We are seeing a period of significant change in the rights, obligations and benefits associated with employment (and small contracting and gig) relationships. Amongst the changes being considered by the federal government is a restriction on the use of contractual non compete clauses. The ostensible focus is on measures that can be taken to increase economic productivity in the labour market. This has taken the form of a Competition Review issues paper released by the Treasury in April called “Non-competes and other restraints: understanding the impacts on jobs, business and productivity” (“Treasury paper”). The Treasury paper poses a number of questions and seeks submissions by 31 May 2024. It comes at the same time as the publication by the Australian National University of a working paper by former Fair Work Commission president Dr Iain Ross called “Non-compete clauses in employment contracts: The case for regulatory response” (“Ross paper”).
The reality is that most employees (and employers) do not fully read or understand their contracts of employment but they can contain provisions with important consequences. Post employment restraints are one example and are commonly ignored until an employee receives a very nasty letter from their ex employer (or their lawyers) either stating they cannot work for a new employer or cannot deal with former clients, with the threat of an injunction or damages. Most of the time, these contract clauses are included for deterrent effect, without the intention of enforcement, but one can never be sure. This is why we usually advise a cautious approach by employees. A reasonable clause preventing employees from accepting business from clients they had dealings with for a certain period before the end of employment will usually be enforceable. However, some employers go further and wish to include general non compete clauses preventing employees from working for competitors or even in the same industry. These clauses are unlikely to be enforceable as a general rule, with the exception of senior executives.
We are starting to see some backlash to these excessive clauses. In a recent Fair Work Commission unfair dismissal case – Mr Andrew Goddard v Richteck Melbourne Pty Ltd [2024] FWC 979 – there was no reduction of compensation where an ex employee chose to comply with a post employment restraint and not look for work, even where the clause was manifestly unreasonable. In another case – Lochdyl Pty Ltd v Lind [2024] SAMC 43 – a low paid casual hairdresser’s two year restraint on poaching clients was held to be void and unenforceable.
These issues have been picked up by the government and the Treasury paper says there is growing international evidence that restraints of trade – and particularly non compete clauses – are becoming increasingly prevalent. Indeed, the US Federal Trade Commission is imposing a nationwide ban on non compete clauses. The Treasury paper also suggests that restraint of trade clauses are adversely impacting workers, other businesses and broader economic outcomes through reduced wages growth, job mobility and access to skilled workers. A recent ABS survey found that 46.9% of businesses surveyed used some kind of restraint clause and a significant number of these businesses used non compete clauses. The Treasury paper addresses the economic impacts of these restraints and poses a number of questions about the validity of these restraints including whether it is appropriate for part time, casual ang gig workers to be bound by restraints at all. The Treasury paper defines primary post employment restraints as follows:
1. Non compete clauses prevent workers from joining a competitor or starting a new business in competition with their current employer for a period of time;
2. Non solicitation clauses prevent workers from soliciting former customers and co workers;
3. Non disclosure clauses prevent workers from disclosing confidential information relating to their employment.
The Ross paper concentrates on the narrower issue of non compete clauses. Dr Ross points to the lack of consistency by the courts in dealing with restraint cases (a hallmark of the common law), the confusion created by the use of overly broad and “stepped’ or “cascading” non competes, their widespread use amongst low wage occupations and the chilling effect on mobility this creates for employees. Dr Ross considers existing law and practice to be manifestly unfair and contrary to the public interest. He favours a regulatory response and raises four possible policy interventions as an initial response to these issues:
1. The adoption of an indexed monetary threshold for non-compete enforceability;
2. Placing a term limit (up to six months) on non competes for employees earning more than the monetary threshold, subject to those employees being compensated for the duration of the restraint;
3. Making contract terms which prohibit the poaching of former co workers unenforceable;
4. Prohibiting such clauses in enterprise agreements.
Given the short time for responses to the issues paper, we can expect to see any change in this space proposed before the next federal election. Only time will tell whether any change is limited to non compete clauses or extends to broader issues. In the meantime, employers should be careful to limit post employment restraint clauses in employment contracts and employees should be careful not to simply disregard these provisions.
Please contact us if you would like any further information or help.