The Proposed Ban on Non-Compete Clauses: Your key questions answered

As part of the recent Federal Budget, the Albanese Government announced it will introduce a legislative ban on non-compete clauses for employees earning under the high-income threshold (currently $175,000).

While there are several questions surrounding the proposed reforms, it is possible we could see the ban come into effect as soon as 2027, noting we have a Labor majority Government.

Set out below is an overview of what we currently know about the proposed changes and the practical steps employers can take to start preparing for the potential non-compete ban.

What are restraints of trade?

Restraint of trade clauses are clauses which limit what a worker can do while employed and for period after their employment ends.

In Australia, the most common types of post-employment restraints include:

1. Non-compete clauses which seek to prohibit a worker from working for a competitor, or on their own behalf, in competition with their employer.
2. Non-solicitation clauses which seek to prohibit a worker from soliciting their employer’s clients, employees or suppliers.
3. Non-disclosure (confidentiality) clauses which seek to prohibit a worker from disclosing or using confidential information obtained during the course of their employment, after their employment ends.

 

At this stage, the Government has only announced a ban on non-competes, although the Government has signalled that it intends to engage in further consultation regarding the use of non-solicitation clauses as well.

 

What is the current enforcement status of restraints?

In Australia, restraints of trade are presumed void, unless the employer can prove that the restraint is reasonably necessary to protect a legitimate business interest.

This involves a two-prong test for enforceability:

1. Firstly, the employer must prove the restraint is protecting a legitimate business interest, such as confidential information, intellectual property, goodwill, client connections, and so on; and
2. Secondly, the employer must prove the restraint does not go further than reasonably necessary to protect that legitimate business interest, for example by limiting the restraint to a particular area, duration, type of work, and/or type of client.

 

Position in NSW

In New South Wales, the position is slightly different because the Restraint of Trade Act 1976 (NSW) (ROT Act) applies.

Under the ROT Act, a restraint is presumed valid to the extent to which it is not against public policy, regardless of whether the clause is in severable terms.

This means that restraints are slightly easier to enforce in NSW.

 

What exactly is the Government proposing?

As part of the recent Budget, the Government announced it intends to ban non-compete clauses for employees earning under the high-income threshold (currently $175,000) from 2027.

The high-income threshold is determined under the Fair Work Act 2009 (Cth) and adjusted annually.  While it is currently at $175,000, it is predicted that the high-income threshold will be closer to $200,000 by 2027.  It is also worth noting that the high-income threshold does not include superannuation or amounts which cannot be determined in advance such as commissions, incentives, and non-guaranteed overtime.

The Government also announced that it intends to crackdown on:

1. Wage-fixing agreements, which are agreements between businesses to cap or limit wages without their workers’ knowledge or consent; and
2. Non-poaching agreements, which are agreements between businesses to not poach or hire each other’s workers.

 

Why is the Government seeking to ban non-compete clauses?

The proposed ban on non-competes follows a period of Government consultation on the topic in early 2024. This consultation resulted in the publication of an Issues Paper outlining the following concerns:

1. restraints are widely used throughout Australia, observing that over 3 million Australians are currently subject to a non-compete clause and many of those are lower-paid employees, often without the resources to challenge a non-compete;
2. the use of non-compete clauses reduces job mobility because people are disincentivised to move from their current position;
3. a lack of job mobility can negatively impact wage growth (people are less inclined to move for higher paying jobs and there’s less pressure on employers to pay more), as well as productivity and innovation.

 

The Government suggests that the proposed non-compete ban will help lift wages by up to 4%, improve productivity, reduce inflation and add $5 billion to GDP annually.

 

What still needs to be figured out?

There are still a number of key questions surrounding the proposed ban, and the Government will engage in further consultation to address some of these issues, as it develops the policy.

During consultation, we expect the following issues will be explored further:

1. Whether the high-income threshold is the appropriate cap for the ban – There are concerns that many employers have a legitimate business interest in seeking to restrain employees below the high-income threshold (noting it excludes super, bonuses, etc.), who possess extensive confidential information or are in client-facing roles.
2. Whether the ban will extend to non-solicitation clauses – This has been flagged by the Government as an area for further consideration.
3. How the ban will affect non-compete clauses in commercial transactions, for example in business sale agreements, where a seller is restrained from setting up a competing business.
4. Whether the ban will apply to contractors, as well as employees.
5. How the ban will interact with the ROT Act in NSW.
6. Whether there will be exemptions for specific jobs or industries.

 

How can employers prepare?

While there are still many questions surrounding the proposed ban, there are practical steps employers can start taking to prepare assuming the changes go ahead in 2027.

In particular, we recommend employers ensure their employment contracts:

1. Contain strong confidentiality and intellectual property (IP) clauses – if employers cannot rely on non-compete clauses, it is important to ensure there are other mechanisms in the contract to protect your confidential information. If non-competes are banned, we may see more disputes in future relating to confidentiality and IP clauses, so it is important to have well-drafted clauses in place.
2. Contain a gardening leave clause – a ‘gardening leave’ clause permits employers to direct employees not to attend work or contact clients during their notice period. If employers are unable to rely on non-compete clauses, employers may seek to rely on longer notice periods and gardening leave clauses instead.  We note however it is possible the Government will crackdown on this as a potential loophole to the non-compete ban.
3. Contain strong, well-drafted restraints if you are seeking to restrain employees – until the changes come into effect, we recommend employers seeking to restrain employees review and update non-compete and non-solicitation restraints as necessary to ensure maximum enforceability.

 

It is possible employers may start to see push-back from employees on imposing restraints as the potential ban draws closer.

 

Key takeaways

While the proposed non-compete ban is not yet law and there are still many questions surrounding the policy, we expect to see further legal developments and significant reform in this space.

Employers should start to prepare by thinking about other ways to protect their business interests, including confidential information, client relationships and intellectual property.

Noting the end of financial year is often ideal and natural timing to update your employment contracts, please get in touch if you would like our team to undertake a review.