Non-compete and other restraint clauses under review by the Commonwealth Government

3 June 2024
Non-compete and other restraint clauses under review by the Commonwealth Government

Non-compete and other restraint clauses in employment contracts can potentially constitute unlawful anti-competitive behaviour, and their use is currently under review by the Commonwealth Government.

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

Other types of restraint clauses may seek to prevent workers from soliciting former customers or co-workers, disclosing confidential information or fixing workers’ wages or conditions.

Recent data from the Australian Bureau of Statistics has found that 20 per cent of workers in Australia have a non-compete clause in their employment agreement, including in less highly paid industries such as utilities or retail - while 50 per cent of workers have some form of restraint clause in their contracts.

For decades, Australian common law has accepted the enforceability of non-compete clauses, provided the restraint is reasonably necessary to protect a legitimate business interest.

Non-compete clauses are regularly assessed by courts for their reasonableness by considering several factors including their duration, geographical limitations, and the specific circumstances of the case.

However, momentum is growing for Australia to follow the lead of countries like the US and UK in curtailing the use of non-compete clauses.

The review of these clauses currently being undertaken by the Commonwealth Government intends to increase competition, productivity and innovation for businesses. Details of the review can be found at the Treasury Website.

Some studies point to the misuse of non-compete clauses having anti-competitive effects by reducing job mobility and discouraging employees from switching jobs, even if the clauses are not legally enforceable.

While non-compete clauses in employment contracts are not automatically unlawful in Australia, their excessive use and potential anti-competitive impact are increasingly under scrutiny by regulators and courts.

The government's ongoing review of these clauses may lead to reforms in the future that limit their scope and enforce more stringent requirements for their legitimate use.

What are non-compete clauses?

Non-compete clauses are a type of restraint-of-trade clause that seek to restrict a worker – whether employee or independent contractor – from working for a competitor or establishing a competing business, typically within a geographic area and for a time period after the worker ceases employment.

Contracts that contain non-compete clauses can have a legitimate use for businesses, such as protecting intellectual property and encouraging skills formation, but they may also have negative effects, including:

  • preventing workers from moving to better jobs
  • hindering innovation
  • slowing wage growth, productivity and the economy.

Non-compete contract clauses are not automatically unlawful, but for them to be enforceable, employers must show the clause protects their legitimate interests.

Some countries already regulate non-compete clauses, while others, including the United States and United Kingdom, are proposing reforms that would restrict or ban their use.

Other types of restraint clauses under review by the Australian Government include:

  • non-solicitation clauses that prevent workers from soliciting former customers and co-workers
  • non-disclosure clauses that prevent workers from disclosing confidential information relating to their employment
  • no-poaching agreements between businesses who agree not to hire each other’s workers
  • wage-fixing agreements between businesses to cap wages or conditions of their workers.

Assessing the use of non-compete clauses in the labour hire industry

The Labour Hire Authority (LHA) sometimes identifies non-compete clauses and other restraint terms in worker contracts while assessing providers’ licence applications or investigating compliance concerns.

When this happens, LHA may engage with the provider and their workers to assess a clause’s appropriateness.

LHA can take action when it identifies contract clauses that are clearly unenforceable and appear to serve no purpose other than to mislead workers about their rights.

Recently, LHA identified a provider in the construction industry that included a non-compete clause in their template employment agreement.

The clause stipulated that employees would pay a fine to the employer and cover their legal costs if they successfully obtained alternative employment with any other business in the construction industry within six months of leaving the business.

This clause applied to all employees, even those who would only be employed for a single day.

Following LHA engagement with the provider, the business removed the clause from their contracts and will be monitored to ensure ongoing compliance.

LHA will take stronger regulatory action where it is appropriate to do so, to prevent worker exploitation.

If a provider asserts that a worker is both an independent contractor and also subject to a non-compete clause, LHA will also consider whether the worker has been misclassified and should be entitled to the award and other entitlements as an employee.

It is crucial for providers to understand the rules around using independent contractors to remain compliant with their licensing obligations.