By Rachael Sutton, Partner and Astrid Lalor, Lawyer
The proposal follows criticism over the increasing use of non-compete clauses in employment contracts and responds to specific concerns of such clauses in service industries such as hairdressers, construction workers and childcare centre staff. Treasurer Jim Chalmers cited an intention to promote competition, lift productivity reduce inflation, improve GDP and increase wages as the intended consequences of the ban.
The change will most likely be implemented through amendments to the Fair Work Act 2009 (Cth) (FW Act), which are anticipated to take effect in 2027, with prospective application.
Jim Chalmers’ announcement follows the Labor government’s interest since its 2022 election victory in regulating the use of these clauses and recognises similar regulatory efforts by the US Federal trade Commission to implement a similar ban. The decision was also influenced by recent recommendations from the Treasury’s Competition Review Expert Advisory Panel, identifying significant adverse impacts of restraint clauses on low-wage workers, such as hairdressers
The Panel’s review revealed more than 3 million Australian workers are bound by non-compete clauses in their employment contracts, with a concerning expansion into outward-facing service industries. This is a departure from the historical concentration of such clauses in finance and tech industries due to the recognised value of protecting confidential information and IP from use by competitors.
The Review recognised an overarching need to balance the protection of business interests with fostering labour market competitiveness and mobility.
So, what are non-compete clauses and what are the implications of a ban of clauses for employees and employers?
Non-compete clauses are often incorporated into employment contracts where an employer wishes to limit an employees’ ability to work for competitors or operate a competing business for a certain time period and within a certain geographic area following end of employment.
However, non-compete clauses have become increasingly common in employment contracts, including lower-wage industries such as fast-food workers, retail workers and hairdressers.
Including these restraints in employment contracts goes beyond general legal obligations of implied fidelity and loyalty and secures express contractual promises that restricts an employee’s post-employment activities.
The main impetus for including these clauses in contracts concerns a desire by employers to prevent employees from taking business away, or leveraging information gained during their employment for future employers or their own companies.
The Expert Advisory Panel’s advice reflected a trend of growing concern regarding the impact of these clauses on lower paid workers’ mobility and bargaining power surrounding wages and promotion.
A 2023 study conducted by the e61 Institute estimated roughly half of the Australian workforce is bound by some form of employment restraint. Such restraints are particularly cumbersome on lower-paid employees, who often aren’t aware of the existence of such clauses when signing their contracts and can be disproportionately impacted in terms of job mobility, wages and productivity as a result.
Non-compete clauses aren’t the only restraint clauses available to employers. Non-solicitation and non-disclosure clauses also seek to limit former employees’ actions after leaving a company in respect to approaching clients and using confidential information to the disadvantage of their former employers.
The government’s proposal to implement a ban on non-compete clauses follows a growing concern surrounding power imbalances created by post-employment constraints, especially for lower paid workers.
The Expert Review Panel’s research revealed that the misuse of restraint clauses has a significant impact on employees’ post-employment opportunities and places workers at a disadvantage when advocating for increased wages or promotions.
In announcing the proposal, Jim Chalmers noted the intention for the proposed ban to spur new business entry, competition, and to increase workers ability to set up their own shop and pursue entrepreneurial ambition without the risk of legal action.
Employees should take care in reviewing employment contracts before signing to ensure they understand what, if any, restraints are contained in their contracts and how such clauses will impact their post-employment opportunities.
The proposed ban has been met with initial criticism from employers who are concerned the changes will leave their businesses assets vulnerable to competitors and former employees starting their own rival businesses.
Non-compete clauses have become increasingly recognised as a means of protection for employers against former employees diverting key clients, suppliers or assets from their employer post-employment. Further, restraints are seen as crucial to enterprise.
The parameters of the ban excluding workers that meet the high-income threshold highlights the intention to protect lower-wage earners and the recognition of the increasingly extended use of restraint clauses against lower and middle wage earners.
Employers are reminded to be cognisant of which workers may fall within the high-income threshold, as well as the annual adjustments to the high-income threshold occurring on 1 July each year.
The proposal is only in the initial policy announcement stage and will be subject to consultation on policy details including exemptions, penalties and transition arrangements before the (likely) implementation of amendments to the FW Act in 2027. The ban could also be extended to include high-income earners.
Further, the government is currently considering whether to include consultation on non-solicitation clauses for clients and coworkers, and non-compete clauses for high income workers.
The government has also indicated plans to ‘close loopholes’ in other areas of competition law which currently allow businesses to fix wages through caps on worker pay and conditions, as well as ‘no poach’ agreements which seek to block workers from being hired by competitors.
Employers and employees are encouraged to watch this space for any further updates in relation to the proposal’s progress and clarity surrounding scope.
If you would like further information or have any queries regarding other matters, please do not hesitate to contact:
