Out-Law Analysis 6 min. read

Australia’s assessment of non-compete clauses could hold major implications for employers

The Australian government’s recent issues paper on post-employment restraints of trade, which follows growing developments overseas towards regulating, banning or restricting the use of such restraints, is an indication for employers that Australia could be moving in the same direction.

The issues paper (42-page / 915KB PDF), released by the federal treasury in April, is seeking public comment and feedback by 31 May. It follows a series of developments which began with the Australian government’s announcement in August that non-compete and related clauses in employment contracts would be a policy matter considered by its Competition Review, which also began in August.

The government’s subsequent Employment White Paper Roadmap, released in September, noted “emerging” research that non-compete clauses may be restricting workers from moving to better paid jobs and hampering job mobility and innovation.

This was followed by the Australian Bureau of Statistics conducting a first-of-its-kind survey late last year, known as the ‘short survey of employment conditions’. It included information on non-competes and other employment restraints of trade, and the survey results were released on 21 February.

Results of the ‘short survey of employment conditions’

The survey found that non-disclosure clauses were the most common form of ‘restraint’ used by 45% of businesses, with non-solicitation clauses the next most common, used by 25% of businesses. Non-competes were shown to be used by 20% of businesses and non-poaching of fellow workers clauses were only used by 18% of businesses.

The survey also found that 47% of businesses used at least one of these contractual clauses, while 19% of businesses used only one of them and 14% used all four kinds.

1% of those surveyed said a potential employee turned down their job offer because of a non-compete clause.

In addition, very large businesses – those with 1,000 or more employees – were found to be the category of businesses that used non-competes the most, with 40% of very large businesses indicating they used non-compete clauses. By contrast, small businesses – with up to 19 employees – were the category with the lowest number of users, with 20 percent of small businesses indicating they used non-compete clauses.

The industries using non-competes the most, according to the survey, were financial and insurance services at 39%, and real estate services at 32%. Those using non-competes the least were the retail industry at 12% and the construction industry at 13%.

The ‘non-competes and other restraints’ issues paper

The federal treasury’s subsequent recent issues paper focuses on non-competes and other so-called main ‘restraints’ such as client and fellow worker non-solicitation and non-disclosure clauses affecting workers, including employees and independent contractors.

The paper also focuses on examples of what appear to be forms of ‘cartel conduct’ by employers, including agreements not to hire each other’s employees, known as no-poaching agreements, and agreements to fix wages or other employment conditions, known as wage-fixing agreements.

In particular, the issues paper seeks to examine competing policy objectives. Namely, on one hand, removing hindrances to worker mobility with the aim of increasing access to better paid jobs, and increasing competition and innovation and, on the other hand, considering employers’ legitimate business interests in protecting their trade secrets, know-how and other confidential information, as well as business goodwill, and encouraging them to invest in educating and training their staff.

Current law for post-employment restraints across Australia

The current law for post-employment restraints across Australia relies on the common law through precedents set by court decisions, as well as guiding principles in the Competition and Consumer Act 2010 (Cth).

Under common law, a restraint of trade is contrary to public policy and therefore void and unenforceable, except to the extent it is reasonably necessary to protect the legitimate business interests of the person - for example, an employer - seeking to rely on it.

Applying the common law, a court can remove any offending part of a restraint clause to make it reasonable and therefore enforceable, but it cannot add words – this is known as the ‘blue pencil’ approach. This has led to the common practice of drafting restraint clauses in what is known as the ‘cascading’ manner, where a number of different time periods and geographic areas are specified, which a court can delete if it considers them unreasonable.

In NSW, the Restraints of Trade Act 1976 (NSW) takes a different approach. It presumes a restraint is valid to the extent that it is not contrary to public policy. It also allows the Supreme Court of NSW to add words if necessary to make a restraint reasonable and enforceable. This slightly more ‘employer-friendly’ approach has resulted in, according to the issues paper, as much as 56% of post-employment restraints in NSW being more likely to be enforced, compared to the rest of Australia, where 33% of post-employment restraints are likely to be enforced.

International developments in the regulation of non-compete clauses

A few countries, including Germany, Austria and Finland, already regulate non-compete clauses, while other countries such as the UK, the US and Singapore, have recently introduced or are proposing changes to restrict, ban or regulate their use.

In the US, the Federal Trade Commission voted on 23 April to finalise a rule abolishing most employee non-competes. The new ‘non-compete rule’ bans non-competes for all workers, which is broadly defined to include employees, contractors, externs, interns, apprentices, sole proprietors and volunteers. The rule is likely to take effect in late August or early September, following which it will apply to non-competes made before and after the effective date. The rule will also override contrary state law.

The new rule will not apply to existing non-competes in place before the effective date for senior executives - that is, those earning at least US$151,164 per annum who occupy a ‘policy-making position’ in their organisation. However, employers will not be able to make new non-competes with senior executives after the effective date.

In addition, the rule will not apply to certain employers such as some banks, some non-profit organisations and some common carriers. It will also not apply to sales of a business, breaches of existing non-competes before the effective date, acts done in the exercise of good-faith belief, or non-competes applying to current workers during employment or engagement.

Next steps for Australia and non-compete considerations for employers

Through the current issues paper, the Competition Review is inviting public submissions, seeking feedback until 31 May from both workers and employers. This is being done in conjunction with targeted stakeholder engagement and other meetings which aim to gather further diverse perspectives.

The feedback is expected to help inform the federal government’s review process as to whether any recommended changes, including legislative changes, should be made in the second half of this year, and if so, what form those changes should take.

Potential guidance on the kinds of changes the government may consider can be gained from recent developments overseas.

Employers should be monitoring developments closely and considering making a submission under the issues paper.

If, as seems likely, the federal government moves forward to propose legislative changes later this year to regulate, restrict or ban post-employment restraints of trade, possibly with an effective date in late 2024 or early 2025,  there will likely be significant impacts for many employers, particularly those who make use of contractual non-competes, non-solicitation clauses and non-disclosure - that is, confidentiality - clauses.

There may be other implications organisations will need to consider, including, for example, arrangements some employers have in place to recover some or all of the costs of significant training or education costs incurred on behalf of employees. Examples of this include pilot and other flight crew training costs and costs for management and other education courses. While these might not strictly be seen as ‘restraints’, these arrangements for the re-payment of some or all of the costs paid by an employer if an employee resigns within a specified time period after completing these types of courses may be seen as indirect restraints.

Employers may also need to consider employment restraints used in sales of businesses. In our experience, non-competes and other restraints are commonly used for the benefit of the buyer when buying a business. It is unclear, at this stage, whether any proposed changes will extend to this kind of transaction or whether, as in the US, any change will carve them out.

Measures that employers should take to respond to these potential changes include reviewing current arrangements to identify to what extent, if at all, restraints are used in the business and assessing the benefits obtained by current arrangements. Employers should also consider possible alternative means of business protection, such as fixed or maximum term contracts and extended notice periods with ‘gardening leave’ arrangements.

Co-written by Suren Missaghi of Pinsent Masons.

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