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Non-competes and other restraints: understanding the impacts on jobs, business and productivity
Issues Paper
April 2024
© Commonwealth of Australia 2024
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Contents
Consultation process ........................................................................................................................... 1
Request for feedback and comments ....................................................................................................... 1
Introduction ........................................................................................................................................ 2
The importance of job mobility to our economy .................................................................................. 4
Post-termination worker restraints of trade ........................................................................................ 6
Non-compete clauses ............................................................................................................................... 6
Non-solicitation clauses ............................................................................................................................ 6
Non-disclosure clauses ............................................................................................................................. 6
Prevalence of restraint of trade clauses in Australia ................................................................................ 7
Non-compete clauses .......................................................................................................................... 8
Non-solicitation clauses ....................................................................................................................... 8
Non-disclosure clauses ........................................................................................................................ 9
Enforceability of restraint of trade clauses .............................................................................................10
Business interests that have supported enforceable restraint clauses .............................................11 Rule of severance and cascading clauses ..........................................................................................12 Restraints of Trade Act 1976 (NSW) ..................................................................................................14 Enforcement in practice ....................................................................................................................14
Impact of restraint of trade clauses on workers, businesses and job mobility ..................................... 17
Non-compete clauses .............................................................................................................................17
Impact on businesses ........................................................................................................................18 Impact on workers .............................................................................................................................22
Other impacts ....................................................................................................................................24 International comparison of regulation of non-compete clauses ......................................................24
Non-solicitation clauses (of clients, other business contacts, co-workers) .............................................26
Impact of non-solicitation clauses .....................................................................................................26
Non-disclosure clauses ...........................................................................................................................29
Impact of non-disclosure clauses.......................................................................................................29
Restraints on workers during employment ........................................................................................ 30
Part time, casual and gig workers ......................................................................................................30
No-poach and wage-fixing agreements .............................................................................................. 32
No-poach agreements ............................................................................................................................32 Wage-fixing agreements .........................................................................................................................33 Prevalence ..............................................................................................................................................33 Enforcement and regulation of no-poach and wage-fixing agreements ................................................34 Impact of no-poach and wage-fixing agreements ..................................................................................35 International regulation and enforcement: no-poach and wage-fixing agreements ..............................37
Conclusion and next steps ................................................................................................................. 39
Consultation process
Request for feedback and comments
This paper seeks information and views to inform the Competition Review’s consideration of non-compete clauses and related clauses that restrict workers from shifting to better-paying jobs. Should any potential reform be needed, the Government will engage in further consultation on potential options.
Questions are included throughout the paper to guide comments. You are invited to answer some or all of the questions, or to comment on issues more broadly.
While submissions may be lodged electronically or by post, electronic lodgement is preferred. For accessibility reasons, please submit responses sent via email in a Word or RTF format. An additional PDF version may also be submitted.
Publication of submissions and confidentiality
All information (including name and address details) contained in formal submissions will be made available to the public on the Australian Treasury website, unless you indicate that you would like all or part of your submission to remain confidential. Automatically generated confidentiality statements in emails do not suffice for this purpose. Respondents who would like part of their submission to remain confidential should provide this information marked as such in a separate attachment.
Legal requirements, such as those imposed by the Freedom of Information Act 1982, may affect the confidentiality of your submission.
Closing date for submissions: 31 May 2024
Email [email protected]
Competition Taskforce The Treasury Langton Crescent PARKES ACT 2600
Enquiries Enquiries can be directed to [email protected]
Introduction
On 23 August 2023, the Australian Government announced that non-compete and related clauses in employment contracts would be an area of policy considered by the Competition Review. The Government’s Employment White Paper Roadmap, released in September 2023, reiterated the Government’s intent to investigate non-compete clauses, and noted emerging research that non-compete clauses may be restricting workers from switching to better-paying jobs and hampering job mobility and innovation. There is empirical evidence linking lower rates of job mobility with reduced productivity growth, both in Australia and across the OECD.[1] Labour mobility is also particularly important for managing structural changes in our economy, including the transformation to net zero and the shift to the care economy.[2]
There is growing international evidence that restraints of trade – and particularly non-compete clauses – are becoming increasingly prevalent. This evidence also suggests that despite benefiting some businesses, restraint of trade clauses are adversely impacting workers, other businesses and broader economic outcomes – through reduced wages growth, job mobility, and access to skilled workers. Some countries already regulate non-compete clauses (e.g. Austria, Finland and Germany), while others, including the United States (US) and United Kingdom (UK), are proposing reforms that would restrict or ban their use.
What are non-compete and other restraint of trade clauses?
Non-compete clauses are a type of restraint of trade clause that seek to restrict a worker (both employees and independent contractors) from working for a competitor or establishing a competing business, typically within a geographic area and for a time period after the worker ceases employment.
Non-compete clauses can be distinguished from other types of restraint of trade clauses, such as client or co-worker non-solicitation and non-disclosure clauses. These other clauses can restrict what a worker can do with relationships built during employment, or how they can use confidential information learned on the job.
Separately, two or more businesses may agree not to hire each other’s workers (a no-poach agreement), or to fix wages or other working conditions (a wage-fixing agreement). Workers may be unaware of these restrictions which can harm labour market competition and worker outcomes.
A recent Australian Bureau of Statistics (ABS) survey has found that 46.9 per cent of businesses surveyed used some kind of restraint clause, including for workers in non-executive roles. The survey also found 20.8 per cent of businesses use non-compete clauses for at least some of their staff and 68.2 per cent of these businesses used them for more than three-quarters of their employees.[3]
1 Z Durretto, O Majeed and J Hambur, ‘Overview: Understanding productivity in Australia and the global slowdown’, Treasury Round Up, 2022; F Calvino, C Criscuolo, and R Verlhac, ‘Declining business dynamism: structural and policy determinants’, OECD, 2020.
2 Australian Government, 2023-24 Budget, ‘Structural shifts shaping the economy’, Budget Paper 1 Statement 4, May 2023.
3 Australian Bureau of Statistics (ABS), ‘Restraint Clauses, Australia, 2023’, ABS website, 2024.
This issues paper outlines policy concerns with the use of these restraint clauses and seeks feedback on their impact on businesses, workers and the broader economy. It has been informed by experience in Australia and overseas, including targeted engagement with lawyers, business groups, unions, think tanks, international organisations, and relevant national and international government agencies. Following a recommendation in the recent Independent Review of the Franchising Code of Conduct, the Competition Review will also consider how restraints of trade and other uncompetitive terms in franchise agreements may be affecting franchise workers.[4] The feedback received will inform the Government’s consideration of whether reform is needed. If so, the Government will engage in further consultation on potential reform options.
4 M Schaper, Independent Review of the Franchising Code of Conduct, Australian Government, 2023.
The importance of job mobility to our economy
Job mobility – the movement of workers between jobs – plays an important function in a dynamic and competitive economy. Workers moving to better jobs is a key source of entrepreneurship and innovation in the economy, including by enabling the creation and expansion of new businesses. Businesses benefit by gaining access to the skills they need, while workers benefit by matching with to roles that better suit their skills and preferences, which can mean higher wages and job satisfaction.
Australian research has found that job mobility is associated with higher wages for workers, 2F[5] even for those who stay in their existing jobs, since a more dynamic labour market increases workers’ bargaining power.[6] Job mobility is particularly important for younger workers, who to find jobs that better match their skills, which also brings positive mental health benefits.[7] Young workers also receive the largest pay rise from switching jobs compared to other age groups.[8]
Additionally, job mobility plays an important role in increasing aggregate productivity by supporting the expansion of more productive businesses through the movement of workers. Workers who switch jobs tend to move to businesses that are (on average) 13.1 per cent more productive than the businesses they leave.[9] However, the share of workers moving to higher productivity businesses has fallen slightly over time from 54.2 per cent between 2003 to 2006 to 52.8 per cent between 2015 and 2019.[10] Similarly, Treasury research has also highlighted that the pace of labour reallocation from less to more productive businesses has slowed since 2012, perhaps accounting for about a quarter of the slowdown in aggregate labour productivity growth in Australia.[11]
Australia has seen a general decline in job mobility over the past 30 years, a rate that is similar to other advanced economies.[12] Some of this may reflect an ageing population – older workers tend to shift jobs less.[13] But given the economic benefits from job mobility, any barriers that may be limiting people from moving to better opportunities must be carefully assessed.
At the same time, there is evidence that rising market concentration is giving employers more bargaining – or ‘monopsony’ – power in some markets, which recent Australian research suggests partly explains low wage growth prior to the COVID-19 pandemic.[14] This may be particularly relevant for workers in regional and remote areas of Australia with fewer choices of employer. While some monopsony power can evolve ‘naturally’ from markets (such as a town based around a mine), it can also be generated by law. Distributional impacts of market power in the labour market are also
5 For example, see A Wong, ‘Climbing the wage ladder: linking job mobility and wages’, e61 Institute, 2024; and S Black and E Chow, ‘Job Mobility in Australia during the Covid-19 Pandemic’, Reserve Bank of Australia Bulletin, June 2022.
6 N Deutcher, ‘Job-to-job transitions and the wages of Australian workers’, Treasury Working Paper, Australian Government, 2019.
7 A Michielsen and J Buckley, ‘The mental health costs of job loss, job insecurity and skill mismatch’, e61 Institute, 2023.
8 Wong, ‘Climbing the wage ladder: linking job mobility and wages’.
9 J Buckley, ‘Productivity in Motion: The Role of Job Switching’, e61 Institute, 6 November 2023, p 1.
10 Buckley, ‘Productivity in Motion: The Role of Job Switching’, p 2. 11 D Andrews and D Hansell, ‘Productivity-Enhancing Labour Reallocation in Australia’, Treasury Working
Paper, 2019, p 2.
Australian Government, 2023.
2023, p 8-9.
14 J Hambur, ‘Did Labour Market Concentration Lower Wages Growth Pre-COVID’, RBA Research Discussion
Paper, 2023.
uneven: there is evidence that workers with caring responsibilities may have inflexible preferences when choosing a job (such as flexibility of hours, proximity to homes and schools) that reduce the number of potential employers and increases those businesses’ monopsony power.[15] The Organisation for Economic Co-operation and Development (OECD) identified non-compete clauses, no-poach and wage-fixing agreements as increasing the monopsony power of businesses over workers.1[16]
Restricting job mobility through non-compete clauses may be particularly important for some businesses, by protecting their intellectual property and confidential information which can give those businesses the confidence to invest and innovate. The key question for policy is whether the benefits from non-compete clauses balance the broader costs to the economy, or if businesses can access the benefits in another way. There has been increasing evidence overseas suggesting that the use of non-compete clauses may be substantially hampering job mobility and wages growth and may also be affecting broader economic outcomes including business dynamism and innovation.[17]
15 OECD, OECD Employment Outlook 2022 – Building Back More Inclusive Labour Markets, 2022, p 139. 16 OECD, OECD Employment Outlook 2022 – Building Back More Inclusive Labour Markets, p 137. 17 E Starr, Noncompete clauses: a policymaker’s guide through the key questions and evidence, Economic
Innovation Group, 2023.
Post-termination worker restraints of trade
There are a number of clauses in worker contracts that limit what a worker can do, both during employment and when they stop working for a business including non-compete, non-solicitation and non-disclosure clauses.
Non-compete clauses
Non-compete clauses can restrict former workers from working for a competitor or establishing a competing business, typically within a certain geographic area and for a certain time period after the worker leaves the business.
Non-compete clauses are generally considered a ‘catch all’, compared to other more targeted restraint of trade clauses, providing businesses with more far-ranging protections. They can purport to protect business goodwill and intellectual property by delaying the risk that employees’ knowledge of trade secrets and customer relationships may be used by a competitor. They may also seek to protect and encourage investment in workers’ knowledge, training or customer relationships so they are more productive. However, in reducing the costs for business associated with recruitment and job turnover, they also limit a worker’s potential future job opportunities.
Non-solicitation clauses
Non-solicitation clauses can restrict former workers from ‘soliciting’ former clients (or customers[18]) or other business contacts (for example, suppliers), or co-workers.
During employment, many workers will engage and develop connections with clients, other business contacts and co-workers. Businesses will often facilitate these connections to improve services.
A non-solicitation clause may seek to protect the business against the former worker using the knowledge of, and relationship with, these former contacts for the benefit of their new employer or to start a new competing business.
Non-disclosure clauses
Non-disclosure (or confidentiality) clauses can restrict former workers disclosing confidential information gained during the course of employment. Such confidential information can include trade secrets, such as product formulas and client lists, that the worker may otherwise seek to use in a future job.[19]
Non-disclosure clauses provide protection to businesses that provide confidential information to workers. Such clauses may facilitate investment in training and hiring of workers, and may be particularly relevant for senior workers, who can require access to a wide range of (often confidential) information to perform their roles.
18 In this paper, clients and customers have the same meaning. 19 Non-disclosure clauses may also be used in other contexts, such as dispute settlements, which is beyond
the scope of this issues paper.
Businesses also have other statutory and common law protections available to them to protect confidential information, including section 183 of the Corporations Act 2001 (Cth) (Corporations Act) which prohibits an employee from improperly using their position (including the company’s information gained through their position) for personal gain, third-party gain, or to cause detriment to the company.[20] The Privacy Act 1988 (Cth) (Privacy Act) also protects certain personal information collected by certain businesses by restricting the use or disclosure of this information by former workers.
Prevalence of restraint of trade clauses in Australia
Identifying the prevalence of restraint of trade clauses in worker contracts in Australia is important to assess the potential magnitude of their impact. Recent surveys of employers and workers suggests restraint clauses[21] are reasonably common (Figure 1).
Figure 1: Use of restraint clauses by employers (by type)
Per cent Per cent
50 50
Non-compete Non-solicitation of clients Non-solicitation of co- Non-disclosure
workers
Source: ABS, Restraint Clauses, Australia, 2023. Note: The figures above report the share of businesses surveyed (per cent). They include employers that responded “Yes” to the use of these restraints and does not include employers that responded “Unsure”. Figures do not add to 100 per cent, as employers may use more than one kind of restraint clause.
According to the ABS,[22] restraint clauses are used across all industries and all business sizes,[23] with 46.9 per cent of Australian businesses using some type of restraint clause. The reason or motivation for using restraint of trade clauses may vary by business size – for example, smaller businesses may use standard form employment contracts which automatically include these clauses, rather than a
20 Examples of actions for relief against former employees include Lifeplan Australia Friendly Society Ltd v
Woff [2016] FCA 248; Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43. Also see Del Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172.
21 The term restraint clauses are used interchangeably with restraint of trade clauses in this paper. 22 ABS, ‘Restraint Clauses, Australia, 2023’. 23 The ABS defines business size based on employment size, grouped into micro/small business (0-19
employees), medium-sized business (20-199 employees) and large business (employment size greater than 199 employees). See ABS, Australian Industry (2021-22), May 2023.
more bespoke company specific employment contract. Use is also not limited to upper-level managers or executives but includes all workers.[24] The use of restraint clauses by businesses is also growing over time, with the ABS survey results indicating that use had increased over the past five years and was likely to increase in the future.[25 ]
Non-compete clauses
Around 20.8 per cent of businesses used a non-compete clause for some of their workers in 2023.[26] Usage of non-compete clauses is highest among the largest businesses that have 1,000 or more workers, with 40.0 per cent of these businesses using them.
The ABS survey also reported that 68.2 per cent of businesses which used non-compete clauses, used them for over three-quarters of their workers. Non-compete clauses were used in all industries across the economy, although are particularly common in knowledge- and relationship-focussed services industries including finance, real estate, professional services and healthcare.[27] This is broadly consistent with the e61 Institute’s 2023 online survey of 3,000 respondents (‘e61 Institute’s worker survey’), that estimated 22 per cent of Australian workers had a non-compete clause, including many workers in low-paid relationship-focussed jobs such as childcare workers and yoga instructors.[28]
Australian data on the prevalence of non-compete clauses is comparable to evidence from other jurisdictions. In the UK, 15.2 per cent of businesses reported using a non-compete clause.[29] For workers, surveys report: 26 per cent in the UK,[30] 18.1 per cent in the US,[31] and 37 per cent in the Netherlands (having doubled from 18.9 per cent in 2015)[32] are covered by non-compete clauses. In Austria, prior to setting a minimum income threshold for non-compete clauses in 2006, over 30 per cent of low-income workers were estimated to have one.[33]
Non-solicitation clauses
Non-solicitation of clients
The ABS survey reported 25.4 per cent of businesses used a client non-solicitation clause for some of their workers in 2023.[34] Client non-solicitation clauses were the second most used restraint. Client
24 The ABS restraint clauses survey reported 68.8 per cent of employers using at least one restraint clause for
upper-level managers or executives and 74.8 per cent of employers using at least one restraint clause for other types of employees. The ABS notes that the proportion figures do not sum to 100 per cent, as the survey response are not mutually exclusive.
25 ABS, ‘Restraint Clauses, Australia, 2023’. See Table 5 and Table 7. 26 ABS, ‘Restraint Clauses, Australia, 2023’. See Table 1. 27 ABS, ‘Restraint Clauses, Australia, 2023’. 28 D Andrews and B Jarvis, ‘The ghosts of employers’ past: how prevalent are non-compete clauses in
Australia?‘, e61 Institute, 2023.
29 Office of National Statistics (ONS), Business Insights and Conditions Survey data, Wave 87: 27 July 2023. 30 Competition and Markets Authority, ‘Competition and market power in UK labour markets’, UK
Government, 2024, p 8.
Economics, 2021 64(1), p 5.
32 M Bartsch, D Grijpstra and R Houweling, ‘De werking van het concurrentiebeding‘, Panteia Research
Bureau, 2021, p 117; M Streefkerk, S Elshout and B Cuelenaere, ‘Concurrentiebeding. Dataverzameling bij het LISS panel’, 2015, CentER Data, p 3.
Ban in Austria’, July 5, 2021, p 3.
34 ABS, ‘Restraint Clauses, Australia, 2023’. See Table 1.
non-solicitation clauses are predominantly used by larger businesses, with the highest proportion (46.3 per cent) reported for businesses with between 200 and 999 workers.
The ABS survey also reported that 71.3 per cent of businesses which used client non-solicitation clauses, used them for over three-quarters of their workers. Client non-solicitation clauses were used in all industries across the economy, with the highest prevalence in financial services and real estate.
The e61 Institute’s worker survey estimates that 16 per cent of Australian workers are covered by a client non-solicitation clause.
In the UK, 11.4 per cent of businesses reported using a client non-solicitation clause.[35] While in the US, 12 per cent of workers are estimated to be covered by a client non-solicitation clause.[36]
Non-solicitation of co-workers
The ABS survey reported 18.0 per cent of businesses used a co-worker non-solicitation clause for some of their workers in 2023,[37] the least used of the four restraint clauses reported in the survey. Co-worker non-solicitation clauses were most often used by large businesses, with reported use of 37.7 per cent among businesses that have 1,000 or more workers and 37.6 per cent for businesses with between 200 and 999 workers.
