non-compete for a mid-level employee will almost certainly fail a reasonableness test.

Check the geographic scope. "Worldwide" restrictions are hard to enforce unless the business genuinely operates globally and the restricted party had a global role. A regional restriction tied to the areas where the business operates is more defensible.

Check whether there's consideration. In many US states, continued employment alone isn't enough consideration for a non-compete signed after the start of employment. Some jurisdictions require a payment or other benefit, often called "garden leave" in UK practice, where the employer pays the employee during the restricted period.

Common pitfalls

Overly broad non-competes are the most common problem, and they're self-defeating. A clause that restricts all competitive activity, worldwide, for three years after departure is almost certainly unenforceable. The employer ends up with nothing because the court voids the clause rather than narrowing it (in most jurisdictions outside Australia).

Failing to tie the non-compete to a legitimate interest is fatal. The restriction must protect something specific: trade secrets, confidential client relationships, or specialised training provided at the employer's expense. "We don't want them working for a competitor" isn't a legitimate interest.

Non-competes without a confidentiality clause alongside them are incomplete. Often what the employer wants to protect is information, not competition itself. A strong confidentiality clause may achieve the same goal with fewer enforceability risks.

Enforceability varies so much by jurisdiction that a non-compete drafted for the UK may be worthless in California and vice versa. If the restricted party can relocate or work remotely from a jurisdiction that doesn't enforce non-competes, the clause may be unenforceable in practice.

Example clause

"For a period of 12 months following termination of employment, the Employee shall not, within the United Kingdom, directly or indirectly provide contract analysis or review services to any client of the Company with whom the Employee had material dealings during the final 12 months of employment. During the restricted period, the Company shall continue to pay the Employee's base salary ('garden leave')."

Frequently asked questions

Are non-compete clauses enforceable?

It depends on the jurisdiction and the drafting. UK courts enforce them if they protect a legitimate interest and are reasonable in scope, duration, and geography. California bans them for employees entirely. Most other US states enforce them subject to reasonableness tests that vary widely. The trend globally is towards tighter restrictions on enforceability.

What is the difference between a non-compete and a non-solicitation clause?

A non-compete prevents working for or running a competing business. A non-solicitation clause is narrower: it prevents approaching specific clients or employees. Courts view non-solicitation clauses more favourably because they're less restrictive. If a non-compete is struck down, a well-drafted non-solicitation clause may still survive.

Can a non-compete be enforced if there's no garden leave payment?

In some jurisdictions, yes. UK courts don't strictly require garden leave, but paying the employee during the restricted period strengthens the argument for reasonableness. Several European countries (France, Germany) require compensation during the restricted period as a condition of enforceability. In the US, it varies by state.

How Clara helps

Clara identifies non-compete and restrictive covenant clauses, flags unreasonable durations or geographic scope, and highlights missing consideration or garden leave provisions. It warns when a non-compete may be unenforceable in specific jurisdictions.