Government outlines plan to scrap ‘unfair’ non compete clauses

According to a media release^[1], the Government plans to ban non-compete clauses for around 3 million workers who earn less than the high-income threshold prescribed under the Fair Work Act (which is currently $175,000 per annum and is adjusted annually from 1 July each year). 

The Government’s proposal also includes plans to reform Australian competition laws to ‘close loopholes’ in competition law that currently allow businesses to: 

• fix wages by making anti-competitive arrangements that cap workers’ pay and conditions, without the knowledge and agreement of affected workers; and
• use ‘no-poach’ agreements to block workers from being hired by competitors.

The Government has said that it will consult on the changes, which will take effect from 2027 following the passage of new legislation and operate prospectively. The Government has also flagged possible changes to non‑solicitation clauses for clients and co‑workers, and non‑compete clauses for high‑income workers.

While it is unclear at present how the changes will be implemented, the reforms could include amendments to the Fair Work Act that render non-compete clauses in existing contacts invalid and impose civil penalties for employers that include unlawful non-compete clauses in contracts after the new laws come into effect (ie similar to the pay secrecy changes introduced under the Secure Jobs, Better Pay Act).

The changes are said to reflect advice from the Treasury’s Competition Review Expert Advisory Panel and are part of a broader package of reforms that the Government says will strengthen competition and boost wages by encouraging job mobility among the Australian workforce. 

The changes also align with recent studies both in Australia and overseas, including research from the QUT Centre for Decent Work and Industry, Australia^[2] which examined the use of post-employment restraints for hairdressers and IT professionals and found around 25 per cent of small and medium sized enterprises surveyed restricted their workers from finding work elsewhere, contacting clients or recruiting co-workers after their employment ends.

As we noted in our previous article, the common law has long recognised the need to strike a fair balance between freedom of contract and public interest in competition. Even in NSW where the Restraints of Trade Act applies, the courts are reluctant to enforce non-compete restraints against junior workers who are less likely to have access to confidential information and generally aren’t employed in a position with responsibility for making strategic decisions within the business. 

In practice, this means that it is already difficult for employers to enforce non-compete restraints against junior workers who typically earn less than the high-income threshold. Indeed, there is already a common misconception among the workforce that post-employment restraints (including non-compete restraints) aren’t enforceable. 

So, what will the new reforms mean for Australian businesses?

The reforms will almost certainly prohibit businesses from including non-compete restraints in employment contracts for those employees earning less than the high-income threshold, which are often presented in standard form and on a ‘take it or leave it’ basis. The reforms will prevent parties from abusing the court process and seeking to enforce non-compete restraints without proper justification, particularly against low paid workers who often cannot afford the cost of defending such claims themselves. 

On the other hand, businesses may also find it easier to enforce non-compete restraints against senior workers who earn more than the high-income threshold. Importantly, the reforms are unlikely to impact non-disclosure clauses that protect against the misuse of confidential information gained by workers during the course of their employment or engagement.

The high-income threshold currently operates as a limit to a worker’s eligibility to be protected from unfair dismissal under the terms of the Fair Work Act. While the proposal to ban non-compete clauses for those workers earning less than the high-income threshold is intended to strike a balance between junior and senior workers, there may be unintended consequences for businesses because of how the high-income threshold is calculated under the Fair Work Act.

Businesses should be particularly mindful of workers whose remuneration consists of a low base salary combined with incentive-based payments and bonuses which are excluded from ‘earnings’ for the purpose of the high-income threshold. Businesses should also consider reviewing their use of non-compete restraints regularly to ensure that they remain compliant, given the high-income threshold is adjusted annually from 1 July each year.

It is unclear at this stage whether the changes will only affect employees or be applied more broadly to apply to other workers such as independent contractors, labour hire workers, gig workers, sale of business agreements and shareholders more broadly. The Government has said that it will consult on the proposal, including exemptions, penalties, and transition arrangements, before finalising the new legislation. 

While the future for restraint of trade clauses in Australia remains uncertain, employers should consider reviewing their use of restraints of trade and considering what steps they can take now to protect their trade secrets, confidential information, goodwill and other legitimate business interests.

[1] Cracking down on non-compete clauses to boost wages and productivity 
[2] Locked In or Left Out: Assessing the Impact of Post-Employment Restraints in Australia