Australia’s consultation on non-compete clauses reveals differing industry views

The issues paper (42-page / 915KB PDF) was released by the federal treasury in April and sought public comment and feedback by 31 May. In response to the 50 submissions that were made during that time, the competition review is now expected to advise the federal government on outcomes from the consultation process later this year. Following this, a bill outlawing or limiting post-employment restraints of trade is expected to be announced in early 2025. If so, Australia could be one of the few countries considering new rules to remove or alter the use of post-employment restraints of trade.

Industry feedback

The Australian Council of Trade Unions

Representing 38 affiliated unions, the Australian Council of Trade Unions (ACTU) - the over-arching body for Australian unions – is in support of legislative changes to remove non-compete clauses, arguing that such clauses are a wage suppression tactic by employers.

In a report by Australian industrial relations news website Workplace Express, ACTU assistant secretary Joseph Mitchell said the ACTU believes such restraints should not apply to workers who leave employment because any risks that might arise in their absence are already dealt with adequately in current legislation, such as the Competition and Consumer Act 2010 (Cth).

Mitchell also said that the ACTU is considering a legislative solution similar to the Fair Work Act 2009 (Cth) ban on pay secrecy clauses, together with other possible changes – such as ensuring public servants who are made redundant are not “unnecessarily restrained” from finding employment in the public sector, and looking for ways to ensure that gig workers are not subject to non-competes.

The ACTU argued that non-competes should be banned for workers who are not employed full-time - such as casual hairdressers, for example, who, if not given enough hours at one hair salon, should not be restricted from working at a different salon.

Australian Chamber of Commerce and Industry

The Australian Chamber of Commerce and Industry (ACCI) - Australia’s largest business organisation, with over 400,000 members - supports the codification of the current common law on non-competes and non-solicitation clauses. In its submission, it asked the federal government to undertake educational initiatives to inform employers about the use of ‘restraint of trade’ clauses, including how to implement them reasonably and appropriately.

The ACCI submitted that restraint of trade terms in employment contracts are important in enabling employers to protect their legitimate business interests such as inventions and other confidential information. It asked the government to focus on policies designed to help protect business interests, while also fostering labour mobility across the economy. The ACCI argued that the codification of restraint of trade clauses in employment has the potential to be a ‘win-win’ for employees and employers, by providing greater clarity on their use and ensuring they are applied fairly in practice. The ACCI also supports employees having the freedom to pursue new work opportunities within reasonable and clearly outlined boundaries.

The ACCI criticised the evidence used in the issues paper, which included references to international examples to justify changes in Australia. The ACCI argued that Australia has a “unique workplace relations system”, the features of which are not comparable to the international examples cited in the issues paper.

The ACCI also criticised the “chilling effect” cited in the issues paper to describe reduced job mobility caused by restraint clauses. To support its criticism, the ACCI referred to a survey conducted by the Australian Bureau of Statistics (ABS) in which only 1% of the Australian businesses surveyed said a potential employee turned down a job offer because of a non-compete clause.

The Australian Industry Group

Chief executive Innes Willox of the Australian Industry Group (AIG) - another peak national employer organisation - stated that “our position is that non-compete and other restraint clauses are an important contracting device for both employers and employees” that place limits on the ability of employees to misuse confidential information accessed as a result of their employment. Willox pointed to employer concerns that misuse of this information can include taking up work for a direct business competitor and poaching clients or staff from previous employers.

According to Willox, the purpose of restraints in employment contracts is to give employers the confidence to invest in their businesses and to employ staff, secure in the knowledge that contractual protections can be enforced when necessary and reasonable to protect employers’ legitimate interests. He said: “… the limited protection these clauses provide acts as an incentive to employers to invest in employees and, relatedly, in innovation activities… the fact that a clause is in place reduces risks for an employer and in doing so encourages the sharing of valuable information with their employees who are subject to a restraint”.

Rather than considering further regulation which may prevent future productivity improvements, AIG’s view is that the Australian government should focus on policies designed to deliver improved wages and a more prosperous country. It said: “… to constrain the use of such clauses will give rise to a raft of unintended consequences for industry, for employees and for our economy”.

Other points of view

The assistant competition minister

The federal government’s assistant competition minister Andrew Leigh took the opportunity at a speech he gave on 4 April to the McKell Institute - a left-wing think tank - to say that non-compete clauses in employment agreements are businesses’ “bluntest tool in the shed”. According to Leigh, Australia should follow the direction other countries have taken recently on removing such clauses in order to provide more flexibility for employees in choosing new employers in situations where alternative methods can be utilised by businesses to protect their interests.

Leigh relied on ABS data to say non-compete clauses harm job mobility, wages growth and innovation by preventing employees from moving to competing businesses or starting new ones.

Leigh also cited studies from the US highlighting the banning of non-compete clauses for low-wage workers in 2008 - which resulted in a 2% to 3% wage increase for that group - and a 2015 prohibition of non-compete clauses for tech workers said to have resulted in 4% wage growth for new hires.

The former president of the Fair Work Commission

In March, the former president of the Fair Work Commission, Iain Ross, published a research paper on non-compete clauses in employment contracts and argued in favour of the need for a regulatory response.

In the research paper, Ross concluded that non-compete clauses and their prevalence will continue to accelerate if regulators do not intervene and that such clauses should be banned from enterprise agreements.

In addition, Ross recommended:

• the federal government introducing new laws to impose an income cap threshold below which non-competes are unenforceable;
• limiting to six months the terms of non-competes applying to workers above the threshold; and
• rendering unenforceable terms prohibiting solicitation of former co-workers.

Potential outcomes

It appears likely that a new bill resulting from the consultation process will seek to amend the Fair Work Act 2009 (Cth) by either limiting or banning post-employment restraints in employment contracts. The extent of the proposed changes – for example, whether they will affect all or only some national system employees – remains to be seen.

For part-time, gig, casual and ‘employee-like’ workers, the federal government may introduce a ban on restraint clauses in their employment contracts due to the nature of their work which typically involves multiple jobs to supplement an income.

For other workers, the government may introduce a limit on restraints for certain categories of employee, such as those earning less than the high-income threshold – which is currently AU$175,000 (US$118,000) a year. Alternatively, a time limit for restraints may be introduced, similar to the UK’s proposed three-month maximum.

In Germany, workers receive compensation for non-competes based on a percentage (50%) of their income, however it is unlikely that such a rule would be introduced in Australia.

More will be known following the completion of the consultation process. In the meantime, employers should review their use of restraints in employment contracts to determine their exposure to potential legal risks arising from the proposed changes. They should also review other potential business protection strategies to help minimise any commercial threats posed by the proposed changes.

Co-written by Suren Missaghi of Pinsent Masons.