Update on the proposed non-compete clause ban

Non-compete clause ban concept image - a close up of new employee signing a contract

Earlier this year we wrote about the Government’s intention to ban non-compete clauses for low and middle-income employees and consult on the use of non-compete clauses for those on higher incomes.

The Government has now indicated that the reforms in this area will take effect from 2027. This hasn’t come as a complete surprise as the Competition Review have already published an issues paper on the topic and the Productivity Commission have also issued a report indicating that limiting the use of unreasonable restraint of trade clauses would have a material impact on wages for workers.

Treasury has since issued a consultation paper, seeking feedback in the following key areas:

How the proposed ban on non-compete clauses should be implemented;
Whether additional reforms are required to the use of post-employment restraints, including for high-income employees;
Whether changes are needed to clarify how restrictions on concurrent employment should apply to part-time or casual employees; and
Details necessary to implement the proposed ban on no-poach and wage-fixing agreements in the Competition and Consumer Act.

Treasury makes it clear that the Government is not planning to change the way the rules apply to restraints of trade outside employment arrangements (eg, on sale of a business) or change the use of confidentiality clauses in employment.

Non-compete clauses: The current state of play

A recent Australian Bureau of Statistics (ABS) report found that 46.9% of businesses surveyed used some kind of restraint clause, including for workers in non-executive roles. The survey also found 20.8% of businesses use non-compete clauses for at least some of their staff and 68.2% for more than three-quarters of their employees.

From an economic perspective, declining job mobility impacts wage growth and innovation as restraints prevent access to skilled workers within the economy. Productivity is a key concern as Australia’s productivity has declined in the last 20 years.

Non-compete clauses in Australia are generally enforced under common law. For all regions except New South Wales, restraints are generally presumed to be against the public interest and therefore void and unenforceable except where they are deemed to be reasonably necessary to protect the legitimate interest of the employer

In NSW, a restraint of trade is valid to the extent to which it is not against public policy.

When non-competes are contested, the courts consider the nature and extent of the business interest to be protected (e.g., confidential client information) and whether the scope of restriction the business wants imposed is reasonable including its geographic area, time period and activities which the restraint seeks to control.

Interests considered ‘legitimate’ by courts include the protection of trade secrets or other confidential information; protection against solicitation of clients with whom the former worker had a personal connection; and protection against key staff being recruited by a former colleague. An employer is not entitled to protect themselves against mere competition by a former worker.

What’s next?

If the proposed reforms are implemented, this could have a direct impact on a range of employers and their workers. Existing agreements will need to be reviewed and potentially updated. However, it is too early right now to guess how this will end up so we will keep you updated as further information becomes available.