Two legal professionals break down what the non-compete clause ban could mean for you, and outline some steps to take now.
With the re-election of the Albanese government, the proposed ban on non-compete clauses, which was announced during this year’s budget, remains on the table.
The proposed ban follows the release of the Treasury’s Issues Paper in April 2024, which considered the impact of non-competes and other employment restraints.
Because promoting job mobility in the labour market remains a focus for the government, now is an ideal time to start thinking about what the ban could mean for you and your small business.
What’s happening?
Non-compete clauses could be banned
If the proposal is passed by Parliament in its current form, non-compete clauses will be banned in employment contracts from 2027 for workers earning less than the high-income threshold (currently $175,000 per year).
At present, around 3 million employment contracts in Australia contain non-compete clauses which restrict these workers from going to work for a competitor or setting up a competing business within a certain geographical area for a set period once they cease employment with their employer.
Non-solicitation clauses may also be on the chopping block
The government has also foreshadowed consultation on the use of non-solicitation clauses. These clauses seek to prevent former employees from soliciting clients or employees from their former employer.
Should a ban be implemented on non-solicitation clauses, this is likely to be of significant concern for small businesses seeking to protect their valuable confidential and sensitive information, especially in the context of a ban on non-compete clauses.
Possible crackdown on wage-fixing and no-poach agreements
Post-employment restraint clauses are not the only target for further reform.
The government has committed to close further loopholes on the use of “wage-fixing” and “no-poach” agreements.
Under a wage-fixing agreement, two or more businesses agree to fix wages or employment conditions to discourage workers from moving to a higher paying role with a competitor.
Similarly, under a no-poach agreement, businesses agree not to hire workers from certain other businesses, thereby reducing job opportunities for workers. It is not uncommon that workers are not aware of these agreements.
It is projected that the proposed reforms will increase job mobility within the labour market, leading to higher wages for workers and greater economic productivity.
What you should do now
While it remains to be seen whether the proposed reforms will pass through Parliament and become law, there are several steps small businesses can take in the interim to ensure they are prepared for the changing competition landscape:
- Review the business’ current use of non-compete clauses – review existing employment contracts and determine how many contracts contain non-compete clauses and if there is a trend in their use (for example, lower income earners in specific positions)
- Consider the reasonableness of existing non-compete clauses – irrespective of any possible ban, it is important to consider whether the non-compete clause is reasonable having regard to the legitimate business interests you as a business owner are trying to protect.
- Review non-solicitation clauses – while the government has foreshadowed consultation on the use of non-solicitation clauses, these clauses provide an alternative method for seeking to protect legitimate business interests by preventing former employees from poaching clients or other employees.
- Review employee confidentiality clauses – given the uncertainty surrounding the future use of non-compete clauses, it is wise for small businesses to ensure their employee confidentiality clauses are adequate to protect their business interests. Given an employee’s obligations under a confidentiality clause survive the termination of their employment contract, these clauses, when drafted appropriately, are an effective way to protect confidential information.
Are your non-compete clauses really enforceable?
Even if you already have non-compete clauses in your employer contracts, there’s no guarantee these are actually enforceable.
In order to be enforceable, a non-compete clause must be reasonable, having regard to the legitimate business interests an employer is trying to protect, and not be contrary to public policy.
A variety of factors would be considered, including:
– What is the legitimate business interest the employer is seeking to protect?
– Does the non-compete clause interfere with an employee’s ability to work and earn an income using their skills and experience?
