What is the future for the use of restraints of trade for employees in Australia?

By Aaron Dearden and Matthew Peterson

Restraint of trade clauses are commonly used by businesses to prevent unfair competition by protecting their trade secrets, confidential information, goodwill and other legitimate business interests.

Indeed, recent data from a survey conducted by the Australian Bureau of Statistics (ABS)[1]shows one in five Australian businesses (21%) used non‑compete clauses for at least some of their employees in 2023. Additionally, almost half (47%) of employers used some kind of restraint on employees, such as a non‑disclosure clause or a clause restricting solicitation of customers or co‑workers.

Despite their prevalence, there is growing commentary both in Australia and overseas that the use of restraint of trade clauses is harming job mobility, innovation and wages growth. Concern is being expressed by some commentators about their use for low-paid workers, including hairdressers, early childhood workers and security guards.

The Hon Dr Andrew Leigh MP Assistant Minister for Competition, Charities and Treasury, Assistant Minister for Employment recently described non-compete clauses as the ‘bluntest tool in the shed‘ and claimed the mere threat of enforcement proceedings have a ‘chilling effect‘ on worker mobility.[2]

Some countries already regulate non-compete clauses (eg Austria, Finland and Germany), while others, including the United States (US) and United Kingdom (UK), are proposing reforms that would restrict or ban their use.

So, what does the future hold for the use of restraint of trade clauses in Australia?

Background: restraint of trade clauses in the Australian context

The common law has long recognised the need to strike a fair balance between freedom of contract and public interest in competition, given that the relative bargaining power between capital and labour is inherently unequal.

In Stacks Taree v Marshall [No.2] [2010] NSWSC 77, McDougall J observed at [38]:

[38]      A consideration of contracts in restraint of trade requires recognition of two competing principles. The first is the principle that contracts freely negotiated should be given effect according to their terms, at least in the absence of any vitiating element. The second is the public interest in competition and, more generally, in the promotion of economic efficiency and growth that are said to be concomitants of effective competition. The two principles collide where a clause in a freely negotiated contract seeks to restrain the ability of one of the parties to that contract to compete with the other in defined circumstances.

Types of restraint of trade clauses

There are several different types of restraint of trade clauses, which can be broadly categorised as follows:

• Non-compete restraints prevent workers from being involved with a competing business or from setting up their own business in competition with their former employer, often by reference to certain geographic radius and/or business activities.
• Non-solicitation restraints prevent workers from soliciting, enticing, approaching or dealing with clients of their former employer with whom they had built a relationship during their employment, which they could otherwise seek to leverage.
• Non-poach restraints prevent workers from soliciting, enticing, inducing or encouraging other employees of their former employer, with whom they had dealings, to leave their employment or engagement.
• Non-interference restraints prevent workers from seeking to interfere with the relationship between their former employer and its clients, customers, employees, contractors or suppliers.
• Non-disclosure clauses restrict former workers disclosing confidential information gained during their employment. This can include trade secrets, product formulas and client lists.

Applicable principles

At common law, a restraint of trade provision is prima facie invalid unless the party seeking to enforce the restraint (typically the former employer) demonstrates that, at the time of entering into the contract, there were circumstances justifying the restraint and it is reasonable in the circumstances of the particular case.

The position, however, is somewhat different in New South Wales where the Restraint of Trade Act 1976 (NSW) applies. The effect of the Restraint of Trade Act is to modify the common law position so a restraint of trade is valid to the extent it’s not against public policy, even if not in severable terms.

In considering whether a particular restraint is reasonable in Australia, courts will consider all the circumstances, including (without limitation):

• the restraint’s duration, being how long the restraint seeks to prevent certain conduct;
• the geographical area in which the restraint is to have effect;
• the activities the restraint seeks to restrain;
• the nature of the industry and value of personal relationships in that industry;
• the person’s seniority;
• the person’s business connections and the extent to which they were the ‘face of the business’;
• the person’s contact with and influence over clients;
• the person’s relationship with others and in particular their influence over others;
• whether the person is entitled to payment during the period of the restraint; and
• whether the person possesses confidential information or had access to confidential as part of their role, and if so, the nature of that information.

Although the legal principles may be the same, restraints in employment contracts (where the employee didn’t receive a payment in return for the restraint) are viewed more strictly and less favourably than those in commercial agreements, such as sale of business contracts. In commercial agreements, the onus of establishing the reasonableness of the restraint is more easily met due to the need to hold parties to the bargain they made, considering the relative bargaining power of the parties involved.

The use of restraint of trade clauses by Australian businesses

The results of a recent survey of employers by the ABS revealed the following:

The ABS survey[3]revealed non-disclosure clauses were the most common restraint clause (45.3% of Australian businesses in 2023), followed by non-solicitation of clients (25.4%), non-compete (20.8%) and non-solicitation of co-workers (18%).

