The Federal Treasury recently released an Issues Paper seeking input to better understand the effects of employment restraints on employees, businesses, and productivity. The review is considering a potential prohibition on post-termination worker restraint of trade clauses, including non-compete, non-solicitation, and non-disclosure, as part of a broader examination of Australian competition laws. This initiative follows a recent ruling by the United States Federal Trade Commission that banned the use of non-compete clauses in employment contracts.
Restraint of Trade Clauses
- Non-Compete: These clauses aim to restrict an employee or independent contractor from working for a competitor or starting their own competing business after leaving their current employer. They typically specify a geographic area, particular field, and time period to which the restriction applies. Non-compete clauses are intended to protect business goodwill and intellectual property by preventing former employees from using trade secrets and customer relationships to benefit a competitor. However, while they reduce business costs associated with recruitment and turnover, they also limit employees’ future job opportunities.
- Non-Solicitation: These clauses restrict former employees from soliciting former clients, customers, business contacts (such as suppliers), or co-workers. During employment, employees often develop relationships with these contacts. A non-solicitation clause aims to protect the business against the former employee leveraging these relationships for the benefit of a new employer or a new competing business.
- Non-Disclosure: Also known as confidentiality clauses, these clauses prevent former employees from disclosing confidential information gained during their employment. This information can include trade secrets, such as product formulas and client lists, which the employee might otherwise use in a future job. Non-disclosure clauses protect businesses that provide confidential information to employees, facilitating investment in training and hiring. These clauses are particularly relevant for senior employees who need access to a wide range of confidential information to perform their roles effectively.
Considerations of Data & Research
Research indicates that around half of Australian businesses employ some form of restraint clause. The motivations for using these clauses vary across businesses of different sizes, and their use is not limited to upper-level managers or executives but extends to all levels of employees. Notably, the use of these clauses is a growing trend among businesses.
Restraint of trade clauses is regulated under the Competition and Consumer Act 2010 (Cth) across all states and territories. However, New South Wales has its own specific regulations under the Restraints of Trade Act 1976 (NSW). The NSW Act presumes that a restraint of trade is valid to the extent that it is not against public policy. Additionally, the NSW Act allows the court to modify the restraint by adding new words (rather than just removing words) to narrow it down to what is reasonably necessary to protect a legitimate interest. As a result, employers in NSW are less likely to rely on cascading clauses to protect their interests. In practice, this leads to restraints being upheld more frequently in NSW (56.1%) compared to the average for other Australian jurisdictions (33.3%).
The Issues Paper
Given the widespread application of restraint clauses, the Government has initiated a review to assess their impact on employee job mobility as well as on business innovation and development.
The Issues Paper highlights several concerns regarding the use of restraint clauses and is inviting public submissions until 31 May 2024 on the following topics:
- Worker mobility, especially among young and low-paid employees who have limited bargaining power.
- A lack of clarity about what clauses are reasonable and enforceable.
- The impact of restraint clauses on low-paid employees and their conditions during employment.
- The effect on clients, consumers, and other business contracts.
- The economic consequences of restraint clauses, including potential inefficiencies.
In addition to the United States, many other countries regulate non-compete clauses, such as Austria, Finland, and Germany. Other nations, including the United Kingdom, are considering new regulations. The UK, for example, has proposed limiting non-compete clauses to three months. Given this global trend and the context of the current review, it is likely that Australia may soon consider similar regulatory changes.
Key Business Considerations
Restraint clauses offer employers a means to protect their investment in resources, business knowledge, and relationships. However, they can also pose challenges, particularly in times of labour shortages, by limiting the pool of available employees and potentially stifling competition due to reduced employee mobility.
Given the international trend towards regulating or banning restraint clauses, employers should assess the impact of these clauses on their business and evaluate whether the restrictions imposed on former employees are reasonable. Looking ahead, employers might consider reviewing their contracts with employees and independent contractors to determine the necessity of restraint clauses.
If the restriction or banning of restraint clauses would adversely affect your business, it may be beneficial to provide feedback to the Issues Paper. The Competition Review will advise the Government on the outcomes of this consultation from June to December 2024.
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