The ABS survey also reported that 67.2 per cent of businesses which used co-worker non-solicitation clauses, used them for over three-quarters of their workers. Co-worker non-solicitation clauses were used in all industries across the economy, with the highest prevalence in real estate and financial services.
The e61 Institute’s worker survey estimates that 7 per cent of Australian workers are covered by a co-workers non-solicitation clause.
In the UK around 5.9 per cent of businesses reported using a co-worker non-solicitation clause.[38] While in the US, 4 per cent of workers are estimated to be covered by a co-worker non-solicitation clause.[39]
Non-disclosure clauses
Non-disclosure clauses were the most used restraint, with the ABS survey reporting 45.3 per cent of businesses using a non-disclosure clause for some of their workers in 2023.[40] Non-disclosure clauses were most used by larger businesses (78.9 per cent).
The ABS survey also reported that 81.3 per cent of businesses which used non-disclosure clauses, used them for over three-quarters of their workers. Non-disclosure clauses were used in all industries across the economy, with the highest prevalence in public administration and safety, financial services, mining, real estate, and healthcare.
The e61 Institute’s worker survey estimates that 26 per cent of Australian workers are covered by a co-workers non-solicitation clause.
35 ONS, Business Insights and Conditions Survey data, Wave 87: 27 July 2023. 36 Starr et al., ‘Noncompete Agreements in the U.S. Labor Force’, 2021 p 30. 37 ABS, ‘Restraint Clauses, Australia, 2023’. 38 ONS, Business Insights and Conditions Survey data, Wave 87: 27 July 2023. 39 Starr et al., Noncompete Agreements in the U.S Labor Force’, 2021, p 30. 40 ABS, ‘Restraint Clauses, Australia, 2023’.
Comparable to Australia data, non-disclosure clauses are the most utilised restraint overseas. In the UK, 29.3 per cent of businesses reported using a non-disclosure clause.[41] While in the US, 36 per cent of workers are estimated to be covered by a co-worker non-disclosure clause.[42]
Enforceability of restraint of trade clauses
In Australia, restraint of trade clauses between workers and businesses are governed by the common law, with the partial exception of New South Wales (NSW).[43 ]
At common law, worker restraints of trade are presumed to be against the public interest and therefore void and unenforceable unless they are reasonably necessary to protect the legitimate interest of the employer.[44] This test will be applied to the particular facts and circumstances of the worker-employer relationship and ultimately only determined by a court. In broad terms, the courts application of the common law proceeds on a pragmatic, discretionary basis, recognising the limitation on a worker’s freedom of trade with the legitimate business interest of the employer.[45]
In a dispute, between a business and worker, a court will consider the nature and extent of the business interest to be protected (for example, confidential client information) and whether the scope of restriction the business wants imposed is reasonable including its geographic area, time period and activities which the restraint seeks to control.[46] This assessment does not typically consider the worker’s interests[47] but may take account of the amount of compensation received by the worker[48] and if the restraint operates to prevent the person from earning a living or having reasonable alternative employment opportunities.[49] There are few decided cases in which an otherwise valid restraint has been struck down as being against the public interest.[50]
41 ONS, Business Insights and Conditions Survey data, Wave 87: 27 July 2023. 42 Starr et al., ‘Noncompete Agreements in the U.S. Labor Force’, 2021 p 30. 43 The Restraint of Trade Act 1976 (NSW) modifies the common law rules where the employment contract is
subject to the laws of NSW.
44 Herbert Morris Ltd v Saxelby [1916] 1 AC 688. 45 C Arup et al., ‘Restraints of Trade: The Legal Practice’, University of New South Wales Law Journal, 2013,
36(1): 1-29, pp 2-5.
46 A Stewart, Stewart’s Guide to Employment Law, 7th edn, The Federation Press, Australia, 2019, pp 320-321. 47 A Fell and E Rudz, ‘Employee Non-Compete Restraints: Resolving Uncertainty‘, UNSW Law Journal, 2013,
46(4) 1252-1283, pp 1257-1261.
48 Amoco Australia Pty Ltd v Rocca Bros Motor Engineering Cot Pty Ltd (1973) 133 CLR 288; Although note that
J D Heydon contests whether the proportionality of consideration received by an employee is legitimate on the question of reasonableness. See Heydon, The Restraint of Trade Doctrine, p 196-199.
49 A Fell and E Rudz, ‘Employee Non-Compete Restraints: Resolving Uncertainty’, 2013, pp 1257-1261. 50 Heydon, The Restraint of Trade Doctrine, p 199; for an example, see Lindner v Murdock’s Garage (1950) 83
CLR 628 at 641, and Sherk v Horwitz [1972] 2 OR 451 at [454]-[456].
Business interests that have supported enforceable restraint clauses
Interests considered ‘legitimate’ by courts include the protection of trade secrets or other confidential information; protection against solicitation of clients with whom the former worker had a personal connection; and protection against key staff being recruited by a former colleague.[51] An employer is not entitled to protection themselves against mere competition by a former worker.[52]
Determining what kinds of information can be protected from disclosure and used to enforce a restraint on a worker after termination is complex and can depend on many factors, including how the information is stored and used, what the information cost to acquire or is worth and how easily it could be acquired or duplicated by others.[53]
Although businesses may maintain that information is confidential and make effort to keep the information secret from disclosure, workers with access to the information as part of their role pose a practical threat to this secrecy including when changing jobs. The worker may be unable to avoid remembering the confidential information and be unable to separate potentially confidential information from their general know-how and experience that they developed during their employment and would be entitled to use when they left. The worker may be unaware that they are acquiring information that limits their future job opportunities.
Courts have also determined that businesses can protect their customer and supplier connections[54] using a restraint of trade clause, and in some cases have argued they afford adequate protection to protect customer connections of a business in the absence of a non-compete clause.[55] However, there are exceptions to this broad rule. It is not enough for the worker to simply have contact with the customer for a non-solicitation restraint to be enforceable. There must be some element of the worker-customer relationship where the worker has become the human face of the business and acquires influence over the customer’s business.[56] If the worker acquires influence over or has special knowledge of the customer due to the seniority of their position, they may also be validly restricted from dealing with clients of the business that they have not previously dealt with.[57]
In addition to connections with clients and other business contacts, courts in Australia have recently also held that a business’s interest in a ‘stable workforce’ may justify a reasonable restraint preventing workers from soliciting their co-workers.[58]
Solicitation of clients, other business contacts and co-workers may apply to a broader range of conduct than where communication is initiated by the former worker. An injunction against solicitation may also apply where the customer (or supplier, or co-worker) makes the first approach, and the former worker reciprocates.[59]
51 Stewart, Stewart’s Guide to Employment Law, 7th edn, pp 320-321. 52 Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; 71 NSWLR 9. 53 A non-exhaustive list of factors is provided by R Dean, The law of trade secrets and personal secrets (2nd
Edn), Lawbook Co., 2002, p 190 quoted by Hodgson JA in Del Casale v Artedomus at [40].
54 Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; 71 NSWLR 9 at [25]. 55 Stacks Taree v Marshal [No.2] [2010] NSWSC 77 (McDougal J) at [122], [123]. 56 Stacks Taree v Marshal [No.2] [2010] NSWSC 77. 57 Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; 71 NSWLR 9 at [33]. 58 I Ross, ‘Non-compete clauses in employment contracts: the case for regulatory response‘, TTPI Working
Paper, ANU, 2024, p 17.
59 Stacks Taree v Marshal [No.2] [2010] NSWSC 77 (McDougall J) at [122], [123].
Rule of severance and cascading clauses
Courts may ‘sever’ an offending part of an unreasonable restraint to permit the remainder of the otherwise reasonable restriction to survive. However, outside of NSW (see section below on ‘Restraints of Trade Act 1976 (NSW)’) this ‘blue pencil’ rule only permits a court to strike out words, not to add words to make the restraint enforceable.
This limitation has encouraged businesses to take a precautionary approach by adopting ‘cascading’ or ‘laddered’ clauses. These are a series of overlapping or cumulative restraints which include multiple options so that any offending aspects can be struck out, without the entire restraint being held as unenforceable.
Although cascading clauses have sometimes been held to be void for uncertainty,[60] courts are willing to apply the blue pencil test if the cascading clause is drafted in sufficiently precise and clear terms,[61] and a genuine attempt has been made to define the employers need for protection.[62]
The use of cascading clauses and the blue pencil test has been a subject of criticism.[63] Cascading restraint clauses mitigate the risk of the entire restraint being unenforceable but create significant uncertainty for workers and businesses. For example, the contract might state that the restraint applies for a period of 24 or 12 or 6 months. However, it is unclear – without recourse to the court – which term(s) of the restraint are enforceable as a court will determine each restraint in dispute based on the particular facts and circumstances. As such workers who want ‘to do the right thing’ or take a precautionary approach are likely to abide with the broadest formulation of the restraint.
See Box 1 for an example of a cascading clause and the application of the rule of severance.
60 Austra Tanks Pty Ltd v Running (1982) NSWLR 840 (82,152 possible restraints were involved) 61 JQAT Pty Ltd v Storm (1987) 2 Qd R 162. 62 Lloyd’s Ships Holdings Pty Ltd & Anor v Davros Pty Ltd & Ors (1987) ATPR 40-769; Sear v Invocare Australia
Pty Ltd (2007) ATPR 42-149.
63 Ross, ‘Non-complete clauses in employment contracts: the case for regulatory response’; A Stewart,
‘Drafting and Enforcing Post-Employment Restraints’, Australian Journal of Labour Law, 1997, 10(2): 181-221, p 218.
Box 1: Hanna v OAMPS Insurance Brokers Ltd [2010] NSWCA 267
This case is an example of the use of cascading clauses for non-solicitation.
Mr Hanna was an experienced insurance broker who commenced employment with OAMPS in 1990. He resigned from OAMPS on 22 April 2010, having accepted an offer to work at another insurance broking firm.
After Mr Hanna left OAMPS a dispute arose concerning the enforcement of the restraint clauses in the employment contract. The relevant parts of the restraint clause in the employment contract were as follows:
“Restraint Period means, from the date of termination of your employment:
(a) 15 months
(b) 13 months
(c) 12 months
Restraint Area means:
(a) Australia;
(b) The State or Territory in which you are employed at the date of termination
of your employment;
(c) The metropolitan area of the capital city in which you are employed at the
date of termination of your employment.
Each restraint contained in this Deed (resulting from any combination of the wording above) constitutes a separate and independent provision, severable from the other restraints. If a court of competent jurisdiction finally decides any such restraint to be unenforceable in whole or in part, the enforceability of the remainder of that restraint and any other restraint will not be affected.”
The NSW Supreme Court found that in Mr Hanna’s case the restraint of 12 months within the metropolitan area of Sydney was reasonable due to the strong relationships Mr Hanna had maintained with OAMP’s clients and the fact the length of most insurance policies is 12 months.
The Court found that the clause was not void for uncertainty and the rule of severance allowed the Court to sever the remaining sub-clauses.
Restraints of Trade Act 1976 (NSW)
In NSW, the Restraints of Trade Act 1976 (NSW) (NSW Act) presumes that a restraint of trade is valid to the extent to which it is not against public policy. The NSW Act permits the court to add new words into the restraint (rather than only severing words from them) to narrow the restraint to what is reasonably necessary to protect a legitimate interest. This means that employers in NSW are less likely to rely on cascading clauses to protect their interests. In practice, this also results in restraints being more frequently upheld in some form in NSW (56.1 per cent) compared to the average for all other Australian jurisdictions (33.3 per cent).[64]
Notably, while the law governing a contract is typically the same as the jurisdiction in which the contract is contested before a court, they can be different under certain circumstances. For example, this could be where the employer and worker are based outside of NSW, however the employment contract expressly specifies the choice of law to be NSW.[65]
Enforcement in practice
In practice the enforcement of a restraint of trade clause generally starts with the business reminding the worker of the restraint clause upon resignation or termination, or when the business considers that a worker has breached a restraint or is about to do so.
It is relatively simple for businesses to identify a potential breach of a non-compete clause, as the business may only need to know the new employer or business of the former worker. Establishing breach of a non-solicitation clause can be more challenging, as it requires knowledge and evidence that the worker actually solicited a client, other business contact or co-worker. Similarly, businesses may have little way of knowing whether a worker has used or disclosed confidential information in a new role.
Even though some restraints may be too broad to be backed by law, some businesses may still attempt to enforce them. Although non-solicitation and non-disclosure clauses may be generally more targeted by design, they can be drafted more broadly than would be considered proportionate for the circumstances. In one case study provided by Legal Aid NSW, a worker at a beauty clinic was restricted for 12 months from soliciting “any person associated with the company”.
Although workers could challenge a restraint in court on the basis that it is unenforceable, the financial cost of seeking legal advice and the uncertainty associated with legal action can be prohibitive. Research in the US suggests that a not only a worker’s belief about the possible enforceability of the clause, but also their belief about the likelihood of legal action and the cost that entails that can influence their behaviour.[66]
The Competition Review heard from stakeholders that the cost of opposing an injunction at interlocutory proceedings (i.e. proceedings prior to a final court hearing) is between $50,000 and $150,000, depending on the complexity of the case. If the case goes to a final hearing, parties could expect to pay around $300,000 at a minimum and up to $700,000 in some cases. These figures are broadly consistent with estimates of the cost of legal action in other earlier research.[67] Even if successful, workers are unlikely to have their full legal costs paid by the business, reducing the
Australian Journal of Labour Law, 2016, 29(3):283-304, p 300.
65 See for example, Hawker de Havilland Ltd v Fernandes & Anor (1996) ATPR 41. 66 E Starr, JJ Prescott and N Bishara, ‘The Behavioural Effects of (Unenforceable) Contracts‘, Journal of Law,
Economics, and Organization 36, no. 3 (2020), p 6.
67 Arup et al., ‘Restraints of Trade: The Legal Practice’, p 18.
incentive to challenge a restraint. However, the costs are greater if there are adverse findings, and courts more often grant partial, or provisional enforcement at an interlocutory injunction to an employer, particularly in NSW where courts are empowered to rework the clause.[68]
Businesses may also strategically commence proceedings in court, by filing a statement of claim and serving a former worker. This can provide an impetus for negotiations and provide a basis for the parties to seek out of court settlements. Proceedings are discontinued after a settlement is reached.[69] The Competition Review has heard from employment practitioners that enquiries about restraints of trade are common but are rarely continue beyond initial letters or reminders to workers as typically workers adjust their behaviour to avoid further escalation. Of the 115 matters relating to restraints of trade between 2020 and 2023 dealt with by Legal Aid NSW, only one business was noted as having commenced proceedings in court against a former worker.
Most cases do not go to trial and are often decided on an urgent interlocutory basis.[70] At the interlocutory stage, there is a lower evidentiary burden than at a formal trial as the courts are making urgent and provisional decisions, until the final hearing and determination. Courts ask whether there is a serious issue to be tried and if so, whether the balance of convenience favours granting the injunction. The latter requires the employer establishing whether damages are an adequate remedy and that if the injunction was refused the employer would suffer a greater injury than a worker would suffer if the injunction was granted.[71] The Competition Review heard that of those restraint of trade matters which escalate to engaging barristers, fewer than half proceed to court, and only half of those cases reach interlocutory stage and seldom proceeded to full trial.
The lower evidentiary burden for employers at an interlocutory injunction has been a subject of criticism, as it can practically act as the final determinant of the matter.[72] There are few cases which proceed to trial where they can be fully contested on the merits.[73] If the employer makes an arguable case, the balance of convenience test tends to favour employers since courts generally do not consider damages awarded after the event an adequate remedy.[74]
Despite this, one Australian study[75] found that, out of 145 judgements including interlocutory applications between 1989 and 2012, employers were mostly (53.8 per cent) unsuccessful in enforcing a restraint (see Figure 2).
68 Arup et al., ‘Restraints of Trade: The Legal Practice’, p 20. 69 Arup et al., ‘Restraints of Trade: The Legal Practice’, pp 10-11. 70 Arup et al., ‘Restraints of Trade: The Legal Practice’, p 12; Competition Review stakeholder engagement. 71 Hartleys Limited v Martin [2002] VSC 301 at [24]-[46] for a more detailed discussion on requirements. 72 Ross, ‘Non-compete clauses in employment contracts: the case for regulatory response’; Arup et al.,
‘Restraints of Trade: The Legal Practice’, pp 9-10; J Riley, ‘Sterilising Talent: A Critical Assessment of Injunctions Enforcing Negative Covenants’, Sydney Law Review, 2012, 34(4):617-636.
73 Ross, ‘Non-compete clauses in employment contracts: the case for regulatory response’. 74 Arup et al., ‘Restraints of Trade: The Legal Practice’, p 10-11. 75 Chia and Ramsay, ‘Employment Restraints of Trade: An Empirical Study of Australian Court Judgments’,
p 300.
Figure 2: Enforceability of restraints of trade in Australian courts, 1989 to 2012
Source: Chia and Ramsay, ‘Employment Restraints of Trade: An Empirical Study of Australian Court Judgments’, 2013.
Treasury calculations
Of these unsuccessful cases, 67.9 per cent involved a finding that the restraint was invalid. In the remaining 32.1 per cent of cases, the restraint was valid, but not enforced, for example because the employer suffered no damage, or the worker did not in fact breach the restraint. Excluding NSW (where the court is permitted to rework a restraint to be enforceable), Australia-wide employers were unsuccessful in 66.7 per cent of cases, with the restraint being found invalid in 78.6 per cent of unsuccessful cases.
The high number of cases with unenforceable restraints may suggest that businesses and workers are unclear as to what is likely to be a reasonable restraint. Although the courts do provide an avenue for businesses and workers to determine the restraint in dispute, it is at significant cost (both financial and non-financial) which may limit its effectiveness in practice. Data is not available for the much wider number of restraint clauses that affect worker mobility and outcomes without any interaction with the court system.
Impact of restraint of trade clauses on workers, businesses and job mobility
Non-compete clauses
Non-compete clauses may provide businesses with additional protection of legitimate business interests above that provided by other restraints or incentives. However, the experience and evidence that is available in Australia suggests non-compete clauses may have a negative impact on workers, particularly lower-paid workers, who do not have the resources to challenge a non-compete clause even if it may be unenforceable. Non-compete clauses also have consequential and broader impacts on economic growth, competition, wages and innovation.
Figure 3: Lifecycle of a non-compete clause
Figure 3 outlines key elements and consequences across the lifecycle of a non-compete clause from the start of the worker’s relationship with the business, during employment, to when a worker resigns, and the considerations faced and the options available to businesses to enforce a restraint.