According to the ABS survey[4],non‑compete clauses were most common in financial and insurance services (39.6% of employers), as well as rental, hiring and real estate services (32.6% employers). Businesses with more than 1,000 employees were around twice as likely (40%) to have employees with non‑compete clauses than those with fewer than 20 employees (20.2%).[5]

Just one percent of Australian businesses said a potential employee had turned down their job offer because of a non-compete clause.[6]However, non‑compete clauses have been found to also apply to many low wage workers, including hairdressers, early childhood workers, security guards and yoga instructors.[7]

What is happening internationally?

United States

The US Federal Trade Commission has issued a Final Non-Compete Clause Rule banning employers from entering into or attempting to enforce any new non competes, even if they involve senior executives. Existing non-competes will also no longer be enforceable under the Final Rule (other than non-competes for senior executives) and employers will be required to provide notice to workers (other than senior executives) who are bound by an existing non-compete that they will not be enforcing any non competes against them.[8]

United Kingdom

The UK Government has announced plans to limit the use non-compete clauses under employment agreements for a maximum duration of three months following termination of employment.[9]

Austria

Non-compete clauses must not exceed one year and must not be unreasonable. A non-compete clause is only enforceable if the remuneration due for the last month of employment is over a certain threshold, being between €3,315 and €3,900.[10]

Luxembourg

Non-compete clauses are only permitted when an employee earns over a certain revenue threshold, being €64,382.45. The non-compete clause must be geographically limited, cannot run for over 12 months and can only relate to activities that are identical or similar to the employer.[11]

Finland

Employers are required to have a particularly weighty or compelling reason related to the employer’s operations or to the employment relationship to enforce a non-competition restraint. Additionally, the employer is required to pay compensation to an employee for the duration of the non-competition restraint period. This compensation is calculated at 40% of the employee’s regular salary for a restraint period lasting less than six months or 60% of the employee’s regular salary for a restraint period lasting more than six months.[12]

Belgium

Non-compete restraints are only valid if the employee earns annual gross remuneration of at least €78,706 (currently) as at the date of termination, with some limited exceptions.[13]

Will restraint of trade clauses be banned in Australia?

Last year, the Treasurer announced a Competition Review to undertake rolling policy projects and provide advice to the government on how to improve competition across the economy. The Competition Review was tasked with considering the use of non-compete and related clauses in employment contracts among other policy areas.

The Competition Review recently published an Issues Paper,[14]which examines the ABS data and outlines policy concerns with the use of restraint of trade clauses. The reported impacts include lack of resources for vulnerable workers to challenge restraints, job mobility, restriction of employment opportunities, lower wage growth and labour shortages in certain industries.

The Competition Review is inviting public submissions to its issues paper in addition to targeted stakeholder engagement. This feedback will inform the Australian Government’s consideration of whether reform is needed. The consultation process is open until 31 May 2024.

Possible reforms could include, for instance:

• a complete ban of the use of restraint of trade clauses with limited exceptions of higher paid workers and/or for a certain duration (eg three or six months);
• restrictions on the use of restraint of trade clauses, particularly regarding non-compete clauses for workers who are paid below a certain threshold and/or perform work in lower paid industries; and
• a requirement to pay workers for the duration of the restraint of trade clause.

What does this mean for employers?

While the future for restraint of trade clauses in Australia remains uncertain, employers should consider using other means to bolster the protection of their commercial interests, such as longer notice periods for key positions and garden leave, separate deed polls dealing with confidential information and intellectual property, using liquidated damages clauses where non-solicitation is breached and use paid non-compete periods.

This article has been written with the assistance of Charlotte Pratt, Law Graduate.

[1] Restraint Clauses, Australia, 2023 – Restraint clause use by employers
[2] Unenforceable and unnecessary non‑competes hold us back
[3] Australian Bureau of Statistics | Restraint Clauses, Australia, 2023 – Restraint clause use by employers
[4] Restraint Clauses, Australia, 2023 – Restraint clause use by employers
[5] Restraint Clauses, Australia, 2023 – Restraint clause use by employers
[6] Restraint Clauses, Australia, 2023 – Restraint clause use by employers
[7] New data shows 1 in 5 Australian employers used non‑compete clauses
[8] FTC Announces Rule Banning Noncompetes
[9]  Non-Compete Clauses: government response
[10] Amendments to the Austrian Labour Law
[11] What is a non-competition clause?
[12] Employers to compensate employees for all non-competition agreements – legal amendments to take effect in January 2022
[13] Interesting development regarding Belgian non-compete clauses
[14] Non-competes and other restraints: understanding the impacts on jobs, business and productivity | Issues Paper