73% of SMEs exposed to risk by lack of competition clauses

Most Australian SMEs are at risk of former employees taking clients, contacts and company secrets straight to the competition, as a result of them not having a post-termination contract.

A new study by workplace relations company Employsure shows 73% of Australian SMEs surveyed have no policies in place to stop employees going to work for their competitors after resigning or being made redundant.

The survey finds 47% of businesses are frustrated when employees leave and go to work for the competition, while 49% do not believe post-termination clauses in contracts were enforceable.

Employsure managing director Edward Mallett told SmartCompany this morning it is important for SMEs to review this area in order to protect their revenue.

“The clauses can offer real protection if they are properly drafted,” he says. “Few companies have a post-termination contract in place and few have a decent confidentially clause.”

Mallett says industries that involve dealing with clients are highly at risk, such as marketing, sales and personal services like hairdressing.

“They are at risk of a hard-working employee building up a big client base, bringing in the bulk of company revenue, and thinking ‘I could work elsewhere at a better rate or do this on my own’,” he says.

Mallett says post-termination clauses usually determine a reasonable timeframe after termination before the employee can work for a competitor.

“There is no rule of thumb, it depends on each case. Make the timeframe no more than is necessary to legitimately protect your business.”

In sales and advertising, for example, he says one to three months may be agreed upon. In industries such as finance and insurance, especially at senior levels, time frames could be up to a year.

Mallett explains there are three clauses to consider. The first, “non-compete”, covers when the ex-employee can work for a competitor, the second, “non-solicit”, is the timeframe the former staff member can approach your company’s clients, and the third, “non-deal”, refers to the time at which they can speak to a client of your company that approaches them.

“I’d advise SMEs to realise that one-size doesn’t fit all when it comes to these clauses, and only use them if legitimate and reasonable.

“Review your contracts and focus on strong confidentially policies.”

The survey involved 1093 Australian SMEs.