Impact on businesses
Non-compete clauses can provide businesses with a way to protect their investment in confidential information and business relationships that may have been built or acquired over a period of years, by restricting the job opportunities of their former workers. However, non-compete clauses can negatively impact on other businesses, particularly in industries experiencing labour shortages as they operate to limit the potential pool of workers. This has broader impacts on workers, business dynamism, competition, innovation, productivity and wage growth.
Including a non-compete clause in employment contracts has 2 primary costs: the consideration (if any) that is paid to the worker for agreeing to the clause, and any legal costs in drafting the contract.
The value of consideration paid for the clause depends on the relative bargaining power of the business and the worker and its relative importance as compared to other contractual terms (e.g. salary, benefits). Relative bargaining power is influenced by how much scope businesses and workers’ have to hold out from entering an arrangement and seek alternative opportunities. This dynamic tends to favour businesses as a period of unemployment can be more costly to workers than the cost of a temporary reduction in labour output for a business. Businesses are also more likely to be ‘repeat players’ in the labour market and have greater negotiating experience and access to relevant information.[76]
There is some evidence overseas that suggests businesses tend to have relatively greater bargaining power in the negotiation of non-compete clauses. Evidence from the US found that only 10.1 per cent of workers reported attempting to negotiate over the terms of their non-compete clause or asked for additional compensation for the clause, and 86.0 per cent of workers reported that businesses did not offer them additional benefits in exchange for agreeing to the non-compete clause.[ 77] The US study found the majority of respondents simply agreed to the non-compete clause – this may be analogous to the situation in Australia, as the Competition Review heard that many workers in Australia will sign employment contracts without being fully aware of their terms. It may also be difficult or awkward for many workers to negotiate terms of their employment contracts, particularly ones which relate to post-termination restraints as opposed to salary or other benefits of more immediate value, even if the worker has the resources and capacity to negotiate. Many workers, particularly in non-executive roles, will be asked to sign a standard employment contract which may be presented as non-negotiable.
The legal costs to a business of including a non-compete in a contract can be scaled proportionately to the value of the role; for example, by including a standard clause in lower paid contracts and seeking legal advice for tailor made clauses when the risk to business interests is higher. Although the cost of litigation is high, businesses may prefer the relative simplicity of a non-compete clause, since it may be easier to prove a former worker is working for a competitor than to prove they are using confidential information or solicited clients. At the same time, proceedings are generally commenced by the former employer, which means they are well placed to weigh up the costs and benefits beforehand. These factors support the proliferation of non-compete clauses, since businesses can gain the upside or benefit from the use of non-compete clauses, at relatively limited cost.
This relative low cost and simplicity of non-compete clauses raises policy concerns about the potential indiscriminate use beyond that necessary to protect legitimate business interests, particularly given the imbalance in bargaining power between workers and businesses.[78] Some businesses may
76 Productivity Commission, Workplace Relations Framework: Volume 1, Australian Government, 2015, p 87. 77 E Starr et al., ‘Noncompete Agreements in the U.S. Labor Force’, 2021 pp 34-48. 78 Nordenfelt v Maxim Nordenfelt Guns & Ammunition Co Ltd [1894] AC 535 at [566].
strategically use non-compete clauses to maintain a competitive edge by restricting the movement of workers. Others may include a non-compete clause as a standard contract term, without giving appropriate scrutiny as to its purpose or if it is objectively necessary. The relatively low cost supports continued use of non-compete clauses, despite the potentially significant cost to workers, other businesses, and the wider economy.
Impact on business dynamism and competition
The direct consequence of a non-compete clause is that it hinders competition among businesses: it disincentivises workers from leaving their current job, creating a barrier to the entry of new businesses and the expansion of existing businesses. Access to workers with relevant skills are a key component of a business’s ability to enter a market and expand. A non-compete clause provides a first mover advantage to incumbent businesses, and later businesses may struggle to attract relevant workers if they are subject to a non-compete clause.
Studies from the US have shown that start-ups are less likely to form in states with more strict enforcement of non-compete clauses, and that these start-ups struggle to hire and grow, and innovate less.[79] However, the recent ABS restraint clause survey[80] suggests employers may not have experienced significant barrier in attracting talent due to the use of non-competes. When businesses were asked if potential workers had turned down their job offer because of a non-compete clause with their existing employer, 82.3 per cent of businesses responded “no”. However, some care is required as this would not factor in the missed opportunity of potential employees who did not apply due to the “chilling effect” on mobility from their non-compete clause (see Impact on workers below).
Impact on business training, investment and innovation
Empirical evidence on the long-term economic consequences of non-compete clauses on business productivity is relatively limited.
Worker mobility in theory has the potential to present a “hold-up problem” that can prevent the business from efficiently investing in their workers.[81] As a worker acquires more general or industry-specific information (instead of information that is uniquely valuable to the business), they become more productive and of greater value to competing businesses which can reap the rewards without the costs of undertaking the investment in training. In some contexts, workers may prefer to self-fund their training (e.g. TAFE or university) in return for a higher wage, avoiding any hold-up of investment.[82]
While in theory there may be a disincentive for a business to invest in a worker, potentially hampering innovation and productivity, there is no empirical evidence of such a “hold-up problem” in Australia, or that non-compete clauses are the most efficient solution, should such a problem exist.
Bureau of Economic Research NBER) Working Paper, 2023.
80 ABS, ‘Restraint Clauses, Australia, 2023’. 81 J McAdams, ‘Non-Compete Agreements: A Review of the Literature’, Federal Trade Commission, United
States Government, 2019, p 6.
82 G Becker, Human Capital, 3rd edn, University of Chicago Press, 1993, pp 29-51.
Box 2: Use of non-compete clauses to recover upfront costs with new staff
The Competition Review has heard from some businesses that non-compete clauses reduce the risk of staff turnover and increase employment tenure, providing businesses confidence that they can recover the costs of hiring and training workers. Businesses argue that it takes some time to recover the upfront costs of recruiting, upskilling and certifying a newly hired worker. If a worker switches relatively quickly to another employer the original business may not be able to recover these upfront costs.
For some businesses in need of skills not readily available in the market, workers can be recruited from overseas, which can substantially increase these upfront costs, providing a further incentive for the business to use a non-compete clause.
At the same time, the Competition Review has also heard that migrant workers can be particularly restricted and vulnerable when a non-compete clause is used. Migrant workers can be less aware of their workplace rights in Australia and language barriers may limit them understanding or challenging the terms or enforceability of their employment contract making them vulnerable to the use of broad and potentially unenforceable restraints.
Overseas, the net impact of non-compete clauses on training, investment and innovation has been contested. Proponents argue that non-compete clauses are important for investment in skills and training, once any theoretical potential ‘hold-up’ problem has been addressed by a non-compete clause.[83] A similar economic argument is used to justify intellectual property protections which provide an exclusive right to benefit from a creation for a defined period of time as necessary to encourage investment.[84]
An alternative critical view of non-compete clauses is that they harm innovation by reducing job mobility. Under this view, greater worker mobility not only improves the worker’s own productivity (and consequently wages) by permitting them to start a new business or move between businesses within the same industry, but also improves the sharing of general industry knowledge, knowhow and innovation within the industry.[85] Removing barriers and facilitating workers to move to roles where they are more productive, including by creating new businesses, is crucial for long-term productivity growth. Entrepreneurship is a major driver of innovation and productivity, and younger businesses contribute disproportionately to job creation.[86]
It is difficult to measure the net impact of the potential positive benefit from increased investment and the negative impact from the restriction in the flow of ideas. If workers would receive training in their job regardless of non-compete clause (for example because other more targeted restraints are available), then the argument for using non-compete clauses to support investment diminishes.
p 970. See also: J McAdams, ‘Non-Compete Agreements: A Review of the Literature’, p 6.
84 Starr, Noncompete Clauses: A Policymaker’s Guide through the Key Questions and Evidence; See also:
O Lobel, Talent Wants to be free, Yale University Press, 2013, p 32.
2021, 45(4), pp 936-942.
86 OECD, ‘Start-ups and innovative entrepreneurship‘, OECD Science Technology and Innovation Outlook
2016, OECD, 2016.
Similarly, if workers funded their own training, or drove innovation in the business using their own built-up experience and relationships, restrictions to the mobility of this human capital and expertise from the use of non-compete clauses would unnecessarily impede business productivity. However, if businesses would hold back sharing information or training workers without a non-compete clause, then the potential argument for them increases. These effects may be different across industries, businesses and even within businesses.
Several studies have looked at US states that enforce non-compete clauses differently to examine observable differences in training, investment, and patents (to make inferences about innovation). One study found that, when comparing a state where non-compete clauses are not enforceable to a state with average enforcement, business-provided training was higher by 14.7 per cent but wages were lower by approximately 4.0 per cent.[87] Another study found that an increase in enforcement of non-compete clauses was associated with an increase in investment in intangible assets of 8.1 per cent, but a reduction in the number of new patents of 16–19 per cent over 10 years, with no reduction in patent quality or an increase in the use of trade secrets.[88]
Measuring the long-term impact on innovation of a specific policy change to the use of non-compete clauses can be challenging. One seminal study considered the relative success of the Silicon Valley technology hub over a comparable hub in Massachusetts and argued that it could be explained by the unenforceability of non-compete clauses in California. Critics of this study have highlighted the use of other mechanisms in California to protect innovation and questioned causation given the economic, legal and technological differences between the 2 hubs over the period.[89]
87 E Starr, ‘Consider This: Training, Wages and the Enforceability of Covenants not to Compete’, Sage
Publications, 2019, 72(4): 783-817, p 793.
88 Johnson et al. ‘Innovation and the enforceability of non-compete agreements’. See also J Jeffers, ‘The
Impact of Restricting Labour Mobility on Corporate Investment and Entrepreneurship’, 2023.
Covenants Not to Compete‘, New York University Law Review, 1999, 74(3):575:629; but see: Barnett and Sichelman, ‘The Case for Noncompetes’, pp 978-1008.
Impact on workers
Evidence from overseas finds that workers with a non-compete clause have lower job mobility and bargaining power during employment and experience lower wages growth than workers without a non-compete clause.[90] However, there is a lack of similar research in the Australian context.
The ‘chilling effect’ on worker behaviour
The impacts of non-compete clauses are exacerbated by the complexity of these clauses, the uncertainty as to enforceability and the substantial costs associated with challenging or enforcing a restraint.[91] Australian research has found that, while uncertainty impacts both businesses and workers, it weighs more heavily on workers who lack the knowledge of court proceedings and decisions, and the financial, psychological, and reputational resources to bargain and undertake litigation.[92]
This can result in a ‘chilling effect’ on job mobility, where a worker’s beliefs about the enforceability of a non-compete clause can influence behaviour independent of whether the clause is in fact enforceable. Evidence from the US suggests workers with non-compete clauses frequently decline job offers because of it, even in states that do not enforce such restraints. If a worker seeks to change jobs despite a non-compete clause, the worker is more likely to redirect their job searching towards non-competitors.[93]
In starting a new business, a worker is most likely to do so in an industry where they have existing expertise, skills and experience. Non-compete clauses may also therefore have a chilling effect on entrepreneurialism. This ‘chilling effect’ may also be amplified for migrants with employer-sponsored visas because they must comply with the terms of their visa, including minimum income and time periods to change sponsor that increase the difficulty of finding employment outside of their field of expertise.
Impacts on job mobility and wages in the labour market
Non-compete clauses may have broader labour market impacts, including on workers that decide not to switch jobs and even those that do not have a non-compete clause. A US study showed that in states and industries with a higher incidence and enforceability of non-compete clauses, workers, including those without a non-compete clause, received relatively fewer job offers, had reduced job mobility and experienced lower wages.[94] The study suggests this is explained by the increased uncertainty generated by non-compete clauses and asymmetries of information in labour markets, which increases recruitment and search costs for hiring businesses and workers.
Other international studies that looked at the effect of bans on non-compete clauses found positive or unclear impacts on broader labour market mobility and wages. Researchers examining the effect of a ban on non-compete clauses and non-solicitation agreements for tech workers in Hawaii found that it increased job mobility by around 11.0 per cent and new-hire monthly earnings for tech workers by
Science, 68(1):143-170; N Balasubramanian et al., ‘Locked in? The enforceability of covenants not to compete and the careers of high-tech workers’, Journal of Human Resources, 2020 58(6); See also Young, ‘Noncompete Clauses, Job Mobility, and Job Quality: Evidence from a Low-Earning Noncompete Ban in Austria’, which finds that non-compete clauses reduced mobility to better paying jobs but did not increase workers overall wage growth.
91 Ross, ‘Non-compete clauses in employment contracts: the case for regulatory response’. 92 Arup et al., ‘Restraints of Trade: The Legal Practice’. 93 Starr et al., ‘The Behavioural Effects of (Unenforceable) Contracts’. 94 E Starr et al., ‘Mobility constraint externalities’, Organization Science, 2018, 30(5), p 18.
4.2 per cent, while all worker wages (which includes those that do not have or were not seeking outside opportunities, and workers that had non-compete clauses not affected by the ban) rose by 0.7 per cent.[95] On the other hand, researchers studying a ban on non-compete clauses for workers below the median gross-monthly income in Austria found that although it increased job mobility and wages for those workers that were previously subject to non-compete clauses, a significant impact was not observed on job-mobility or earnings trends for all workers.[96]
Box 3 Impacts on low-income workers
The Competition Review conducted targeted engagement with legal practitioners, including low-income legal services Legal Aid NSW and the Employment Rights Legal Service, as well as business groups. This revealed several instances of broad restraint of trade clauses (including non-competes) being applied to low-wage workers.
Lack of bargaining power
Legal services noted several instances where workers were not aware of or did not understand the restraint of trade clause in their contract. In one instance a migrant worker with limited English skills was asked to sign a 12-month restraint of trade clause and was not provided a copy of the employment contract translated in his preferred language despite being explicitly requested. The employer later threatened to sue if the worker worked for a competitor.
Uncertainty and chilling effect
Business groups and lawyers both highlighted the significant uncertainty created by non-compete clauses, particularly for low-income workers. Even where a worker was informed that, based on their circumstances, a non-compete clause was unlikely to be enforceable, many workers were unwilling to risk breaching the restraint. Since lawyers cannot provide guarantees of legal outcomes, the risk and costs of challenging a clause in court remained too high for many clients. One business stakeholder noted that many employers may have no intention of enforcing a restraint and merely use it as a means to discourage staff from resigning.
Business enforcement practices and worker impacts
There were a number of concerning cases of enforcement by businesses. This included:
- Threats and legal proceedings against workers earning below $45,000, including cleaners,
nurses and hairdressers, with no financial means to challenge the employer. In one case, a legal action was filed against a teenager on minimum wage.
- Enforcement of non-competes in cases of toxic and harmful work practices by employers. In
one case a worker experiencing workplace bullying felt like they could not resign from the workplace, due to their concerns that the broad non-compete was enforceable and would prevent moving to a similar job nearby.
95 Balasubramanian et al, ‘Locked in? The enforceability of covenants not to compete and the careers of
high-tech workers’, 2020.
96 Young, ‘Noncompete Clauses, Job Mobility, and Job Quality: Evidence from a Low-Earning Noncompete Ban
in Austria’.
Other impacts
Impacts on clients and consumers
Clients are also affected by non-compete clauses. Clients that have built a relationship a worker may not be able to continue that relationship if the worker changes employer. The right of a client to choose their supplier is important in any market but may be increasingly important in the growing care economy where personal and sensitive information is used and can be affected by non-compete and non-solicitation clauses (see Box 4 below). In the US, around 37.0 to 45.0 per cent of physicians are covered by non-compete clauses, despite the American Medical Association (AMA) Code of Medical Ethics asserting that they can disrupt continuity of care and may limit access to care.[97] Similarly, lawyers in the US have, since the 1960s, been prevented from having non-compete clauses under their rules of professional conduct, with the American Bar Association (ABA) arguing that “an agreement restricting the right of lawyers to practice after leaving a firm not only limits their professional autonomy but also limits the freedom of clients to choose a lawyer”.[98]
International comparison of regulation of non-compete clauses
The prevalence of worker non-compete clauses (particularly low-income workers), and concerns with their use and impact on businesses, workers and the broader economy, has resulted in a number of countries regulating, or considering taking action to regulate, the use of non-compete clauses in worker agreements. Table 1 below provides a summary of the policy models adopted, within the broader context of each country’s legal system.
Table 1: International regulation of non-compete clauses
Ban Limited duration Post-employment mandatory compensation
Transparency
State-level policy e.g., Mandatory disclosure to employees (various)
United States
United Kingdom
Nationwide ban (proposed) State-level policy e.g., Complete ban (5 states, notably California)
State-level policy e.g., 12 months (Oregon)
3 months (proposed) - Guidance material (proposed)
Above income - threshold: 12 months
Austria Below certain income threshold1
Finland - 12 months Minimum 40% of regular salary
Germany - 24 months Minimum 50% of earnings
Netherlands - 12 months (proposed) Minimum 50% of earnings (proposed)
Specify protected interest
Specify protected interest (proposed)
Spain - 6 months, up to 24 months for technical employees
Note (1): Around the median income level.
Discussion Questions
‘Adequate compensation’ – generally between 20 to 70% of earnings
- Does the common law restraint of trade doctrine strike an appropriate balance between the
interests of businesses, workers and the wider community? If no, what alternative options are there?
- Do you think the Restraints of Trade Act 1976 (NSW) strikes the right balance between the
interest of businesses, workers and the wider community? Please provide reasons. If not, what alternative options are there?
- Are current approaches suitable for all workers, or only certain types of workers? For
example, senior management, low-income workers, or care workers etc?
- Would the policy approaches of other countries be suitable in the Australian context? Please
provide reasons.
- Are there other experiences or relevant policy options (legislative or non-legislative) that the
Competition Review should be aware of?
Non-solicitation clauses (of clients, other business contacts, co-workers)
Impact of non-solicitation clauses
Non-solicitation of clients and other business contacts
There is limited empirical evidence on the impacts of client (or other business contacts) non-solicitation. However, for businesses, non-solicitation clauses may provide protection to support efficient worker-client relationships that improve the operation of the business. These clauses may give businesses more trust and confidence in their workers, making them more likely to invest in and share client information among workers, as well as giving workers the freedom to directly engage clients or other business contacts.[99] Client non-solicitation clauses can also support business continuity when a worker departs by preserving the existing relationships between a business and its clients or other business contacts.
While client non-solicitation clauses may be considered less restrictive than non-compete clauses for workers, in some circumstances client non-solicitation clauses can still have comparable impacts on job mobility. This may be the case within customer-centric industries like real estate agencies or law firms, especially in rural or regional areas with smaller markets, or where the business has extensive customer networks. Businesses in smaller, concentrated markets such as these often have long-standing history and entrenched customer relationships spanning across the entire community due to the limited geographic area they serve. Consequently, in these scenarios, non-solicitation clauses, particularly if broadly framed, may function similarly to non-compete clauses, effectively prohibiting former workers from engaging with any clients associated with the business. This may result in affected workers choosing to stay due to the barriers to mobility, relocate to find new employment or seek work in another industry.
