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Dismissed employee's attempts to find other work thwarted by "non-compete" clause in employment contract

The Non-compete clause in an unfairly dismissed employee's contract deemed unreasonable by FWC, preventing payout reduction for failure to seek other jobs within his expertise.

02 May 2024

Mike Toten

Mike Toten is a freelance writer, editor and media commentator.

"Restraint of trade" and "non-compete" clauses in work contracts have long been a troublesome area of employment law. A company who unfairly dismissed an employee failed to have his payout reduced because the Fair Work Commission (FWC) held that a clause in his contract discouraged him from applying for other jobs "within his sector of expertise" to mitigate his losses from being dismissed.

The FWC described the clause as "unreasonable and most likely unenforceable" but added that an ordinary employee would not be expected to know that. Therefore, the employer could not argue that his refusal to apply for some other jobs because of the clause amounted to his failure to mitigate his losses.

Decision re restraint clause

The employee was a grouting salesman. His contract stated that for 12 months after dismissal, he could not work for any business that "engaged in activities substantially similar or identical to [employer's name] and provides services substantially similar or services offered by the company". The employee told the FWC he had applied for hundreds of jobs, including many sales ones, but none in the grouting industry, because of the restraint clause.

The FWC held that it was understandable that the employee would choose not to apply for grouting industry jobs due to fear that breaching his contract would have legal consequences for him. He could not be expected to deduce that the clause was (in the FWC's view) unreasonable and unenforceable. The FWC therefore refused the employer's claim that his compensation for unfair dismissal should be reduced because he had not made serious attempts to obtain other employment.

The FWC also made the general comment that many "restraint" clauses put in employment contracts were aimed less at protecting the employer's business than at reducing employees' capacity to seek other work and reducing competition for labour and services.

Decision re unfair dismissal

The employer summarily dismissed the salesman via email with no payment in lieu of notice. It claimed he failed to follow the company's policy for issuing quotes and some other matters and was rude to a customer, resulting in a complaint about him. When the employee claimed he had not received any prior warnings, the employer sent him three that had been emailed to him in quick succession earlier that day. The FWC found that the second and third warnings were merely hasty adaptations of the first one, and their timing meant the employee had no opportunity to try to improve performance.

The FWC found that the salesman had been rude and sarcastic to a customer, and that amounted to a valid reason for dismissal. Still, the employer's other misconduct allegations were not proven. It was the employee's first offence, and as such deserved a less severe disciplinary response, such as a final warning. The content of the warning letters was inadequate, and the employee had no opportunity to respond to the allegations made against him. The employer had also relied on two negative customer reviews, but didn't find them until after dismissing him and failed to prove that they came from the employee's customers.

Therefore, he was unfairly dismissed and the FWC awarded compensation of $39,205, taking into account earnings from work obtained since dismissal and a discount for misconduct.

What this means for employers

If contemplating putting a "restraint of trade" or "non-competition" clause in an employment contract that seeks to put restrictions on an employee's subsequent work opportunities, seeking legal advice on drafting the clause is strongly recommended. If a dispute arises, the employer will need to prove that a genuine objective (eg financial) threat to its business would arise if a protective clause did not exist. The clause must also be drafted in a way that is legally enforceable.