Non-compete clauses and worker restraints under review

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A new issues paper from Treasury’s Competition Review questions whether non-compete clauses and other restraints are limiting job opportunities and movement.

But first, let’s define some terms…

Non-compete clauses prevent workers from joining a competitor or starting a new business in competition with their current employer for a period of time.

Non-solicitation clauses prevent workers from soliciting former customers and co-workers.

Non-disclosure clauses prevent workers from disclosing confidential information relating to their employment.

Now, let’s get into it!

A recent Australian Bureau of Statistics (ABS) survey found that 46.9% of businesses surveyed used some kind of restraint clause, including for workers in non-executive roles. The survey also found 20.8% of businesses use non-compete clauses for at least some of their staff and 68.2% for more than three-quarters of their employees.

Over the last 30 years, Australia has seen a decline in job mobility. Australia is not alone in this and other advanced economies have experienced the same issue. While restraint clauses are not the only factor contributing to the decline – an ageing population and a rise in post-pandemic market concentration in some industries has also contributed, it is specifically the role of restraints that is the focus of the Competition Review issues paper (submissions close 31 May 2024).

From an economic perspective, declining job mobility impacts wage growth and innovation as restraints prevent access to skilled workers within the economy. Productivity is a key concern as Australia’s has declined in the last 20 years.

The review states that, “The direct consequence of a non-compete clause is that it hinders competition among businesses: it disincentives workers from leaving their current job, creating a barrier to the entry of new businesses and the expansion of existing businesses.”

For business however, this is the point – restricting the knowledge developed by a worker during their employment from benefiting a competitor, limiting the likelihood of a ‘mass exodus’ of key workers from the business to a competitor, preventing clients from employing key workers, and protecting the value of the business by preventing employees from walking away with customers that were hard won, at a cost, by the business.

However, the impact of restraints appears to be a psychological deterrent given that most are not contested. Of the 115 matters relating to restraints of trade between 2020 and 2023, only one business commenced proceedings in court against a former worker. And, a further study indicates that where employers seek legal redress in the courts, they are more likely than not to fail.

In Australia, restraints are allowed but cannot be more onerous than what is reasonably necessary to protect the employer’s legitimate business interests. What is reasonable is context sensitive, whether in terms of time, geographical scope or what activities are restrained. A non-solicitation clause is much more likely to be reasonable than a non-compete. A restraint against a senior executive is more likely to be enforceable than a restraint against a junior employee.

In practice, these clauses often create considerable uncertainty as neither employees or employers can ever be entirely certain how enforceable a restraint is until the matter is put before a court. This causes trepidation for exiting employees and proves an impediment to startups.

In April, the United States Federal Trade Commission voted to ban non-compete clauses, with some exceptions for senior executives. The UK and various European countries have sought to limit the scope of restraints either by banning restraints below a nominated income-threshold, imposing statutory time limits on restraints, or mandating compensation payments during the restraint period.

Although it’s not apparent which of these models Australia might adopt, overseas developments coupled with the Treasury’s recent review suggest some form of change is likely.

Written alongside Christian Chenu, Senior Associate at Aintree Group Legal.

For further assistance, please get in touch with your Aintree Group advisor.