Client non-solicitation clauses may also have impacts on the third-party client, leaving them worse off in some instances. Client non-solicitation clauses can restrict the competition in product markets if former workers cannot approach former clients – a client may receive a better price offering or higher quality goods or services if the former worker could compete for that client business. Clients may also have special needs that only a particular worker understands, such as in the care sector, and the client may not feel comfortable establishing this relationship with another person (see Box 4).
99 In one Australian example, a business required a worker to sign a non-solicitation agreement before they
could represent the business in meetings with key overseas suppliers. The NSW Court of Appeal upheld a 4-year injunction against soliciting clients, recognising the information about suppliers as confidential, even if not a trade secret. See: Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317.
Box 4: Impact of restraint clauses on access to preferred care providers
While restraints on non-solicitation may be important for businesses to protect connections, this comes at a direct cost to the quality of services in sectors, including in the care sector, where there can be significant benefits to people choosing their preferred service provider.
The National Disability Insurance Scheme is designed to give people with a disability the right to choose who delivers their support and how their support services are delivered and obliges providers to act with respect for this right.[100] This recognises that providing choice and control, provides greater support and enhances the well-being of those with a disability.
The Competition Review heard that the use of non-compete and non-solicitation clauses is prevalent within the disability support sector and within the care economy more broadly, in a way that may be inconsistent with this right to choose:
- Legal Aid NSW noted several instances within the last 3 years where employers had threatened
to sue former workers for breach of their restraint clauses after former clients sought to follow them of their own accord. The clauses were often broadly defined to cover all of Australia for as long as 24 months. In one matter, the worker resigned from their new job instead of challenging the restraint.
- These clauses also appear to be common in the childcare sector, as found by the ACCC at a
series of roundtables for the Childcare Inquiry 2023. The ACCC noted that some operators may not understand their compliance obligations with industrial law, and some may receive poor advice from disreputable sources,[101] suggesting they may be using clauses that a court would find unenforceable.
The presence of non-compete and non-solicitation clauses in the care sector may also exacerbate worker shortages and persistent low wages in the sector. The Government’s 2023 Draft National Care and Support Strategy has outlined the Government’s vision for a care and support system that provides quality care and support, which provides safe and secure jobs, and is productive and sustainable.[102]
Non-solicitation of co-workers
There is limited empirical research that exists on the impact of co-worker non-solicitation clauses on businesses and workers. However, for business, non-solicitation of co-worker clauses may promote the stability of the workforce by reducing turnover and associated costs. These agreements may also reduce the risk of a business losing its investment in training personnel and allow recoupment of a greater proportion of investment in training.
Despite this, these clauses have been the subject of criticism as they restrict both the rights of the former worker to recruit staff, as well as the opportunities of remaining staff to pursue future
100 NDIS Commission, NDIS Code of Conduct – Guidance for NDIS Providers, September 2023. 101 ACCC, Childcare Inquiry Roundtable Summary, 11 August 2023, p 4. 102 Department of Prime Minister and Cabinet, Draft National Care and Support Economy Strategy, 2023.
opportunities.[103] In one case, an injunction was granted preventing a personal assistant from accepting a job offer from a previous colleague even though the assistant was not a party to the agreement which contained the restraint.[104] Despite being affected by a colleague’s co-worker non-solicitation clause, co-workers are not compensated for the restraint imposed as they are not a party to the agreement.
Non-solicitation of co-worker clauses may, without limiting the ability to make their own enquiries about employment opportunities, in practice limit a co-worker’s ability to reach out to networks from the same business. Studies have established that networks play a key role in reducing information frictions in the job market, and facilitating job matches,[105] suggesting possible implications on productivity.
In addition, these clauses may impact business dynamism and competition in the economy. For example, restricting a worker’s access to former co-workers when starting a new business, may hamper new business growth. Overseas research finds that co-workers play an important role in facilitating the creation of new firms by founders[106] and that new firms created by former workers tend to survive longer when hiring co-workers.[107]
Discussion Questions
Non-solicitation of clients and other business contacts
- What considerations lead businesses to include client non-solicitation in employment
contracts? Are there alternative protections available?
- Is the impact on clients appropriately considered? Is this more acute in certain sectors, for
example the care sector? Please provide reasons.
Non-solicitation of co-workers
- What considerations lead businesses to include co-worker non-solicitation in employment
contracts? Are there alternative protections available?
- Is the impact of co-worker non-solicitation clauses more acute for start-ups/new firm
creation or in areas with skills shortages in Australia?
103 Ross, ‘Non-compete clauses in employment contracts: the case for regulatory response’; J Riley, ‘No
“Poaching”? Why Not? A Reflection on the Legitimacy of Postemployment Restrictive Covenants’. Commercial Law Quarterly, 19(1), 3–8, 2005 at p3.
104 Harleys Ltd v Martin [2002] VSC 301. 105 A Glitz, ‘Coworker Networks in the Labour Market’, IZA Discussion Paper No. 7392, 2013; F Cingano and A
Rosolia, ‘People I know: Job Search and Social Networks’, Journal of Labor Economics 30(2): 291-332.
106 R Agarwal and B A Campbell, ‘What do I take with me?: The Mediating Effect of Spin-Out Team Size and
Tenure on the Founder-Firm Performance Relationship’, US Census Bureau Center for Economic Studies Paper No. CES-WP-13 -17, 2013, Available at SSRN.
107 V Rocha, A Carneiro, V Celeste, ‘Leaving Employment to Entrepreneurship – The Value of Co-worker
Mobility in Pushed and Pulled-driven Startups‘, Paper presented at The DRUID 20th Anniversary Conference, Denmark, 2016.
Non-disclosure clauses
Impact of non-disclosure clauses
Little empirical research has been identified on the impacts on workers and businesses of non-disclosure clauses which restrict former workers disclosing the confidential information of the business. However, for businesses, non-disclosure clauses may facilitate investment and innovation by providing assurance that workers cannot disclose unique processes, technologies or strategies.
In the context of estimating the marginal impact of more restrictive covenants, non-disclosure clauses have been associated with higher wages in the United States albeit without establishing a causal link.[108]
Non-disclosure clauses may if not reasonably confined, be hindering the flow of information that should not be restrained and may limit some workers’ opportunities by restricting their ability to use their know-how and experience in other roles. This limitation not only detrimentally affects workers, but also presents challenges for businesses, potentially narrowing their access to a diverse pool of talent.
Although non-disclosure clauses may be more targeted than other restraint clauses, the design non-disclosure clauses can disrupt economic efficiency. This includes by:
- unintentionally disrupting the free movement of workers and non-confidential know-how as a
byproduct of protecting highly valuable know-how and trade secret, which can prevent the best allocation of business inputs, hampering economic growth; and
- imprecisely defining the confidential information intended to be protected from disclosure, which
creates uncertainty that can simultaneously result in workers not knowing what information they are allowed to use, while also potentially reducing the likelihood of successful court enforcement of a restraint.[109]
Discussion Questions
- What considerations drive businesses to include non-disclosure clauses in employment
contracts? Are there alternative protections, such as s183 of Corporations Act 2001 available?
11.How do non-disclosure agreements impact worker mobility?
12.How do non-disclosure agreements impact the creation of new businesses?
108 N Balasubramanian, E Starr & S Yamaguchi, ‘Employment restrictions on resource transferability and value
appropriation from employees’, SSRN working paper, 2024.
109 Courts in Australia, particularly Victoria, have been firm on the requirement to be precise in cases relating
to confidentiality: see C Arup, ‘What/Whose Knowledge? Restraints of trade and concepts of knowledge‘, Melbourne University Law Review 36(2), 2012; also GlaxoSmithKline Australia Pty Ltd v Ritchie (2008) 77 IPR 306; and Manderson M & F Consulting v Incitec Pivot (No 2) [2011] VSC 205.
Restraints on workers during employment
Restraints placed on workers during their employment may be justified to uphold the worker’s duty of fidelity, as it is generally accepted that, whether written into contract or not, workers have a common law duty to serve their employer ‘faithfully’[110] as long as an employment contract subsists.[111] This duty of fidelity is most concerned with conduct involving acts of competition against the employer,[112] and clear breaches of this duty would include running a competing business while still employed or working for another employer in the absence of permission.[113]
It is generally accepted that a fiduciary duty exists for more senior workers with managerial responsibilities,[114] and to satisfy these duties, a worker should not profit at the expense of their employer. For example, if a business opportunity presents itself to a worker, they should bring it to their employer’s attention rather than pursuing it for themselves without their employer’s consent.[115] This restriction on more senior workers may be justified due to the fact there are more opportunities for them to profit from their position at the expense of the employer. It is less clear however whether the same fiduciary duties apply to less senior employees.
Box 5: Case study – Casual brow specialist and lash technician*
A worker employed as a casual brow specialist and lash technician was paid a base rate of $28.58 per hour with penalty rates applying on weekends and public holidays.
During her employment, to supplement her income, she decided to establish her own at-home business. When her employer became aware of this business, she was called into a disciplinary meeting and made aware of her non-compete restraints. She received a cease-and-desist letter from her employer and subsequently resigned seeking legal advice.
The worker was a young single parent and was unaware of the restraints placed upon her and as she had previously worked in the hospitality industry where it is common to work for more than one business.
*Anonymised case study provided by an employment legal service.
Part time, casual and gig workers
Businesses may have justifications for placing these restrains on workers during employment, however, they can disproportionately impact workers in part-time, casual or gig roles – an issue that was raised with the Competition Review during consultations. Often these roles are not able to offer a worker a living wage, and these workers must resort to supplementing this income through multiple jobs or streams of income. For these workers, the non-compete clause creates a barrier to working more by holding multiple jobs. Multiple job holdings can also allow for the development of workers’
110 See Blyth Chemicals v Bushnell [1933] HCA 8 49 CLR 66; Concut Pty Ltd v Worrell (2000) 75 ALJR 312,
[25]-[26], [57].
111 Mason Gray Strange Ltd v Eisdell (1989) 31 AILR 271. 112 M Irving, the Contract of Employment (Lawbook Co, 2012) 415-430. 113 See Harris v Digital Pulse Ltd [2003] NSWCA 10; Dinte v Hales & Anor [2009] QSC 63. 114 A Stewart, Stewart’s Guide to Employment Law, 7[th] edn, p 312. 115 Victoria University of Technology v Wilson [2004] VSC 33.
skills which can further stimulate job mobility and entrepreneurial activity.[116] At an aggregate level, these restrictions contribute to underemployment and underutilisation of capacity in the economy.
However, workers are engaged in part-time or variable hours across more than one competing business raises questions relating to fiduciary duties and duties of fidelity and has the potential to create the risk of co-operative behaviour that may be anti-competitive and illegal. However, the extent of this risk could depend on the level of seniority and access to information a person has within their respective workplaces.
Discussion Questions
13.When is it appropriate for workers to be restrained during employment?
- Is it appropriate for part-time, casual and gig workers to be bound by a restraint of trade
clause?
No-poach and wage-fixing agreements
No-poach and wage-fixing agreements between businesses limit hiring competition among employers, directly impacting workers ability to seek new and better employment outcomes and reducing competition between businesses in downstream product markets. This has consequential and broader impacts on economic growth, innovation, and investment. Unlike a non-compete clause or other restraints included in an employment contract, affected workers are typically unaware and not compensated for these agreements which are made between the businesses themselves.
No-poach and wage-fixing agreements are discussed together in this section as although they place restrictions on different aspects of the labour market, they operate in a similar way as they involve coordination between businesses over employment conditions and they may have similar effects on wages and employment opportunities in practice. Both the existing literature and international organisations such as the OECD,[117] treat these agreements similarly as coordinated agreements between competitors that distort competition in the recruitment and employment for labour. Additionally, in other jurisdictions, both no-poach and wage-fixing are regulated on a similar basis.
No-poach agreements
No-poach agreements can involve 2 or more businesses agreeing to refrain from actively recruiting each other’s workers or to complete prohibitions on hiring each other’s workers.
One reason for businesses to use no-poach agreements is to maintain a stable workforce and to reduce worker turnover and associated costs. These costs are in addition to the risk that other business interests such as release of confidential information or client and other business contacts that might be harmed through the loss of an experienced worker – although it may be possible to protect these interests through non-disclosure or non-solicitation clauses with workers.
These costs can be particularly acute when, after having recruited and trained a worker, a competing business with demand for similarly skilled workers attracts the worker to move jobs. The competing business can afford to do this, since they do not have to pay for the costs of finding and training a suitable worker.
No-poach agreements are expected to emerge in 3 different kinds of contexts:
- Horizontal, or ‘naked’ context: they may arise when unrelated businesses that are often
competitors in the same goods or services market (e.g., both businesses are mining companies) are competing for the same pool of talent in the labour market. Since these agreements would likely be highly unpopular among affected workers at the affected businesses, these agreements may be unwritten “gentleman’s agreements”, such as the one between several animating businesses including Walt Disney Animation Studios and DreamWorks.[118]
- They may also emerge in other contexts, where they are related to another business transaction
where staff are working quite closely together. This includes: – Joint venture agreements, where workers from 2 or more businesses (which may ordinarily be
competitors) work together in a new enterprise. No-poach agreements between franchisee and franchisor (instead of between franchisees) may be considered alike the extent that they protect important aspects of the franchise brand shared between the 2 parties.[119]
117 OECD, Competition in Labour Markets, p 28. 118 Nitsch v DreamWorks Animation SKG Inc, [2015] N.D. Cal 14-cv-04062. 119 OECD, Competition in Labour Markets, 2020, p 30.
– Secondment arrangements and other business-to-business service agreements where a worker
from one business works at another workplace. The other business could observe the worker’s performance and attempt to recruit the worker, which may result in businesses being less willing to enter into such secondment or other arrangements.
– Labour hire businesses that incur the cost of finding workers to contract out to another
business. A no-poach agreement would prevent the business from directly hiring the worker after the labour hire business has contracted them out, thereby avoiding any recruitment and training costs associated with finding the worker.
- Within franchises, where a franchisor may facilitate an agreement between franchisees not to
poach the staff of other franchisees under the same brand. In this context, although they are a vertical arrangement between related business entities, they have horizontal impacts by limiting intra-brand competition for labour between franchisees.
Wage-fixing agreements
Wage-fixing agreements can involve 2 or more businesses agreeing to set a cap on wages and employment conditions (such as health benefits, or non-statutory leave entitlements) for their workers. This may include agreements to pay a specific wage to workers, but they can also include agreements regarding the absolute or relative compensation that workers receive. For example, businesses may have an agreement to cap bonuses at 5 per cent of their salary.
Like a no-poach agreement, businesses may use wage-fixing agreements to reduce their wage costs and worker turnover. Businesses have an interest in avoiding rising wages and a ‘race to the top’ situation where they face high staff turnover and must offer workers increasingly higher remuneration to retain and attract staff.
Similar to no-poach agreements, wage-fixing agreements can also arise in various contexts. They may arise in a horizontal, ‘naked’ context. An example of this was 4 managers of home health care agencies in the US agreeing to fix the rate paid to essential workers during COVID-19.[120] They may also apply in instances where they are facilitated by a related third party but have horizontal impacts. For example, in the US a trade association that acted on behalf of most hospitals in Arizona to provide them temporary nursing services, set a uniform bill rate schedule with the agreement of its members that the hospitals would pay the temporary nurses.[121] Similarly, a franchisor may also facilitate agreement of standard wages and employment conditions that would limit labour market competition between franchisees.
In some contexts, agreements between businesses may promote the mobility of workers, such as where businesses agree to the portability of long-service or other leave entitlements.
Prevalence
It is difficult to estimate the prevalence of either no-poach or wage-fixing agreements in the economy as these agreements are often made in secret and may be unwritten. Even if not unlawful, businesses will typically avoid publicising these arrangements if they impose a cap (as opposed to a floor) on worker wages (and other benefits). Consequently, there is limited evidence of their use. However, these agreements are more likely to exist where there are relatively few employers (that is, where the
Market Allocation Charges, United States Government, 2022.
Service Corp., United States Government, 2007.
transaction costs to collude are lower), which are also likely the labour markets where workers may already face issues arising from concentrated business market power.
No-poach clauses appear to be frequently included in franchise agreements. A 2016 study in the US examined franchising agreements for 156 of the largest franchise chains and found that around 58.0 per cent of them contained no-poach restrictions.[122] The study also found that no-poach agreements are more common in low-wage and high-turnover industries.[123]
In Australia, franchises such as McDonald’s, Bakers Delight and Domino’s reported using no-poach clauses as a standard term in their franchise agreements, preventing franchisees from hiring workers from other stores within the chain.[124] Data from the Franchise Disclosure Register suggests that 89.9 per cent of all franchisors impose some kind of restraint of trade on franchisees.[125] However, details on the specific type of restraint are limited, such as whether these restraints impact workers (e.g. no-poach agreements), intra-brand competition (non-compete clauses between franchises), or overall business dynamism (non-compete clauses post termination of the franchise relationship).
Enforcement and regulation of no-poach and wage-fixing agreements
The starting point for analysis of no-poach and wage-fixing agreements is that they are an agreement to fix prices (no-poach agreements indirectly reduce the price of labour by reducing demand for specific workers) and are therefore anticompetitive agreements. These agreements operate in the same way as a seller’s cartel that coordinates action to increase prices of output for the mutual profit of its members.
In Australia, cartels are prohibited under Part IV of the Competition and Consumer Act 2010 (Cth) (CCA) and the Competition Codes of the states which extend the operation of Part IV to all persons in Australia.[126] However, Part IV contains exemptions for certain anti-competitive agreements including:[127]
- Acts done or any provision of a contract, arrangement or understanding to the extent that it relates
to the remuneration, conditions of employment, hours of work or working conditions of employees.
- Any provision of a contract of service or a contract for the provision of services where the service
provider is not a body corporate (i.e., an independent contractor), where the person agrees to accept restrictions to their work during or after termination of the contract.
Working Paper Series, 2018.
123 Krueger and Ashenfelter, Theory and Evidence on Employer Collusion in the Franchise Sector. 124 A Leigh, ‘How uncompetitive markets hurt workers‘, Australian Journal of Labour Economics, 2023, 26(1),
p 16.
125 Prevalence of the use of restraints of trade as of November 2023. Franchisors may provide a standard
franchise agreement on the Franchise Disclosure Register, which can provide relevant information to existing and prospective franchisees. As at March 2024, template agreements were available for around 150 of 1812 franchises listed on the Register.
