Uncertain prospects for non-compete agreements: An exploration of their potential demise
The Australian Government is currently consulting on proposed reforms to ban non-compete clauses for employees earning below a high-income threshold, with the intention to introduce statutory bans overriding common law protections. These reforms, if passed, are expected to take effect from 2027.
The ban focuses primarily on low- and middle-income workers but also opens the door to further reforms for high-income employees. Consultation is ongoing, with stakeholders invited to submit feedback until early September 2025.
The reforms aim to promote worker mobility, increase access to higher-paying employment, and reduce wage suppression caused by restrictive clauses often misapplied even to low-wage workers in industries like childcare and construction.
Additional reforms may clarify how restrictions on concurrent employment apply to part-time and casual workers and remove current exemptions under competition law for no-poach and wage-fixing agreements between businesses.
International Influence
The Australian reforms appear to align with a global trend toward restricting or banning non-compete clauses, reflecting similar motivations to enhance competition and worker freedom observed in the United States. The U.S. Federal Trade Commission (FTC) has recently issued a landmark rule broadly banning noncompete clauses nationwide. This FTC ban has generated significant discussion, legal challenges, and practical guidance for companies.
In the UK, the focus is on limiting the duration of non-compete clauses, rather than other restraint conditions like non-disclosure and non-solicitation clauses. The UK Government has proposed a statutory limit on the duration of non-competes to three months.
In the EU, many states impose mandatory compensation for the duration of non-competes, such as Germany, the Netherlands, and Spain. In Germany, a non-compete clause will only be enforceable if the employer agrees to pay at least 50% of the remuneration received during employment.
Current Scenario in Australia
Approximately 46.9% of all Australian businesses use at least one type of restraint of trade clause. The FTC's ban on non-competes in the US applies retrospectively and will make existing non-competes unenforceable 120 days after the ban comes into effect, but an exception is made for senior executives and certain other cases.
The Australian Government has demonstrated a willingness to regulate contractual relationships, such as the recent prohibition on pay secrecy clauses in employment contracts. The Issues Paper acknowledges concerns regarding the current legal framework and uncertainty about the enforceability of restraint of trade clauses.
Employers in Australia should review and consider employment contracts and reliance on restraint clauses, focusing on well-crafted non-solicitation restraints and strategic use of notice periods and alternatives such as garden leave.
The FTC ban on non-competes in the US is subject to legal challenge. Public submissions in response to the Issues Paper on the impact of non-competes and other restraints of trade are open until 31 May 2024.
[1] Australian Treasury, Issues Paper: Non-compete clauses and other restraints of trade, April 2024. [2] U.S. Federal Trade Commission, Press Release: FTC Bans Non-Compete Clauses, June 2023. [3] UK Government, Consultation: Proposals to limit the use of non-compete clauses, October 2023. [4] European Commission, Guidelines on the applicability of EU competition law to vertical restraints, December 2022.
Finance and business sectors may closely monitor the Progress of Australian Government's proposed reforms to ban non-compete clauses for low- and middle-income employees, as it could potentially influence industry practices and employee mobility within these sectors. The international trend towards restricting or banning non-compete clauses also highlights the need for Australian businesses to review their current contractual relationships, particularly in light of the FTC's ban on non-competes in the US, which is subject to legal challenge.
