Non-compete clauses make it too hard to change jobs. Banning them for millions of Australians is a good move

The Labor government used this week’s budget to announce it plans to ban non-compete agreements for employees on less than A$175,000 per year, a move that will affect about 3 million Australian workers.

Describing them as “unfair”, a media release by federal Treasurer Jim Chalmers said non‑compete clauses “are holding back Australian workers from switching to better, higher‑paying jobs”. Banning non-compete clauses could lift the wages of affected workers by up to 4%, the government has said.

 

The Australian Chamber of Commerce and Industry quickly called the measure “heavy-handed”, arguing that very few employees, according to businesses, turn down employment due to non-compete clauses.

 

However, research I did with colleagues from Melbourne and Monash universities showed very few employees signing a new job contract ever think about the end of the relationship and what might happen after.

 

Workers often accept non-compete clauses with little understanding or regard for their practical implications.

 

What the law currently says

The current law says contractual clauses that stop departing workers from taking a new job in their preferred line of work, often for long periods of time, are – in principle – unenforceable.

 

That is, however, unless a court says a particular non-compete clause is “reasonably required” to protect a “legitimate interest”.

 

Therein lies the problem: it is hard to predict when, where or under what circumstances a court will find a particular clause is “reasonably required”.

 

Our research concluded this uncertainty favoured employers with greater nous and resources.

 

These employers have the advantage over employees, who are rarely willing or able to go to court arguing their non-compete clause is invalid.

 

This has a chilling effect on the mobility of employees. In other words, these clauses make it harder for workers to change jobs.

 

That’s detrimental to labour market competition and can hold back knowledge-sharing and economic growth.

 

Global efforts to ban non-compete clauses

In California, non-compete clauses have long been banned. Many economists have identified this as among the key reasons for the success of the Californian knowledge economy. This example also featured in a submission I made (with researcher Caitlyn Douglas) to a 2024 Treasury review into non-compete clauses in Australia.

 

US research from 2021 also found non-compete clauses can hinder labour mobility. They can impede fundamental freedoms such as freedom of employment and freedom of general competition.

 

In 2024, under President Biden, the US Federal Trade Commission banned non-competes clauses across the US.

 

However, the ban has been blocked due to legal challenges in the US Federal Court. It’s also been reported the Trump administration may kill off these reforms altogether.

 

The UK government proposed in 2023 limiting non-competes to a maximum of three months.

 

Holding employees back

Unlike in some countries, Australian law does not require employers to compensate their ex-employee for loss of income during their non-compete period.

 

This means that if workers comply and do not work in the field they’re most skilled for, they will take a serious financial hit for months or more.

 

This is another detrimental effect of non-compete clauses. They really hurt if the worker in question is lower paid and has very specific skills (such as hairdressers or dental assistants).

 

In that respect, Labor’s mooted ban on such clauses for employees on less than $175,000 is well conceived.

 

Courts will usually only enforce a non-compete clause if its terms are reasonable to protect a legitimate interest, such as trade secrets an employee has learned during their employment.

 

However, it’s mostly higher-ranked employees that have access to really significant trade secrets, such as technical information, confidential business plans or pricing structures.

 

Higher paid employees are also more often the “public face of the business”. A court might decide it’s fair to say such workers can’t leave and the next day turn up as the main face of a competing business.

 

And the new government proposal won’t leave employers without any recourse against employees who take their genuine trade secrets and pass them on to their new employers. They will still be able to sue for breach of confidence.

 

Challenges for reform

The proposed reforms are well supported by authoritative legal and economic research.

 

The federal government will have to consider carefully how to make sure the prohibition cannot be easily circumvented.

 

And they’ll have to ensure these reforms don’t make it more likely judges will find restraints valid for those on more than A$175,000. Labour and knowledge mobility remain crucially important for them too.

 

Another key challenge will be ensuring a ban doesn’t encourage practices or clauses restricting competition to emerge or become too prevalent.

 

That could include “garden leave” clauses. These give a departing employee a long notice period, during which they are paid but do not work and are isolated from their employment (and instead “doing the gardening” at home).

 

The risk is that if employers can no longer include non-compete clauses in contracts, they might use long garden leave provisions more often.

 

Although it is good that “garden leave” employees get paid during that period (unlike during a non-compete term), they are still isolated from their work, stagnating in their skills and unable to move to new employment.

 

This article is republished from The Conversation under a Creative Commons license. Read the original article.