126 Competition Policy Reform (New South Wales) Act 1995; Competition Policy Reform (Victoria) Act 1995;
Competition Policy Reform (Queensland) Act 1995; Competition Policy Reform (South Australia) Act 1995; Competition Policy Reform (Western Australia) Act 1995; Competition Policy Reform (Tasmania) Act 1995; Competition Policy Reform (Northern Territory) Act 1995; Competition Policy Reform (Australian Capital Territory) Act 1995.
127 Competition and Consumer Act 2010 (Cth), s 51(2).
A number of reviews into Australian competition policy and workplace relations have concluded that the negotiation and determination of employment terms and conditions are best dealt with under the Fair Work Act 2009, as labour markets are generally treated differently to other markets for goods and services.[128]
The effect of these exemptions and other aspects of the legislation is that the Australian Competition and Consumer Commission (ACCC) may not have jurisdiction to deal with agreements or aspects of agreements that relate to working conditions for employees and independent contractors. Consequently, even if 2 competitors agree to fix and supress the wages and other conditions of their workers the ACCC, unlike its international counterparts, may not be able to take enforcement action.[129]
Instead, these agreements are dealt with under the common law on restraints of trade. However, in general, at common law, third parties injured by contracts in restraint of trade have no remedy.[130] Thus, workers impacted by a no-poach or wage-fixing agreement, even if they had the awareness of such agreements or the financial resources to challenge them, do not have standing to bring an action against their employer as they are not a party to the agreement. Unless the worker’s new employer seeks to challenge the agreement there may be few legal avenues available to workers to challenge their use.
An Australian court recently found, in an interlocutory application, that there was a prima facie case that a no-poach agreement between 2 businesses was enforceable and granted an injunction restraining one of the businesses from employing the employee until final determination of the proceedings.[131] In that case, one business had contracted out an employee to the premises of another business as part of a service agreement. The case did not proceed to a final hearing.
Impact of no-poach and wage-fixing agreements
The OECD considers collusion, typically in the form of no-poach and wage-fixing arrangements, to be the most detrimental anti-competitive practice in labour markets.[132] Businesses coordinating to set prices or to not compete for staff effectively increases their market power and deprives workers of new job opportunities and the ability to increase their wage and/or conditions. This can also create a ‘lock-in’ effect on workers, specifically highly specialised workers, by reducing the expected wage of the best alternative employer and reducing their bargaining power to negotiate for higher wages with their current employer. If the reduction in wages is substantial enough, workers – even those with a great deal of relevant professional experience and education – may have to seek employment in alternative industries to find a higher paying job. This diminishes the value of the worker’s accumulated human capital if it is no longer being used in its most productive industry.[133]
In addition, no-poach agreements can suppress a worker’s ability to move to a role with a different employer that is a more suitable match and a more productive allocation of their labour. Wage-fixing agreements work analogously by suppressing the potential gains from moving jobs, reducing the
and G Taperel, National Competition Policy, National Competition Policy Review, 1993; National Competition Council, Review of sections 51(2) and 51(3) of the Trade Practices Act 1974, 1999; Productivity Commission, Workplace Relations Framework, Productivity Commission Inquiry Report Vol 2 No. 76, 30 November 2015.
129 R Sims, Meeting expectations: Industrial relations as a case study speech, ACCC, 14 August 2015. 130 Heydon, The Restraint of Trade Doctrine, p 301. 131 Quantum Services and Logistics Pty Ltd v Schenker Australia Pty Ltd [2019] NSWSC 2. 132 OECD, Competition in Labour Markets, p 28. 133 Davis et al., ‘No-poach agreements – Closing the enforcement gap’, pp 8-11.
incentive for workers to search for more productive roles. Increases to a worker’s productivity improves their bargaining position to demand commensurately higher wages. Despite being favourable to the original employer by reducing their fixed costs associated with staff turnover, suppressing this improved match is harmful to the overall economy by reducing economic output – which could conceivably result in reduced employment and higher prices for goods and services.[134 ]
One justification for no-poach and wage-fixing agreements is that they may provide employers an incentive to invest more into the training and development of their personnel. A no-poach agreement limits the number of prospective employers for a given worker, decreasing the likelihood they will depart their current business. In this sense, no-poach agreements reduce the business’ risk of losing their investment in training personnel and allows recoupment of a greater proportion of investment in human capital.[135] Although each business will lose the benefit of attracting experienced workers (and may face increased costs to train new staff), this may be offset by reduced turnover costs and ultimately by reduced remuneration of workers.
However, despite these benefits to employers, wage-fixing agreements are recognised to promote anti-competitive behaviour on the basis that they artificially reduce workers’ wages and decrease competition between employing businesses, which may result in reduced output or less innovation.[136] The standardisation of wage levels also reduces the strategic uncertainty that characterises competition and may promote price coordination in the downstream markets.[137]
In the same way that evidence on the prevalence of no-poach and wage-fixing agreements is scarce, there are few measurements of the impact of these agreements on wages and other outcomes, due to the secrecy of these arrangements. However, there is an emerging body of research demonstrating that no-poach agreements have the effect of limiting hiring competition among employers, resulting in worse worker outcomes such as lower wages and fewer benefits.[138]
Some studies have been able to estimate the impacts of no-poach agreements. An analysis investigating the impact of no-poach agreements revealed that such agreements among Silicon Valley businesses led to an estimated 4.8 per cent reduction in worker salaries, with stock bonuses and ratings of job satisfaction also negatively affected.[139] No-poach agreements can also have detrimental effects on workers in lower paid industries. In the fast-food franchise sector in the US, where there is a known prevalence of no-poach agreements and government investigation and litigation to curb these agreements, studies have shown the removal of these agreements was estimated to have increased average wages of job postings for roles in the affected businesses by 5-6 per cent and increased the overall earnings of workers in those businesses by around 4 per cent.[140]
134 Davis et al., ‘No-poach agreements – Closing the enforcement gap’, pp 8-11. 135 Autoridade da Concorrencia (AdC, Portugese Competition Authority), Labour market agreement and
competition policy – Issues Paper – Final Version, September 2021.
International, 2017.
139 M Gibson, ‘Employer Market Power in Silicon Valley’, IZA Discussion Paper No. 14843, 2021. 140 F Lafontaine, S Saatvic and M Slade, No-Poaching Clauses in Franchise Contracts: Anticompetitive or
Efficiency Enhancing?, 2023; B Callaci et al., The Effect of Franchise No-Poaching Restrictions on Worker Earnings, IZA Institute of Labor Economics discussion paper, 2023, Abstract.
International regulation and enforcement: no-poach and wage-fixing agreements
No-poach and wage-fixing agreements have been subject to increasing regulatory scrutiny overseas, given their impact on competition:
- In the US, in 2007, the Department of Justice (DOJ) successfully settled enforcement action against
a wage-fixing agreement in the healthcare sector.[141] The DOJ also settled an enforcement action in 2010 and 2012 against a group of Silicon Valley companies including Apple, Google, Pixar, Adobe, eBay and Intel not to recruit or solicit each other’s software and animation engineers.[142] In 2016, the DOJ issued guidance warning employers that no-poach and wage-fixing agreements would be prosecuted criminally,[143] and has pursued 7 such criminal cases since 2020.F[144]
- In 2015, A US court awarded each worker affected by a no-poach agreement between Adobe,
Apple, Google and Intel $5,770 as part of the class action settlement.[145]
- In Europe, the European Commission has expressly included wage-fixing agreement as per se illegal
in its 2023 Horizonal Antitrust Guidelines.[146] The European Commission has also recently carried out raids for suspected cartel infringements relating to no poach agreements in the online food delivery sector.[147] In addition, France,[148] the Netherlands,[149] Portugal,[150] Switzerland,[151] and other European countries have taken enforcement action against no-poach and wage-fixing agreements.[152]
- In 2023, the UK Competition and Markets Authority (CMA) issued advice to employers to avoid
anticompetitive practices, including no-poach and wage-fixing agreements, which are considered to be examples of business cartels.[153] This was preceded by a CMA civil cartel investigation in 2022
D Ariz CV 07-1030-PHX.
D.D.C 1:10-cv-02220; United States v eBay Inc, [2012] N.D. Cal 12-cv-05869.
143 DoJ Antitrust Division and Federal Trade Commission, Antitrust Guidance for Human Resource
Professionals, United States Government, October 2016, pp 3-4.
Consumer Rights, Assistant Attorney General, DoK Antitrust Division, United States Government, September 2022, p 8; the DOJ has subsequently pursued an indictment in a seventh, ongoing, case, see: United States v. Lopez [2023], D. Nev, 23-cr-00055.
145 Re: High-Tech Employee Antitrust Litigation [2015] D.D.C 11-CV-02509. 146 European Commission, ‘Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the
European Union to horizontal co-operation agreements ‘, 1 June 2023.
delivery sector’, Press Release, 21 November 2023.
la concurrence (French Competition Authority) fined 37 modelling agencies for anti-competitive practices relating to wages of models in France.
possible wage-fixing cartel between supermarkets after conclusion of collective agreement, November 2021.
anticompetitive agreement in the labor market for the first time, April 2022.
151 Secretariat of the Competition Commission, Secretariat of the Competition Commission (COMCO)
investigates the labour market in the banking sector, 5 December 2022.
152 Davis et al., ‘No-poach agreements – Closing the enforcement gap’, p 3. 153 CMA, Employers advice on how to avoid anti-competitive behaviour, UK Government, 9 February 2023.
into concerns of wage-fixing by UK broadcasters.[154] Identifying potential competition issues within UK labour markets and actively pursuing collusive behaviour that affects household incomes is one of the CMA’s 2023-2024 strategic priorities.[155]
- In 2023, Canada prohibited certain no-poach and wage-fixing agreements under existing criminal
and civil competition law prohibitions, (which includes severe criminal sanctions of up to 14 years in prison on conviction) given the potential for these agreements to undermine competition like any other price-fixing agreement between competitors.[156] The reforms followed public scrutiny of the appropriateness of possibly co-ordinated increases to grocery worker wages during COVID. F[157]
Discussion Questions
- Should there be a role for no-poach and wage-fixing agreements in certain circumstances, for
example:
a) If the agreement is between unrelated businesses (e.g., competitors)?
b) If agreement is between businesses that are co-operating in some way (e.g., joint
venture partners)?
c) If it is part of a franchise agreement, either horizontally (where franchisees through a
common agreement do not to poach each other’s staff) or vertically (where franchisors make agreements with each franchisee)?
- Are there alternative mechanisms available to businesses to reduce staff turnover costs
without relying on an agreement between competitors?
- Should any regulation of no-poach and wage-fixing agreements that harm workers be
considered under competition law as an agreement between businesses (for example reconsidering the current exemption), or under an industrial relations framework?
- Should franchisors be required to disclose the use of no-poach or wage-fixing agreements
with franchisees?
- Are there lessons Australia can learn from the regulatory and enforcement approach of
no-poach and wage-fixing agreements in other countries?
and broadcasting of sports content, UK Government, 13 July 2022.
This CMA Microeconomics Unit has also recently published a report ‘Competition and market power in UK labour markets’, Report No.1, 25 January 2024.
156 Competition Act 1985 (CNDA), c. C-34, s 45(1.1); Competition Bureau Canada, ‘Wage-fixing and
no-poaching agreements are illegal in Canada‘, Government of Canada.
157 Canada, Parliament, House of Commons Standing Committee on Industry, Science and Technology:
Evidence, 10 July 2020, pp 3-4.
Conclusion and next steps
This issues paper outlined the existing research and evidence in Australia and overseas on the use and effects of restraints of trade on workers, and no-poach and wage-fixing agreements made between businesses. This has been supported by valuable early engagement from lawyers, business groups, unions, think tanks, international organisations and relevant national and international government agencies.
Several issues have been identified relating to the use and impact of non-compete clauses. Many issues identified in empirical analysis have been affirmed as practical issues affecting Australia today through the Competition Review Taskforce’s early engagement, and include concerns about:
- the “chilling effect” of restraint clauses on worker mobility, particularly among lower-income
workers, to choose better-paying jobs, and the ability for businesses to start up, recruit talent and grow;
- the high cost of litigation, the lack of clear guidance and ‘bright line’ rules, and the use of cascading
clauses or the ‘blue pencil test’, which can leave both workers and businesses with an unclear understanding whether an agreed restraint will be upheld as reasonable and enforceable; and
- the economic consequences of potentially inefficient allocation of labour and information, which
may be hampering productivity growth and innovation.
Further feedback is required to improve our understanding of such issues and inform the next steps.
The Competition Review welcomes any perspectives and contributions from the Australian community and will also release a questionnaire for businesses and workers.
The Competition Review will also continue to gather and review evidence, including undertaking analysis of recently released data by the Australian Bureau of Statistics in conjunction with other administrative and survey datasets.
END DOCUMENT 1
BEGIN DOCUMENT 2
Worker non-compete clauses and other restraints
Competition Review Taskforce The Treasury
6 June 2024
Telephone +61 2 6246 3788 Email [email protected] PO Box 5350, Braddon ACT 2612 Level 1, MODE3, 24 Lonsdale Street,
Table of Contents
About the Law Council of Australia ................................................................................. 3
Acknowledgements ........................................................................................................... 4
Executive summary ........................................................................................................... 5
Non-compete clauses ........................................................................................................ 6
General Comments .......................................................................................................... 6
Discussion Question 1. .................................................................................................... 6
Discussion Question 2. .................................................................................................... 9
Discussion Question 3. .................................................................................................. 10
Discussion Question 4. .................................................................................................. 12
Discussion Question 5. .................................................................................................. 14
Non-solicitation of clients and other business contacts ............................................. 14
Discussion Question 6. .................................................................................................. 14
Discussion Question 7. .................................................................................................. 17
Non-solicitation of co-workers ....................................................................................... 17
Discussion Question 8. .................................................................................................. 17
Discussion Question 9. .................................................................................................. 18
Non-disclosure clauses .................................................................................................. 18
Discussion Question 10. ................................................................................................ 18
Discussion Question 11. ................................................................................................. 19
Discussion Question 12. ................................................................................................ 19
Restraints on workers during employment ................................................................... 19
Discussion Question 13. ................................................................................................ 19
Discussion Question 14. ................................................................................................ 20
No-poach and wage-fixing agreements ......................................................................... 20
Discussion Question 15. ................................................................................................ 20
Discussion Question 16. ................................................................................................ 21
Discussion Question 17. ................................................................................................ 21
Discussion Question 18. ................................................................................................ 22
Discussion Question 19. ................................................................................................ 22
About the Law Council of Australia
The Law Council of Australia represents the legal profession at the national level; speaks on behalf of its Constituent Bodies on federal, national, and international issues; promotes and defends the rule of law; and promotes the administration of justice, access to justice and general improvement of the law.
The Law Council advises governments, courts, and federal agencies on ways in which the law and the justice system can be improved for the benefit of the community. The Law Council also represents the Australian legal profession overseas, and maintains close relationships with legal professional bodies throughout the world. The Law Council was established in 1933, and represents its Constituent Bodies: 16 Australian State and Territory law societies and bar associations, and Law Firms Australia. The Law Council’s Constituent Bodies are:
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Australian Capital Territory Bar Association
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Law Society of the Australian Capital Territory
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New South Wales Bar Association
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Law Society of New South Wales
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Northern Territory Bar Association
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Law Society Northern Territory
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Bar Association of Queensland
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Queensland Law Society
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South Australian Bar Association
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Law Society of South Australia
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Tasmanian Bar
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Law Society of Tasmania
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The Victorian Bar Incorporated
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Law Institute of Victoria
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Western Australian Bar Association
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Law Society of Western Australia
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Law Firms Australia
Through this representation, the Law Council acts on behalf of more than 104,000 Australian lawyers.
The Law Council is governed by a Board of 23 Directors: one from each of the Constituent Bodies, and six elected Executive members. The Directors meet quarterly to set objectives, policy, and priorities for the Law Council. Between Directors’ meetings, responsibility for the policies and governance of the Law Council is exercised by the Executive members, led by the President who normally serves a oneyear term. The Board of Directors elects the Executive members.
The members of the Law Council Executive for 2024 are:
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Mr Greg McIntyre SC, President
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Ms Juliana Warner, President-elect
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Ms Tania Wolff, Treasurer
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Ms Elizabeth Carroll, Executive Member
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Ms Elizabeth Shearer, Executive Member
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Mr Lachlan Molesworth, Executive Member
The Chief Executive Officer of the Law Council is Dr James Popple. The Secretariat serves the Law Council nationally and is based in Canberra.
The Law Council’s website is www.lawcouncil.au.
Acknowledgements
The Law Council acknowledges the assistance of the Law Society of New South Wales and the Law Institute of Victoria in preparing this submission.
The Law Council is also grateful for the contribution of members of the following committees:
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Industrial Law Committee of the Federal Dispute Resolution Section;
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Competition and Consumer Committee of the Business Law Section; and
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Corporations Committee of the Business Law Section.
Executive summary
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The Law Council is grateful for the opportunity to provide a submission to the Competition Review Taskforce in response to the April 2024 Issues Paper Non_competes and other restraints: understanding the impacts on jobs, business and_ productivity (Issues Paper).
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The Law Council recognises that, in certain circumstances, non-compete and other restraint clauses are necessary to support the legitimate interests of employers in protecting their investment in human resources, intellectual property and confidential information, and client connections.
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However, in practice, under the current common law, the restraint of trade doctrine typically favours employers due to an inequality in bargaining power when clauses are negotiated and the uncertainty, cost and time issues of litigation when a dispute arises. As a result, the Law Council generally accepts that non-compete clauses have become overly prevalent in Australian employment contracts—particularly in relation to lower-income workers.
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Lower-income workers generally have less bargaining power to negotiate or remove a non-compete clause, less capacity to absorb a loss of income between jobs and fewer resources to resolve a dispute if they leave. By and large, lower-income workers are also less likely to have access to information or connections reasonably requiring protection. Reduced job mobility amongst lower income workers serves neither the interests of individual workers nor the broader public interest.
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Therefore, the Law Council considers that the Australian Government should consider legislating additional limitations on the use of non-compete clauses. Such protections could include:
(a) legislating an income threshold below which non-compete clauses are generally not permitted;
(b) requiring employers seeking to include a non-complete clause in a contract to identify the ‘legitimate interest’ that they are seeking to protect;
(c) requiring employers to provide reasonable compensation when seeking to enforce non-compete clauses; and
(d) limiting the maximum length of the non-compete clauses or otherwise limiting cascading clauses.
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However, the Law Council considers that several of the other types of restraints discussed in the Issues Paper, including non-solicitation clauses and non-disclosure clauses, play a crucial role in protecting the viability of businesses. Such clauses are less in need of regulation at this time.
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The Law Council responds to each of the Discussion Questions in turn below.
