Will non- compete clauses soon be banned in Australia?
The Australian Council of Trade Unions (‘ACTU’) Congress recently announced that they are set to change their policy to target “wage supressing” non-compete clauses. ACTU assistant secretary, Joseph Mitchell furthered that he believes “there is no compelling case for non- competes to exist in any contract, regardless of the risk they are mitigating against”. Mitchell contends that these risks are already being mitigated by the law, practices and codes such as the Trade Practices Act.
This sentiment has been supported by Assistant Treasurer Andrew Leigh who previously announced he was pushing for a complete ban on the use of non- compete clauses. The Fair Work Commission has also been challenging the use of these clauses in recent cases such as Andrew Goddard v Richtek Melbourne Pty Ltd.
Given this, Australia appears to be following in a similar path to both the UK and the US in relation to non- compete clauses in employment agreements.
What are non- compete clauses
Non- compete clauses are a form of post- employment restraint to employees. They limit a former employees ability to accept a job with a competitor of their previous employers. These clauses may also prohibit an employee from working for a competitor within a specified period or in a defined geographical area.
The reason these clauses are inserted into employment agreements is to protect the business interests of the former employer from having confidential information, trade secrets and customer relationships jeopardized. This protection, however, needs to be balanced against the right workers earn a living and find meaningful employment elsewhere. This tender balance has called into question whether non-compete restraints are enforceable and if they are, to what extent.
How the courts currently interpret restraint clauses
The recent Fair Work Commission decision of Andrew Goddard v Richtek Melbourne Pty Ltd [2024] FWC 979 suggests that non- compete clauses might soon become redundant in Australia.
In this case, an ex- employee of a grouting services business was unfairly prevented from finding similar employment due to a non- compete clause in his employment contract. This clause prevented him from applying for similar jobs within a specified geographical area. As a result, the ex- employee could not get a job and faced a loss of income. The ex- employee subsequently challenged this clause and was awarded compensation by the Fair Work Commission. After the former employer appealed, the Fair Work Commission maintained that the compensation provided was adequate. In his judgement, Deputy President Colman even furthered that he wondered why these provisions were ‘commonly found’ in employment contracts and whether they ‘really’ protect any legitimate business interests of the employer.
Non- compete clauses in the US
In the USA, the Federal Trade Commission has taken the step of banning non- compete clauses in employment contracts. Under this, existing non- competes for the vast majority of workers are no longer enforceable. However, it must be noted that pre-existing non- compete clauses for senior executives will remain in force. In the UK, the government has proposed a statutory limit of three months on non- compete clauses.
In Australia, restraint of trade clauses are currently protected by the Competition and Consumer Act 2010 (Cth). The clauses also appear to be highly prevalent as recent ABC data has revealed that one in five Australians are subject to non-compete clauses and 50% of the current Australian workforce are bound by a type of post- employment restraint. Given this, the Competition Review Taskforce is currently examining the use and necessity of non- compete clauses. In an Issues Paper compiled by them, concerns were raised over the “chilling effect” restraint clauses have on former employees and the lack of clear guidance on whether the clauses are enforceable. Given this, momentum is currently gathering in Australia to follow in both the USA and the UK’s lead.
However, it must be noted that with senior employees, there is often a need for such restraint. These employees have access to confidential information and customer relationships that could potentially be prejudicial to the business’ interests if they move to a competing company.
Given this, employers need to be careful when considering whether a non- compete clause is necessary in an employment agreement. Particular consideration must be provided to each employees seniority within a business. Ultimately, a fine balance must be struck between protecting an employer and respecting their right to seek other jobs.
If you are an employee or employer experiencing issues in regards to restraint of trade clauses, or any other employment law queries, please contact Voice Lawyers by booking through our website, or if you would like a second opinion, come and speak with us or call 02 9261 1954.
Written by: Kayte Lewis and Jake Fitzpatrick