My Employee Is Setting Up A Competing Business, What Are My Options?
- Mark Lazarus
- Last updated: 20 Feb, 2026
If your employee, or ex-employee, is setting up a competing business, this can be a serious threat to your success.
Nowadays, many workers are trying out start-ups while being employed. In this highly litigated field, having a solid plan in place to mitigate possible risks posed by competition is crucial. If you want to protect the future prosperity of your business, read on to learn what some of your options are.
Assessing Your Legal Position
Not every competing venture will justify legal action. In some cases, an employee may be lawfully preparing for their next move. In others, however, there may be clear breaches of contract, misuse of confidential information, or active solicitation of clients and staff.
The appropriate response depends on several key questions:
- Is the employee still employed?
- What do their contractual restraints say?
- Has any confidential information been accessed or used?
- Are clients or staff being approached?
- Is the competing business already trading?
Acting too aggressively without proper advice can expose your business to risk. Acting too slowly can allow damage to escalate.
Understanding your legal position early allows you to respond strategically, whether through negotiation, formal warning, or, where necessary, urgent court action.
While the Employee Is Still Employed
The legal position differs depending on whether the employee remains employed or has already resigned.
While an employee is still working for you, they owe duties that exist independently of any written contract. Under Australian contract law, employees are subject to an implied duty of good faith and fidelity. This requires them to act in the best interests of their employer and not engage in conduct that harms the business.
Implied Duty of Good Faith
An employee cannot actively compete with their employer during their employment.
Conduct that may breach this duty includes:
- Diverting clients or business opportunities
- Soliciting customers for a future competing venture
- Recruiting colleagues to join a new business
- Using company time, systems or resources to develop a competing enterprise
- Exploiting confidential information to gain an advantage
There is, however, an important distinction between preparing to compete and actually competing.
In some circumstances, an employee may lawfully take preparatory steps for a future business while still employed. This might include registering a business name or conducting preliminary planning. What they cannot do is undermine your business in the process. The issue is whether the conduct creates a real conflict with your interests.
What Do Your Contracts Say?
Beyond the implied duties that apply to all employees, your strongest protection will usually come from well drafted employment contracts.
Three types of clauses are particularly relevant when an employee sets up a competing business.
Non-Compete and Restraint Clauses
A non-compete clause, often drafted as a restraint of trade provision, restricts an employee from engaging in certain competitive activities during or after their employment.
These clauses typically limit:
- Working for a competitor
- Starting a competing business
- Operating within a defined geographic area
- Competing for a specified period after employment ends
However, restraints are only enforceable if they are reasonable.
Australian courts will assess whether the restraint goes no further than necessary to protect a legitimate business interest. Legitimate interests may include protection of confidential information, customer connections and goodwill.
A restraint that is too broad in duration, geographic scope or activity may be declared unenforceable. For example, preventing a junior employee from working anywhere in Australia for several years is unlikely to be upheld.
Non-Solicitation and Poaching
Non-solicitation clauses are often more enforceable than broad non-compete provisions. Rather than preventing competition entirely, they restrict the employee from approaching or dealing with:
- Clients or customers of the business
- Suppliers
- Employees or contractors
Employee poaching can be particularly damaging. If a former employee actively recruits your staff in breach of their contractual obligations, you may have grounds to take action.
In some cases, liability may extend to the new business or employer if they knowingly induced a breach of contract.
Confidentiality Obligations
Confidentiality clauses protect information that is not publicly available and that provides a commercial advantage.
This may include:
- Client lists and contact details
- Pricing structures
- Financial data
- Strategic plans
- Trade secrets
- Intellectual property
Unlike non-compete clauses, confidentiality obligations can continue indefinitely where the information remains confidential.
Even without an express clause, the law protects certain categories of confidential information. However, a properly drafted confidentiality provision significantly strengthens your position.
When Is Litigation Warranted?
Litigation is typically appropriate where there is clear evidence of breach and a real risk of ongoing loss.
Legal action may be warranted where:
- A valid restraint clause has been breached
- Clients or staff are being actively solicited in breach of contract
- Confidential information has been taken or used
- The competing business is already trading and causing financial harm
- There is a risk that damage will become irreversible
Before commencing proceedings, a litigation lawyer will assess the strength of your contract terms and protections, the available evidence and the commercial consequences of escalation.
Practical Steps to Protect Your Position
If you suspect that an employee is setting up a competing business, measured action is essential.
Immediate steps may include:
- Reviewing the employment contract and any restraint provisions
- Securing IT systems and restricting access where appropriate
- Preserving evidence of communications or data transfers
- Conducting an internal investigation
- Seeking legal advice before confronting or dismissing the employee
Overreacting can expose your business to claims of unfair dismissal or adverse action. Underreacting can allow further damage to occur. A strategic, legally informed response is crucial.
Key Takeaways
- An employee cannot actively compete with your business while still employed.
- Employees owe an implied duty of good faith and must not undermine your commercial interests.
- Well drafted non-compete and restraint clauses can restrict competitive conduct after employment ends, but they must be reasonable to be enforceable.
- Non-solicitation clauses can prevent former employees from approaching your clients, suppliers or staff.
- Confidential information, trade secrets and proprietary data remain protected even after employment concludes.
- Litigation may involve injunctions, damages or claims against third parties who induce a breach.
- Acting quickly and strategically is critical to minimising financial and reputational harm.
- The strength of your position depends on your contracts, the employee’s role and the available evidence.
Protect Your Business
Disputes involving competing businesses can escalate quickly. The effectiveness of any response depends on the strength of your contracts and the speed at which you act.
If you are concerned about an employee establishing a competing venture, obtaining clear legal advice at an early stage can help you assess your options and protect your commercial interests.
Lazarus Legal assists businesses with drafting enforceable employment contracts, managing disputes, negotiating resolutions and, where necessary, pursuing litigation to protect valuable business assets.
Contact our team to discuss your situation and determine the most appropriate course of action.
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Mark Lazarus
Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.
1 thought on “My Employee Is Setting Up A Competing Business, What Are My Options?”
My employee registered his own company still offering the same services, i did an investigation and the company is in his names. but when i sat him down he denied that the company is not his however i have all the proof but he is till denying everything. Please advise.
Regards
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