Non-compete clauses
General Comments
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Restraint clauses are used by many Australian businesses. A recent survey conducted by the Australian Bureau of Statistics (ABS) found that 46.9 percent of Australian businesses include some type of restraint clause in their employment contracts.[1] The ABS survey demonstrated that non-disclosure clauses were the most frequently used restraint clause.[2] The next most frequently used clauses were non-solicitation of clients, non-compete, and non-solicitation of co-workers.[3]
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As a species of restraint clause, non-compete clauses restrict employees or independent contractors from working for competitors or establishing competing businesses. They typically operate for specific periods of time and in defined geographical locations.
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Complex non-compete clauses risk uncertain results because employees and employers do not have a clear understanding of whether clauses will be upheld by the courts as reasonable and enforceable.
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Competition restraints can be difficult to successfully enforce, both in jurisdictions where the common law doctrine of restraint of trade applies,[4] and in states that modify the common law such as New South Wales. Whilst recent ABS data indicates that large businesses with 1000 employees or more had the highest use of non-compete clauses at 40.0 per cent,[5] the extent to which the non-compete clauses used by these businesses were, or may be, enforceable remains unclear.
Discussion Question 1.
Does the common law restraint of trade doctrine strike an appropriate balance between the interests of businesses, workers and the wider community? If no, what alternative options are there?
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Under the common law, restraints of trade are presumed to be against the public interest, and therefore unenforceable, unless they are reasonably necessary to protect the legitimate interests of the employer.[6] In this regard, the common law can be seen to initially prioritise the rights of the worker by offsetting the presumed inequality of bargaining power in favour of the employer.
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However, the Issues Paper identifies legitimate concerns about uncertainty, cost and time that arise out of the existing common law position and the reliance on litigation to resolve disputes.[7] It also identifies the indiscriminate use of non-compete clauses for lower-income workers and the impact that these clauses can have on individual
1 Australian Bureau of Statistics, Restraint Clauses, Australia, 2023 (21 February 2024). 2 Ibid. 3 Ibid. 4 For example, in Victoria: see Just Group Limited v Peck [2016] VSC 614 at first instance, and then on appeal from the first instance decision [2016] VSCA 334. 5 Australian Bureau of Statistics, Restraint Clauses, Australia, 2023 (21 February 2024). 6 See eg, Herbert Morris Ltd v Saxelby [1916] 1 AC 688; Competition Review, The Treasury, Non-competes and other restraints: understanding the impacts on jobs, business and productivity (Issues Paper, April 2024) 10 (‘Issues Paper’). 7 Issues Paper, 14.
employees and the broader Australian economy by hampering labour mobility, wage growth and innovation.[8]
Limitations of the common law doctrine
- In practice, the doctrine arises at two key points in the employment relationship:
(a) when entering into the employment relationship; and
(b) when exiting, or considering whether to exit, the relationship.
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A number of common issues arise at each of these points, which may support the over-inclusion of unnecessary or unreasonable restraints.
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At the point of entry, many workers lack the bargaining power to challenge the inclusion of restraint clauses that may go beyond what is reasonably necessary to protect their employer’s interests. Often the worker will be advised that these clauses are ‘standard clauses’ which are non-negotiable and may lack an appreciation of what they are permitted to do after the point of exit. This is most often the case in lower-paid jobs or where there are few alternative employment opportunities.
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At the point of exit, while the onus will be on an employer to take some action to enforce a restraint, in practice, the threat or possibility of action is often sufficient to create practical adherence to a restraint clause. The option of a worker challenging a restraint clause through the court system in a proactive way is uncertain, stressful and can be prohibitively expensive.
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Litigation is inherently uncertain, and striking an appropriate or reasonable balance of interests relies not only on the restraint of trade doctrine itself, but on a court weighing up various factors when applying the doctrine to any specific factual circumstance. These factors include the activities restrained, the duration and geographical area covered, the bargaining power of the parties, whether any specific consideration was paid to the worker to agree to restraints, and the general public interest.[9]
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One result of the common law restraint of trade doctrine is the trend of a contractual hierarchy of time-based and area restraints, in descending order of time and geography (a ‘cascading’ restraint clause). Cascading restraint clauses add to complexity, effectively allowing employers to opt out of any meaningful attempt to properly define the appropriate scope of the clause. As noted in the Issues Paper, they also tend to encourage those taking a precautionary approach to comply with the broadest formulation of the restraint.
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As a result of the uncertainty, cost and time issues identified above, the Law Council generally accepts that non-compete clauses have become overly prevalent in Australian employment contracts.
8 Ibid 4, 18-23. 9 As discussed at page 10 of the Issues Paper.
Options for reform
Legislation
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The Law Council considers that the common law position—that non-compete clauses are unenforceable unless they are reasonably necessary to protect the legitimate interests of the employer—is the appropriate starting point for regulating non-compete clauses and should underpin any reform.[10]
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The Law Council does not support a blanket ban on non-compete clauses. However, given the issues identified above and explored in the Issues Paper, there is scope for improvement through legislative reform to provide additional protections for employees—particularly those on lower incomes. Elements of such protection could include:
(a) legislating an income threshold below which non-compete clauses are not permitted;[11]
(b) requiring employers seeking to include a non-compete clause in a contract to identify the ‘legitimate interest’ that they are seeking to protect;
(c) requiring employers to provide reasonable compensation when seeking to enforce non-compete clauses; and
(d) limiting the maximum length of the non-compete clauses or otherwise limiting cascading clauses.
- These potential reforms are discussed further below.
Court or tribunal reform
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Given the financial barriers to engaging in court proceedings to contest a restraint clause, which are particularly faced by lower-income workers, consideration could be given to expanding the jurisdiction of inferior courts to determine these types of matters, and to provide a clearer and easier mechanism for workers to challenge the enforceability of these restraints (beyond simply seeking declarations). Currently, most proceedings concerning restraints are commenced by employers seeking to enforce those clauses by way of injunctions and related orders, and commenced in a superior court. While this reform may assist in reducing the cost of litigation to some degree, we note that it would not address the inherent uncertainty and cost of litigation.
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The Law Council would not support the creation of a new jurisdiction or role for the Fair Work Commission in this area, acknowledging the limitations that would arise as a result of the Commission’s status as an industrial tribunal, and not a court.
10 See eg, Herbert Morris Ltd v Saxelby [1916] 1 AC 688. 11 There may be limited circumstances in which a non-compete clause for a lower-income worker may be reasonably necessary to protect the legitimate interests of a business. For example, where an employee has access to certain intellectual property (such as computer program source code). See further discussion at paragraphs 61-67 below.
Education and guidance
- There is a lack of understanding amongst workers as to the enforceability of unreasonable restraint clauses, even in competitive markets with high job mobility. As such, the Law Council considers that the potential legislative approach set out above could be supplemented by greater education and awareness measures as to workers’ rights in this area (as discussed further in our response to Question 4 below).
Discussion Question 2.
Do you think the Restraints of Trade Act 1976 (NSW) strikes the right balance between the interest of businesses, workers and the wider community? Please provide reasons. If not, what alternative options are there?
Broader concerns with the NSW Act
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Subsection 4(1) of the Restraints of Trade Act 1976 (NSW) (the NSW Act) reverses the general law position, in that it provides that a restraint will be valid to the extent that it is not against public policy. It also provides a mechanism for the court to ‘read down’, or declare invalid, what it considers would otherwise be an unreasonable restraint. However, this means that it can operate as a means for a court to ‘save’ what would otherwise be an unreasonable restraint.
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In the experience of members of the legal profession in NSW, the operation of the NSW Act tends to favour the interests of employers in enforcing restraints over the interests of workers. This is supported by Figure 2 at page 16 of the Issues Paper, which depicts a significant difference between NSW and the rest of Australia in the prevalence of non-compete clauses and in their successful enforcement.[12]
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The Law Council notes that subsection 4(3) of the NSW Act is arguably underutilised by the courts as a means of declaring altogether invalid clauses that are manifestly unreasonable, such as where an employer has made no real attempt to impose a reasonable restraint, but rather has drafted an overly broad restraint, with the expectation that a court will do the work of reading it down significantly.
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Given its reversal of the common law position and its practical impact in supporting the more frequent use of non-compete clauses, at this time, the Law Council would not support the adoption of the NSW Act at a national level.
Impact of the NSW Act on cascading clauses
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However, it has been suggested that the NSW Act may have some benefit as a means of reducing uncertainty and associated challenges, particularly by limiting the use of cascading clauses.
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Cascading clauses can be confusing to workers, and create uncertainty in employment contracts, which can serve to reinforce the power imbalance between employers and workers.
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The use of these clauses arose largely from the common law position, allowing a court to sever (but not alter) those parts of a restraint which may go beyond what is reasonably necessary, with the potential for the remaining parts to then be enforced.
12 Issues Paper, 15 (Figure 2), citing H Chia and I Ramsay, ‘Employment Restraints of Trade: An Empirical Study of Australian Court Judgments’ (2016) 29(3) Australian Journal of Labour Law 283.
As a means of increasing the likelihood that a restraint will remain in place and enforceable, the use of cascading clauses has become standard in many employment and other similar contracts, particularly in circumstances where the NSW Act does not apply.
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Under subsection 4(3), where there has been a manifest failure of an employer to attempt to make a restraint reasonable, a court has a discretion to treat that restraint as being altogether invalid, or invalid on such terms as it thinks fit, on public policy grounds. The consequence should be that, in most circumstances, the use of cascading clauses is unnecessary, at least in relation to employment contracts to which the NSW Act applies.
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Regardless of whether the NSW model is adopted more broadly, the Law Council notes that there is scope for Australian courts to apply common law principles in declaring cascading clauses void for uncertainty, particularly where numerous alternatives are proposed for the activities covered, duration and/or geographical area, leading to a large and unreasonable number of possible combinations.[13]
Discussion Question 3.
Are current approaches suitable for all workers, or only certain types of workers? For example, senior management, low-income workers, or care workers etc?
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In our view, different types of restraint clauses require consideration of a range of different factors and different regulatory responses.
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We acknowledge that the intention of non-compete and other restraint clauses is to support the legitimate interests of employers in protecting their investment in human resources (having acquired talented and/or experienced staff and equipping those staff with specific skills and industry knowledge) and client connections. However, we suggest that restrictions on the use of non-compete clauses for certain categories of workers are warranted, as set out below.
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The current trend internationally is to severely restrict the use of restraint clauses— and particularly restraint clauses purporting to operate for longer periods—to senior executive levels. The Law Council is of the view that this is an appropriate approach in the modern labour market.
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We would support legislative reform that places restrictions on the use of noncompete clauses for workers who are not high-income employees. One option may be to determine the threshold by reference to the existing definition of ‘high income employee’ in section 329 of the Fair Work Act 2009 (Cth) (the FW Act), as this definition is relied on in various aspects of the FW Act and is generally wellunderstood. However, the Law Council has received some feedback that the current threshold may be too high, and therefore overly restrictive, in the context of prohibiting non-compete clauses.[14]
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High income employees often have access to an array of sensitive information which is required to perform their roles, and which validly requires protection in some form. High income employees are more likely to have bargaining power to negotiate the terms of these clauses, such as the duration of the clause, or the
13 See discussion at page 11 of the Issues Paper. 14 Fair Work Act 2009 (Cth) s 329 defines a ‘high income employee’ by reference to the ‘high income threshold’ (see s 333) which is prescribed by the Fair Work Regulations 2009 (Cth). At the time of writing, the high-income threshold is $167,500 per annum.
compensation payable, so that a fair balance is struck between the interests of the employer and the employee. High income employees are generally also better able to absorb any loss of income in order to comply with a non-compete clause. They are also likely to be in a stronger position to negotiate compensation or a settlement in the event of a dispute.
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By contrast, lower-income workers generally have less bargaining power to negotiate or remove a non-compete clause, less ability to absorb a loss of income between jobs, less capacity to negotiate better terms of employment if they remain in their current jobs, and fewer resources to resolve a dispute if they leave. Reduced job mobility amongst lower income workers serves neither the interests of individual workers nor the broader public interest.
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As noted above, the existing common law places the onus on the employer to prove that a restraint clause is reasonably necessary to protect the employer’s business interests. One possible approach to strengthening protections for lower-income workers is to legislatively impose a more stringent test for the employer to meet, so that the court may only uphold a clause where the worker’s role is so commercially critical to the business that a breach would manifestly cause significant damage to the employer—for example, in some critical sales roles or roles involving unique, but commercially critical, technical skills. This could, in practical terms, discourage the use of restraint clauses as ‘standard’ terms for the vast majority of lower-income workers.
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We would not support measures relating to non-compete clauses that differentiate particular sectors of the workforce, such as the care sector. We acknowledge that there may be public interest merit in policies that enhance competition in sectors where there is a shortage of workers, by supporting job mobility and increased competition for labour within those sectors. However, in our view, differentiating lower-income workers is likely to be a more effective means of protecting the mobility of the most vulnerable workers across all sectors and lead to less disputation arising in the context of whether a worker is within or outside of any particular sector.
Recommendation
- The Australian Government should consider legislating an income threshold below which non-compete clauses are not permitted.
Discussion Question 4.
Would the policy approaches of other countries be suitable in the Australian context? Please provide reasons.
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We note the discussion of various options for regulating non-compete clauses which were identified by the United Kingdom’s (UK’s) Department for Business and Trade, in its response to a consultation on measures to reform post-termination noncompete clauses in contracts of employment (the UK Government report).[15]
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This report does not appear to have been considered as part of the Issues Paper. However, the Law Council considers that some of the potential reforms discussed in this report are worthy of consideration in the Australian context.
Statutory limit
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Non-compete restraint clauses operating for 12 months or longer can act as a significant barrier to change of employment, which can have a disproportionate impact on young individuals who hold junior positions, and low-income workers such as individuals who provide care in the aged care, health, and disability sectors. Longer-term clauses can also have a disproportionate impact on new employees who are subject to a probationary period. Such employees may leave their employer after a short period of time such as a few weeks or a month, yet remain bound by a restraint for a year.
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The UK Government has committed to introducing a statutory limit of three months on non-compete clauses, as a means of boosting workplace mobility, flexibility and dynamism in the labour market.[16]
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In principle, the Law Council would not be opposed to introducing a similar measure for lower-income workers. In addition to striking a balance between worker and employer interests, a statutory limit on the period of non-compete clauses for some or all workers would bring clarity and may remove the use of cascading clauses (at least in relation to restriction periods).
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However, in the context of other restrictions suggested by the Law Council— including requiring an employer to identify the legitimate interest it is protecting and pay for it—a limit of 3 months may be overly limiting.
Mandatory compensation
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Another option is the introduction of mandatory compensation for enforcing noncompete clauses. The UK Government report found that this measure may be helpful in encouraging employers to consider whether the use of a non-compete clause is necessary and reasonable for that particular role in the circumstances. Mandatory compensation would also provide a degree of financial security to the worker.[17]
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We note that the UK Government does not propose to proceed with this measure, based on the likely cost to employers in a time of economic recovery, and the risk that it would increase the enforcement of non-compete clauses, and thereby
15 Department for Business and Trade (UK), Non-Compete Clauses: Response to the Government consultation on measures to reform post-termination non-compete clauses in contracts of employment (12 May 2023). 16 Ibid 19. 17 Ibid 11.
potentially stifle competition and innovation.[18] However, mandatory compensation of workers has been proposed or implemented in a number of other nations including Finland, Denmark, Portugal, Sweden, France, Germany, Netherlands and Spain.
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The Law Council suggests that this option is worthy of further consideration. If implemented alongside a restriction on non-compete clauses for lower-income workers, it is likely that the impact on employers would be substantially minimised. It is likely that inclusion and enforcement of non-compete clauses would be reserved for circumstances where the likely benefit of a clause would outweigh the cost of enforcing it.
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Compensation could help to offset this cost for workers, while also protecting the interests of employers. Consideration could be given to the level of compensation being a portion of the worker’s salary and/or determined by reference to any other salary or wages earned by the worker during the restraint period. Any compensation scheme should not impose unreasonable costs on the employer.
Independent legal advice
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As noted above, there is a lack of understanding among workers regarding noncompete clauses, including as to their enforceability. While improving transparency around the use of non-compete clauses may not overcome the difficulty of uneven bargaining power between lower-income workers and employers, it would go some way to informing workers of their rights—both at the point of entry and at the point where the worker is contemplating changing employers—and may help to reduce the overall incidence of unfair non-compete clauses.
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One option for improving transparency which was identified in the UK report is to provide that a non-compete clause is unenforceable unless the employer has paid for the worker to obtain legal advice as to the effect, and enforceability, of the clause, before entering the employment agreement.[19] In principle we would support such a measure, and note that it would not preclude the worker from later challenging the non-compete clause.
Guidance
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Transparency would also be enhanced through the provision of guidance to workers and employers.[20] We suggest this type of guidance should be produced by government and be publicly available in a form much like the Fair Work Information Statement, and through relevant websites. The information should include guidance on what might be fair and reasonable in different circumstances, and how to interpret cascading clauses. It should include plain language and visual information and be available in major community languages.
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Consideration could also be given to requiring an employer to provide this guidance to a worker in order for a contractual restraint to be enforceable.
18 Ibid 11-12. 19 Ibid 18. 20 Ibid.
Recommendation
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The Australian Government should consider legislating additional limitations on the use of non-compete clauses to provide further protections to employees and ensure that non-compete clauses are only sought when necessary. Such protections could include:
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requiring employers seeking to include a non-disclosure clause in a contract to identify the ‘legitimate interest’ that they are seeking to protect;
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requiring employers to provide reasonable compensation when seeking to enforce non-compete clauses; and
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limiting the maximum length of the non-compete clauses, or otherwise limiting cascading clauses.
Discussion Question 5.
Are there other experiences or relevant policy options (legislative or non- legislative) that the Competition Review should be aware of?
- Beyond the policy options discussed above in response to Discussion Questions 1-4, the Law Council did not receive feedback on additional options for reform.
Non-solicitation of clients and other business contacts
Discussion Question 6.
What considerations lead businesses to include client non-solicitation in employment contracts? Are there alternative protections available?
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The Law Council appreciates that losing clients to competitors when particular workers leave can have a significant commercial impact on a business. The main considerations that lead to the use of non-solicitation clauses are to protect valuable client connections and to maintain the stability of the employer’s workforce and business security. Professional and client service based relationships can take many years to establish and maintain, and are the lifeblood of some businesses. Losing clients to a former employee, who either works for a competitor or has set up a new competitive business, can be disruptive to a business and significantly impact its viability.
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There are limited alternative protections available to employers. Some protections may be available to the employer in equity (including breach of obligations of confidence or fiduciary duties) and by statute (including, for example, section 183 of the Corporations Act 2001 (Cth), which prohibits an employee from improperly using their position—including the company’s information gained through their position— for personal gain, third-party gain, or to cause detriment to the company). However, these protections can be difficult to establish and enforce, and more limited in scope than non-solicitation clauses. Confidentiality clauses are widely used in employment contracts, but are of limited assistance in retaining client relationships, as client information is not necessarily confidential to the employer and may be accessible from the client or other sources.
Comments on non-competes in the context of Intellectual Property
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The Law Council submits that there are legitimate reasons for businesses to use non-compete clauses and similar restraints, particularly in relation to executives, employees involved in the development of new products, ideas and innovations for a business, and employees who have developed close relationships with clients or suppliers of the business where it is difficult for them to “unknow” the confidential and sensitive information they have acquired in the role and similar personnel.
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Relevant intellectual property includes, for example:
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copyright, including in materials such as computer program source code, client and customer lists, records of important business methodologies and specifications, plans, blueprints and manuals; and
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confidential information, including know-how, trade secrets and other commercially sensitive and valuable information.
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A key feature of the types of intellectual property listed above is that they are intangible and therefore very difficult to trace and contain. It is also worth noting that, unlike in other jurisdictions such as the United States, Australia does not have a legislative regime for the protection of trade secrets. Of the mechanisms available to Australian businesses, non-compete clauses and similar contractual restraints are usually the simplest to enforce. By contrast, pursuing a former employee for copyright infringement or breach of confidence is generally cumbersome, excessively costly and forensically difficult to prove. It often requires Australian businesses to apply for one or more preliminary or interim measures—such as preliminary discovery, interim injunctions and/or Anton Piller orders—which alone can cost hundreds of thousands of dollars to obtain, and still may not be sufficient to uncover all of the wrongdoing of a former employee. That is particularly the case where the former employee deliberately or unintentionally obscures, destroys or loses incriminating evidence of their misconduct, which is easy to do when dealing with intangible intellectual property.
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As one example, the Law Council notes the recent judgment of the Federal Court of Australia in Motorola Solutions Inc v Hytera Communications Corporation Ltd [2022] FCA 1585, which was delivered in December 2022 but only published (with some redactions) in June 2023. In summary:
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Several former employees of Motorola downloaded its confidential files containing software source code before taking jobs at Hytera, a competitor in the supply of digital mobile radios.
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The source code was key to enabling participants in that market to satisfy stringent industry standards for digital mobile radios, which gave Motorola an important competitive advantage.
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Hytera soon developed a similar product, and Motorola commenced Federal Court proceedings alleging copyright and patent infringement.
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To prove that Source Code A infringes the copyright in Source Code B, it is necessary to conduct a side-by-side comparison to assess whether Source Code B contains substantial part of Source Code A. However, Hytera claimed to have lost significant portions of the source code in its digital mobile radio products, which meant that Motorola and the Court were required to engage in difficult comparisons between source code and object code.
- The result was an extremely lengthy and complex case, with a judgment running to 2,315 paragraphs (over 500 pages) and a subsequent appeal, which is likely to have cost Motorola millions of dollars in legal fees. Motorola ultimately succeeded in its claims, but only partially and with great difficulty, and the appeal judgment is currently pending.
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This case is just one example of how extremely difficult it is for businesses to enforce their intellectual property rights, particularly when dealing with intangibles (such as copyright) upon intangibles (such as source code). In breach of confidence claims, various other difficulties may arise—for example, it is often difficult to delineate proprietary knowledge of the business from personal skills and knowledge of the employee and, while an employee can promise to not utilise information that they have learned on the job when moving to work for a competitor, it may be impossible for that employee to ‘un-know’ that information.
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Non-compete clauses and similar restraints provide an important buffer, to mitigate the risk of a former employee disclosing confidential information, infringing other types of intellectual property or, in the case of intellectual property such as patentable inventions and registrable designs, disclosing information that may compromise the registrability or value of that intellectual property. Non-compete clauses and similar restraints also enable Australian businesses to mitigate such risks proactively, rather than being forced to act only once unlawful conduct has actually occurred or been threatened.
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The Law Council accepts that non-compete clauses may not be appropriate in every circumstance. They are most appropriate for employees who have access to valuable intangible assets of a business, such as confidential know-how, confidential business/client information such as pricing, confidential supplier information, trade secrets, and copyright materials that are not in the public domain. This applies to all industries and sectors, particularly those that are involved in innovation, such as the technology, telecommunications, healthcare, scientific, pharmaceutical, manufacturing, food and beverage, mining, energy and resources, and consumer goods industries.
Business sale restraints of trade
- Employment contracts are not the only place individuals can be bound by restraints of trade. It is common for business sale agreements, shareholders’ agreements and equity incentive plans to restrain parties to the agreement (including founders, senior executives and other employees with equity interests in the business). The commercial basis for restraining these individuals in a business sale context differs from post-employment restraints, in that it is designed to (among other things):
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restrain former owners of a business from using their knowledge of the business’ commercially sensitive trade secrets to operate a new business in competition with the business they sold, to ensure the protection of the goodwill of the business being acquired by the purchaser; and
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restrain former owners from poaching key employees of the business they sold.
- Business sale restraints can be crucial to ensure that key executives and ‘founders’ are retained by the business post-completion, as it is often the case that those individuals have knowledge of (or are the ‘face’ of) the business and their departure would significantly devalue the entity.
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Business sale restraints of trade can be crucial to protecting the goodwill and giving the purchaser of a business or the remaining shareholders the full value of the business they are acquiring.
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The Issues Paper is silent on the use of restraints of trade in a business sale context. The difficulty with this is that there are restraints that ‘cross-over’ between business sale and post-employment contexts. For example, if a senior executive holds a substantial but minority equity interest in a company, through a shareholders’ agreement or equity incentive plan, they may be restrained from competing against the business they managed from the time they cease to hold an equity interest in the company (which can coincide with the cessation of their employment).
Discussion Question 7.
Is the impact on clients appropriately considered? Is this more acute in certain sectors, for example the care sector? Please provide reasons.
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Consideration could be given to imposing limits on the use of clauses for the nonsolicitation of clients on lower-income workers, due to their reduced means and bargaining power, as discussed above. However, in most cases, the effect on a worker of a non-compete clause, which prevents them from working in their chosen occupation for some period, or in a specific location, is markedly different from the effect of a non-solicitation clause, which allows the worker to continue in their occupation, but without their taking existing client relationships to the new employer. This suggests that, even in relation to lower-income workers, there is a stronger case for regulating non-compete clauses than in regulating non-solicitation clauses.
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Consideration could also be given to limiting the use of non-solicitation clauses in particular roles in which a personal relationship with the client, or skills and experienced only developed through working with a particular client, is central, for example in certain care, medical, therapeutic, education, and personal fitness or coaching roles. Care would be required in defining these categories so as not to cast these limits too widely. We would not generally support a differentiated outcome based upon the workers’ sector.
Non-solicitation of co-workers
Discussion Question 8.
What considerations lead businesses to include co-worker non-solicitation in employment contracts? Are there alternative protections available?
- The Law Council’s view is that employers should be able to restrict solicitation of coworkers as this practice can lead to significant loss of skill and expertise within an organisation.
Discussion Question 9.
Is the impact of co-worker non-solicitation clauses more acute for start-ups/new firm creation or in areas with skills shortages in Australia?
-
The Law Council considers that non-solicitation clauses are not the key issue facing start-ups. Rather, start-ups often face the challenge of a general skills shortage in a specialist area, and share that challenge with all businesses operating in the area.
-
Members of the legal profession report that it is relatively uncommon for an employer to seek to enforce a non-solicitation of co-workers restraint in isolation, and, for that reason, it is not generally that type of clause that has the most acute impact for a new or start-up business.
Non-disclosure clauses
Discussion Question 10.
What considerations drive businesses to include non-disclosure clauses in employment contracts? Are there alternative protections, such as s 183 of Corporations Act 2001 available?
-
We note that the general law provides some limited protection through the equitable duty of confidence. However, it is important for businesses to have an appropriate means of protecting their confidential information, and preventing or restricting former workers from using that information while employed elsewhere, or from disclosing that information to a new employer or other party.
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Typically, non-disclosure clauses (or confidentiality clauses) are not considered to be restraints and are not viewed by employers and workers in that light. In our view, regulatory responses to non-disclosure clauses should not necessarily mirror those for non-compete or non-solicitation clauses.
-
The enactment of section 183 of the Corporations Act attests to the commercial need to protect organisations from a loss of corporate information. As noted at paragraph 60 above, section 183 prohibits an employee from ‘improper use’ of their position for personal gain, third-party gain, or to cause detriment to the company.[21]
-
Importantly section 183 prohibits the misuse—not necessarily the disclosure—of information by officers and employees of a corporation. The inclusion of non-disclosure clauses in employment contracts often complements section 183, both by providing a contractual remedy for the employer (rather than relying on a court to impose a civil penalty), and by bringing the issue to the worker’s attention.
-
It is important to note that, for non-corporate entities, section 183 provides no protection, and the inclusion of non-disclosure provisions becomes even more important.
21 A useful analysis of section 183 was recently undertaken by Derrington J in Smart EV Solutions Pty Ltd v Guy [2023] FCA 1580 [67]-[83].
Discussion Question 11.
How do non-disclosure agreements impact worker mobility?
- The Law Council understands that non-disclosure agreements have little to no impact on worker mobility. In practice, workers are able to manage the issue of confidentiality as they transition from one role to another.
Discussion Question 12.
How do non-disclosure agreements impact the creation of new businesses?
- Again, in the experience of members of the legal profession, non-disclosure agreements do not pose a significant barrier to new businesses. The value that new employees bring to a new business primarily takes the form of skills and general industry experience rather than the information or intellectual property of competitors.
Restraints on workers during employment
Discussion Question 13.
When is it appropriate for workers to be restrained during employment?
-
It is appropriate in most circumstances for workers to be subject to restrictions during their employment to prevent them from engaging in conduct in competition with their employer, setting up a competing business, or taking advantage of a business opportunity that arose during their employment which is relevant to their employer’s business or operations.
-
The question as to whether a full-time employee should be permitted to engage in secondary employment without obtaining consent from their primary employer is a more complicated issue. The issue is often considered to be one of whether the secondary employment will have any negative effect on the employee’s performance and productivity in their primary role. In our view, this matter should remain regulated by the employment contract entered into between the parties, and by the common law.
-
In relation to part-time employees and casual workers, in our view, the ability for a primary employer to regulate engagement in secondary employment should be much more restricted. However, we support restricting these workers from using the primary employer’s time or resources to set up a competing business, or take advantage of a business opportunity that arose during their employment which is relevant to their employer’s business or operations.
-
In addition, any change made to the enforceability of post-employment restraints raises further issues for the ability of employers to restrain the conduct of their workers during employment. For example, if an employer is prevented or restricted from relying upon a post-employment restraint, then this may have the consequence of increasing the reliance of employers on longer notice periods and the imposition of ‘garden leave’. While the use of this mechanism results in a worker continuing to be paid during that period, it has the effect of limiting job mobility while limiting that worker’s productivity.
Discussion Question 14.
Is it appropriate for part-time, casual and gig workers to be bound by a restraint of trade clause?
- Subject to the points raised in our responses above, we do not support imposing restraints on casual workers or gig workers, for whom job mobility is of prime importance.
No-poach and wage-fixing agreements
Discussion Question 15.
Should there be a role for no-poach and wage-fixing agreements in certain circumstances, for example:
-
No-poach agreements, with two or more businesses agreeing to refrain from actively recruiting each other’s workers or prohibiting them from hiring each other’s workers, are only used in limited circumstances. For example, it is relatively common for that type of agreement to be included in the context of secondment arrangements and labour hire arrangements.
-
Often the no-poach agreement operates for a limited period or with some form of payment being payable by the contracting party seeking to recruit or hire the worker as a form of compensation to the other party. We suggest that, without the availability of some type of no-poach agreement, commercial parties may be less willing to enter into secondment arrangements and the general labour hire business model may be materially adversely affected.
-
In the experience of members of the legal profession, the use of no-poach agreements between unrelated but competitive businesses (described as being in a horizontal or naked context) is rare.
a) If the agreement is between unrelated businesses (e.g., competitors)?
- In our view, no-poach agreements between unrelated but competitive businesses and wage-fixing agreements, while rarely seen, are anti-competitive by design and should be expressly prohibited. Given that these agreements are entered into between two commercial entities, we do not consider that the FW Act is an appropriate vehicle for regulating agreements of this type.
b) If agreement is between businesses that are co-operating in some way
(e.g., joint venture partners)?
-
We consider that there is a continuing role for no-poach agreements between cooperating businesses, such as in the context of joint venture agreements, secondment arrangements and where labour hire businesses are conducting business.
-
In the case of joint venture agreements, no-poach agreements allow a joint venture partner to lend its employees to work in, or for, the joint venture itself, while minimising the risk of losing employees to the other joint venture partner. Similar
issues arise where an employee is seconded to provide services for the benefit of another entity.
-
In the case of a labour hire business without a no-poach agreement in place, that business may incur costs in finding and placing an appropriate individual with a host entity, to be left with a significant commercial risk that the host entity will simply look to directly employ that individual so as to avoid payment of any continuing fee to the labour hire provider. In those circumstances, the labour hire business model may become unsustainable for some providers.
-
The Law Council also understands that it is not uncommon for no-poach agreements to be made in circumstances where a competitor is undertaking due diligence over the business in question. These agreements will usually be for limited periods of less than 12 months and include a carve out for employment arising out of a response to a bona fide advertised job position. Such arrangements may be a necessary and valid protection of a business’ workforce.
c) If it is part of a franchise agreement, either horizontally (where franchisees through a common agreement do not to poach each other’s staff) or vertically (where franchisors make agreements with each franchisee)?
- The Law Council considers that there is a continuing role for no-poaching agreements in a franchise context, but that such agreements should be disclosed (as suggested in our response to Question 18).
Discussion Question 16.
Are there alternative mechanisms available to businesses to reduce staff turnover costs without relying on an agreement between competitors?
- As discussed in the response to Question 15(a), in our view, the use of no-poach and wage-fixing agreements between unrelated and competitive businesses should be prohibited. For the reasons set out above, there is a continuing role for the inclusion of non-solicitation of co-worker clauses in individual employment contracts.
Discussion Question 17.
Should any regulation of no-poach and wage-fixing agreements that harm workers be considered under competition law as an agreement between businesses (for example reconsidering the current exemption), or under an industrial relations framework?
- As discussed in our response to Question 15(a), the regulation of no-poach and wage-fixing agreements as between commercial entities should be regulated under competition laws such as the Competition and Consumer Act 2010 (Cth), rather than in an industrial relations framework and under the FW Act.
Discussion Question 18.
Should franchisors be required to disclose the use of no-poach or wage-fixing agreements with franchisees?
- Yes, to the extent that such agreements are in place between a franchisor and its
franchisees, the use and terms of those agreements should be disclosed, consistent with the currently prescribed Franchise Disclosure Document.
Discussion Question 19.
Are there lessons Australia can learn from the regulatory and enforcement approach of no-poach and wage-fixing agreements in other countries?
- As stated earlier, in our view a cautious approach should always be taken when
considering applying approaches adopted in other jurisdictions to the Australian context, due to factors such as population, the level of competition and geographical location.
END DOCUMENT 2
BEGIN DOCUMENT 3
INTO NON-COMPETE CLAUSES AND OTHER RESTRAINTS
SUBMISSION TO THE COMPETITION COMMISSION INQUIRY
31 May 2024
Professionals Australia welcomes the opportunity to contribute to the Competition Commission’s review into the use and impact of non-compete clauses and other legal restraints on employees.
Professionals Australia is the trading name of The Association of Professional Engineers, Scientists and Managers, Australia which is a registered union. The union is an occupational based union drawn from a broad range of technical professional and /or supervisory and managerial groups such as architects, engineers, IT professionals, mining supervisory and managerial staff, pharmacists, scientists, and veterinarians.
We support the ACTU (Australian Council of Trade Unions) submission in this Inquiry. Our view is that non-compete clauses in employment contracts should be banned.
Why are we making a submission?
Whilst it is accepted that lower paid workers are disadvantaged in contract negotiations with employers, it is less accepted that highly skilled professionals are rarely able to negotiate changes to their contracts. The fact is that there is currently a skills shortage in engineering, but our professional engineer members find themselves faced with employers unwilling to negotiate changes to their contracts. We have members who are cyber-security specialists, an area in which there is a global skills shortage, and they find they cannot negotiate changes to an employment contract. The main negotiation will be around the remuneration and once that is settled, the negotiation ends. We have members who have sought the removal of clauses which they feel are oppressive, including non-compete clauses. The employer has withdrawn the offer of employment rather than discuss the matter any further.
This lack of genuine negotiation of employment contracts occurs during a period of low unemployment and at a time when the labour market is reported as being strong. In these circumstances, there is no basis to believe the market will correct the overreaches by employers regarding the terms and conditions in employment contracts.
Instead, workers engaged on individual employment contracts rely heavily on legislative protections to regulate the employment relationship in a way which balances fairly the interests of workers, employers, the economy and other broader social interests.
It is our firm view that non-compete clauses are becoming increasingly common in contracts, and we are seeing efforts to cement their place in employment relations. This must be averted via legislative intervention because their effects are overwhelmingly harmful to workers and broader community interests.
What do we base our views on?
Our views are based on the experiences of our members which we are informed about through the contract review service we conduct for members. The contract review service is offered to members whether they will be working as employees, labour hire workers or as independent contractors. Approximately 150 employment contracts were reviewed in 2023 by the national team. The annual review of this number of contracts for engineers, IT professionals and pharmacists, among others, means the national team of senior lawyers conducting this work can discern trends occurring in individual contracts' content. From our vantage point, it is evident that law firms who draft employment contracts for employers play a significant role in the spreading of changes to contractual provisions across various employers.
A typical contract review consultation meeting with a member involves discussing each clause of a proposed contract with them. This takes approximately 45 minutes to an hour. The purpose of the consultation is to assist the member in determining how they will respond to an offer of employment based on the contract setting out the terms and conditions of employment. In broad terms, there will be five areas to consider in making this assessment:
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Any clauses which the member is not sure that they understand;
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Any clauses which are deal-breakers from the member’s perspective;
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Any clauses which do not accurately state the legal position (e.g. contrary to
legislation and /or applicable industrial awards);
- Any clauses which the member does not like but they would like to know if they
are typical or ‘standard’ contract provisions; and
- Any issues which are not covered that the member is concerned about.
It is true that our members are often skilled in making risk assessments in their professional lives and able to engage in distinguishing between the ‘worse case’ and ‘most likely’ scenarios for making such assessments. They find that the contract review
consultations assist them in making those assessments by, for example, deciding what issues they need to ask relevant questions about and/or what legal protections there are outside of the contract upon which they might rely.
There are an exceedingly small number of workers who may have realistic expectations to engage in a lengthy negotiation about their employment negotiation which will be due to a combination of their level of skill, experience and importantly and relevantly to this Inquiry due also to their pre-existing relationship with their prospective employer.
In general, our members have low expectations about engaging in any genuine consultation or negotiation with a prospective employer about the contents of their contract.
Incidence of non-compete, non-solicitation and non-disclosure clauses
Non-compete clauses
The Issues Paper refers to evidence that approximately 22% of Australian workers have a non-compete clause.[[1]] Our experience is around 1 in 4 contracts contain non- compete clauses and when a contract contains a non-compete clause, it will nearly always have non-solicitation and non-disclosure clauses as well.
This is a dramatic increase from 15 years ago when staff report that it was a rarity to see a non-compete clause in a member’s contract.
These days we see non-compete clauses in contracts offered to workers for whom it is difficult to see what legitimate business interest could need to be protected via a noncompete clause. For example, what is the legitimate business need to include a noncompete clause in a contract for the hire of a new engineering graduate? Why prevent a pharmacist from working within 3kms of any store within the chain of pharmacies in which they were hired?
Non-solicitation clauses
The Issues Paper refers to the e61 Institute research showing around 16% of workers have non-solicitation of client clauses in their contracts with evidence suggesting that these are more common in financial services and real estate sectors[[2]]. Our experience indicates that, not surprisingly, consultancy services have a very high incidence of nonsolicitation of clients’ clauses in their employees’ contracts.
Our observations are that the trend is for non-solicitation clauses to apply to both former clients and former colleagues with the exception being to limit to one or the other.
However, we would like to highlight that in the labour hire situation a worker may be hired by an employment agency on a casual or temporary basis to work for a specific employer. Their contract with the employment agency will contain a client nonsolicitation clause which prevents the worker from gaining more secure and/or longerterm employment.
Non-disclosure clauses
Our estimate is that non-disclosure provisions in contracts relating to post-employment are appearing in around 50-60% of our members’ contracts currently. This appears to be an increase compared to previous years. Could this be due to some of the commentary made during the Inquiry that confidential information protections in common law and in the Corporations Law may be adequate safeguards to protect legitimate business interests? This is not clear.
Definitions of confidential information often include references to financial information. With the abolition of pay secrecy provisions, we have seen one or two contracts which refer directly to a person’s own remuneration being exempted from the non-disclosure of confidential information requirement. We have also seen a small number of contracts using the expression ‘to the extent permitted by law’ to denote that there may be legal limits on the non-disclosure requirement but without specifying what those legal limits might be. Most non-disclosure clauses do not contain any wording which might alert a worker to there being any limits on the prohibition of ‘confidential information’ as defined in the contract from being disclosed. There are legal limits on the non-disclosure of confidential information such as whistleblowing or when a worker needs to disclose certain information to obtain independent legal advice on a workplace matter.
The commonplace use of ambiguous or non-specific wording in employment contracts indicates the vital importance of legislation which expresses clearly what employers are prohibited from demanding in employment contracts.
Myth #1 Contracts with non-compete clauses adequately compensate the worker
Professionals Australia has not come across a contract which specifically pays an employee for the period of their post-employment non-compete restraint.
We have noted that many contracts which contain non-compete clauses include wording to the effect that the remuneration under the contract compensates the employee for the post employment non-compete provisions. This suggests the employee is accepting the non-compete provision on that basis.
However, it is difficult to see how the annual remuneration under a contract could adequately compensate someone for a 6 or 12 month or longer period unless it provides an annual remuneration which is well above the average pay.
Fifteen years ago, it was not uncommon for a contract with a non-compete clause to contain a longer period of notice of three months. This reflected the fact that the employee may have their employment terminated: the longer period of notice was intended to assist them in those circumstances.
When we have examined contracts offered to electrical engineer members and reviewed the annual remuneration paid to those with non-compete clauses against those without non-compete clauses, we have found no discernible additional premium in the remuneration being offered to those required to accept a contract with a noncompete clause.
Myth #2 non-compete clauses are not that much of a problem because they are unenforceable
Workers find non-compete clauses threatening.
Including such clauses in contracts, at a minimum, generates uncertainty over whether the employer will act against the worker if they leave and commence working with another business in their industry.
IT professionals often work in the IT industry in large multinationals which perform many different types of functions. The IT professional who works in a specific area of the business can find themselves faced with a contract containing a non-compete clause which purports to prohibit them from working with a competitor to their employer in an area unrelated to where they are currently working. Such clauses show no regard for the interests of employees in broadening and developing their skills nor the wider social and economic interest in having workers with broad skills.
Similarly, many engineers traditionally work in specific industries for the duration of their career e.g. electrical engineers work in the electrical power industry, civil engineers in the construction industry, the range of engineers who work in the rail industry, etc. To impose non-compete provisions on workers effectively prevents those workers from working in the industry in which their skills and knowledge are the most relevant. There are broader economic costs to industry when experienced workers are excluded from working within it.
It is also concerning that when an employer terminates a worker during their probation period or due to redundancy, they do not waive their non-compete clauses. This lack of regard for the interests of workers during these difficult times is symptomatic of the over-reach of employer power which non-compete clauses represent.
Unfortunately, our members have also experienced what can only be characterized as a vindictive use of these types of provisions to harass workers who leave their employment.
Finally, we are starting to see our members having to ‘warrant’ in contracts with prospective employers that they are not subject to any legal limitations impacting on them working with the prospective employer. This development has the potential to stifle labour market mobility even further.
Conclusion
The continued use of non-compete clauses serves only a very narrowly construed employer interest. Professionals Australia and its members are deeply concerned that unnecessary limitations are being placed on workers to pursue better pay and conditions and their careers due to these clauses. There is also a fundamental question of the liberty of a person to agree to work for an employer which does not restrict their future options about for whom they will work.
National Office Workplace Advice and Support
[1] Competition Review, Issues Paper - Non-competes and other restraints: understanding the impacts on jobs, business and productivity, April 2024 at p.8
END DOCUMENT 3
BEGIN DOCUMENT 4 Competition Taskforce Division Treasury Langton Cres Parkes ACT 2600
By email: [email protected]
31 May 2024
Dear Taskforce members,
Worker non-compete clauses and other restraints
The Australian Society of Authors (ASA) is grateful for the opportunity to make a submission to this consultation.
About the ASA
Since 1963, the ASA has been the national peak body, professional association and voice of Australia’s writers and illustrators. We have 4,000 members drawn from every sector of the writing and illustrating world, including: novelists, non-fiction writers, biographers, illustrators, academics, comic artists, scientists, historians, graphic novelists, educational writers, children’s writers, crime writers, science-fiction writers, romance writers, journalists, poets and more.
In this submission, a reference to an “author” is intended to also include illustrators as they are the authors of their artistic works.
Discussion Paper question 14: Is it appropriate for part-time, casual and gig workers to be bound by a restraint of trade clause?
Our submission relates to Australian authors who typically work as sole traders. Authors are not employees. As independent contractors, authors are treated by the law as competitive businesses that can engage in arm’s length negotiations. The reality is that authors have little power to negotiate, cannot set their own rates of pay, do not receive sick leave or annual leave, and lack access to guaranteed superannuation. In short, authors are vulnerable and, in the main, live financially insecure lives.
The Macquarie University Author Income Survey has found that the vast majority of authors are entirely unable to earn a living from their creative practice with an average annual income of only $18,200.
The ASA has long been concerned about authors’ lack of bargaining power in negotiating contracts for their work. As a general observation, authors are unable to negotiate substantial changes to contractual terms with publishers beyond the edges.
Our submission is that it is not appropriate for gig workers such as authors to be bound by restraint of trade clauses. Yet, non-competes and ‘right of first refusal’ or option clauses are commonly found in Australian publishing contracts.
Australian Publishing Contracts
A non-compete clause is a clause that prevents authors from publishing any future work which is similar to, or might compete with, their current work without their publisher's permission. In our view, these clauses are unnecessary to protect the business interests of publishers and can unfairly impede authors from making a living.
We support the Government prohibiting non-competes clauses in contracts with low-paid freelancers for the following reasons:
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The only compensation paid to authors that is guaranteed under publishing contracts is the advance which is typically low, and regularly not offered at all. Royalties are unpredictable and based on sales. According to research by Macquarie University, the average advance earned by Australian authors is $4,100 in a year.[1] There simply isn’t sufficient remuneration on offer to justify any restraint.
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Non-competes are notoriously vague. Although terms can vary across contracts, typically authors are required to warrant that they will not publish, write or become involved in any work of a similar nature, containing the same or similar characters or themes that is likely to compete or likely to lessen its sales for themselves and their licencees. Publishers rarely limit the non-compete by time or geographic territory. It is very difficult for authors to know the parameters of such restraints and their vagueness can cause stress and uncertainty for authors.
1 2022 National Survey of Australian Book Authors: Industry Brief No. 3: Authors’ Income, Zwar, J., Crosby, P., & Throsby, D. (2022). Macquarie University.
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Unless non-competes are very short-lived, they may restrain authors’ abilities to earn a living, particularly for genre fiction writers (where all their works arguably compete with each other), specialist non-fiction writers (where they are an expert in a niche area and may want to publish multiple books on the same subject matter) or illustrators commissioned specifically for their unique style.
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Non-compete clauses are ‘one way’. Authors are not permitted to go to another publisher with a ‘competing work’ but the publisher is not committed to any further support of the author. Nor does the publisher offer a reciprocal promise not to publish a work with a third party that is similar, or likely to compete in the same market, or that has the potential to reduce sales of the author’s work.
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Authors might have a range of valid reasons for moving to another publisher, including that their genre of writing might change - and be more suitable for a different publisher’s list.
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Non-competes are rarely actually enforced by publishers, and are, in all likelihood, unenforceable. However, authors often lack the resources or desire to get into a legal battle with their publishers and are very unlikely to sue. Therefore, these clauses have a chilling effect on author decision-making despite the fact they are probably not enforceable. If the Government introduced a ban on non-competes, authors would be empowered to simply reject such clauses as unlawful.
Option clauses
-
An option clause allows a publisher to have the first right of refusal over an author’s next manuscript and is usually drafted such that authors cannot negotiate with any other publisher unless they have firstly followed a set procedure with their current publisher. These clauses are intended to lock authors into working with one publisher but, again, operate ‘one-way’ as publishers do not promise authors they will publish them again.
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These clauses are similarly onerous on authors who wish to work with a range of publishers or who write across categories and genres meaning that their next work may be more suitable for a different publisher’s list. If both the author and publisher enjoy a good working relationship they will naturally enter into future contracts; option clauses are not necessary to make this happen.
United States ban welcomed by authors
- In April this year, the Federal Trade Commission in the United States issued a rule to ban non-competes. This ban was supported by the US Authors Guild (our counterpart in the United States).
In short, we do not support any restriction on an authors’ ability to freely contract with numerous publishers to optimise their ability to earn a living, given their overwhelming financial instability and precarity.
If we can be of any assistance or provide further information, please don’t hesitate to contact us.
Contact:
Olivia Lanchester, CEO [email protected]
Gadigal Country Suite C1.06, 22-36 Mountain St Ultimo NSW 2007 T 02 9211 1004 www.asauthors.org
END DOCUMENT 4
BEGIN DOCUMENT 5
Feedback to the ‘Non-competes and other restraints: understanding the impacts on jobs, business and productivity’ Issues Paper
Uber welcomes the opportunity to provide feedback to the ‘Non-competes and other restraints: understanding the impacts on jobs, business and productivity’ Issues Paper, and the consideration of non-compete clauses and related clauses that restrict workers from shifting to better-paying jobs.
Uber’s mission is to reimagine the way the world moves, for the better. We started in 2010 to solve a simple problem: how do you get access to a ride at the touch of a button? More than 32 billion global trips later, we're building products to get people closer to where they want to be. By changing how people, food, and things move through cities, Uber is a platform that opens up the world to new possibilities.
The first Uber ride in Australia was taken in 2012, and ever since we have played a significant role in transforming the way Australians move, eat, shop and earn. In fact, more than 150,000 people now earn with the Uber app each month and more than 50,000 Australian merchants are partnered with the Uber Eats platform. In 2023, across the Uber and Uber Eats platforms, Australians earned more than $4.2 billion driving or delivering with Uber.
Flexibility & Platform Work
Drivers and delivery people using the Uber/Uber Eats app value the flexibility of platform work. This includes the ability to choose when and where to accept a trip. A feature unique to the platform workers in the gig economy is the prevalence of what is known as ‘multi-apping’. That is, being online with and accepting gigs via more than one platform at the same time. Through multi-apping, platform workers are able to maximise their earnings, and it can provide income security through diversification.
Survey data shows that nearly half (48%) of platform workers use more than one digital app1
to earn and can be online with multiple apps at the same time.
Everyone who signs up to drive or deliver for Uber is required to follow Uber’s Community Guidelines. These guidelines form part of the contract between the driver or delivery person and Uber. There is nothing in these guidelines that prevents drivers or delivery people from using more than one platform, nor is there anything that resembles a non-compete clause.
1
https://www.ipsos.com/sites/default/files/Uber%20Earner%20Preferences%20Australia%20Meth odology.pdf
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We note Discussion Question 14 within the paper: Is it appropriate for part-time, casual and gig workers to be bound by a restraint of trade clause? Uber submits that for platform workers engaged by Uber, there are no restraint of trade clauses in place.
Uber has long supported reform that improves benefits and protections for platform workers while preserving the flexibility they love. The uptake of platform work shows it meets a need and want - of working Australians. With historically low unemployment, there are an abundance of job opportunities including low-skilled and casual options. Yet we still see some of the highest numbers on record of new platform workers onboarding with our platforms every month. Platform work also helps hundreds of thousands of working Australians earn extra income. It is possible that those who are under non-compete clauses from previous employers may in fact be turning to platform work like driving or delivering for Uber in order to supplement their income during that time. Non-compete clauses are antithetical to the inherent flexibility of platform work, and Uber supports a policy environment that preserves this flexibility for gig workers.
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END DOCUMENT 5
BEGIN DOCUMENT 6 31 May 2024
Via Electronic Mail: [email protected]
Competition Taskforce The Treasury Langton Crescent PARKES ACT 2600
Re: Non-competes and other restraints: understanding the impacts on jobs, business and productivity
Dear Competition Taskforce:
MFA[1] appreciates the opportunity to submit these comments in response to the Australian
Government’s request for information and views to inform the Competition Review’s consideration of noncompete clauses.[2] MFA represents the global alternative asset management industry, of which fund managers with offices in Australia, in total, manage nearly $1 trillion in gross assets.[3] Institutional investors— like pension plans, university endowments, charitable foundations, and other institutional investors—rely on MFA members to meet financial obligations, diversify their investment portfolios, and manage risk.
While MFA understands the Government’s focus on protecting Australian workers and ensuring
their mobility, we believe that the alternative asset management industry’s use of non-compete clauses to protect intellectual property and proprietary interests is unique in context and distinguishable from the restrictive covenants that often are the focus of broad-based academic studies on the use of non-compete clauses. Accordingly, we recommend that the Government closely study market-standard practices in specific industries before reaching a policy prescription. For that purpose, our comments seek to inform the Government’s study of the alternative asset management industry’s use of non-compete clauses.
1 Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 180 member fund managers, including traditional hedge funds, credit funds, and crossover funds, that collectively manage over $3.2 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.
2 AUSTRALIAN GOVERNMENT, THE TREASURY, COMPETITION REVIEW, NON-COMPETES AND OTHER RESTRAINTS: UNDERSTANDING
THE IMPACTS ON JOBS, BUSINESS AND PRODUCTIVITY: ISSUES PAPER (April 2024) (“Issues Paper”).
3 Hedge Funds and Alternative Assets in Australia, FUNDCOMB, https://fundcomb.com/overview/hedge-fundsalternatives/australia-region (last visited May 21, 2024).
I. MFA Members’ Use of Non-Compete Clauses Inures to the Benefit of Employees
MFA members frequently use non-compete clauses with other contractual safeguards to protect
some of their most valuable investment assets and proprietary information. Typically, the secrecy of MFA members’ proprietary information is an inherent part of its value because such information would have little value if it were widely known and, therefore, priced into the markets. Accordingly, MFA members limit the use of non-compete clauses only to employees whose departure would run the risk of exposing such proprietary information and result in competitive harm. In such cases, non-compete clauses are used to protect proprietary strategies and processes that result from research and development. Indeed, MFA
members often file for patent protection (or otherwise rely on trade secret law) in respect of their proprietary technologies, processes, and formulae. However, as explained in further detail below, noncompete clauses afford MFA members unique protection against cases where departing employees misappropriate their proprietary information.
Importantly, non-compete clauses foster the free flow of information and training within a firm that
results in the innovation that is so critical to the competitive process in the alternative asset management industry. Restricting MFA members’ use of non-compete clauses would impede the sharing of information and training within a given firm and limit the number of employees who have access to each firm’s proprietary information. Currently, MFA members use non-compete clauses to safely allow covered employees to access and understand a firm’s strategies and proprietary information. Having access to such information enables employees to gain valuable experience to progress in their careers, and many often go on to start their own firms, increasing competition in this industry. Without the protection of non-compete clauses, firms would be forced to severely limit the number of employees with access to their proprietary information and investment into training and development, and the employees without access would be relegated to working on discrete projects without understanding the broader implications of their work. As a result, employees would likely lose out on career-advancing learning opportunities.
In turn, the use of non-compete clauses allow MFA members to utilise the unique perspectives of
each covered employee, which is needed to develop and implement investment strategies for pension plans, university endowments, charitable foundations, and other institutional investors. These investors depend on the innovation that allows MFA members to diversify their investments, manage risk, and generate attractive returns over time.
Significantly, non-compete clauses limit harm to employees in the alternative asset management
industry, as such employees are typically compensated during the non-compete period. The net result is that the use of non-compete clauses by MFA members fosters investments in employees and creates the prospect of more competition once the post-term non-compete period ends. Not only do new firms started by former employees benefit from the use of non-compete clauses, but other new entrants do too. Both benefit from knowing that their startup investment in their own proprietary information will be protected.
Non-compete clauses play a crucial role in allowing MFA members to protect their proprietary
information, investment strategy, and investors, while balancing the interests of employees.
II. MFA Members’ Use of Non-Compete Clauses is Uniquely Necessary to Protect Intellectual Property and Proprietary Interests
As discussed in more detail below, non-compete clauses are one of the most effective ways MFA
members can ensure protection of their proprietary information, know-how, and investment strategies after their employees with access to such information leave. As noted above, much of the value in MFA members’ proprietary information comes from its secrecy, which makes preventative measures,
particularly non-compete clauses, necessary. In the alternative asset management industry, non-compete clauses serve to reduce costs and foster new market entry and competition. As noted above, employees in this industry need to have access to proprietary information and strategies to develop their skills and knowledge, which also allows them to deliver better results and client service for investors.
For example, MFA members often create and market new funds centered around specific portfolio
managers, generally one or more individuals, who develop and implement the investment strategies of that fund. Before developing a new fund centered around one or more portfolio managers, to justify the substantial financial commitment required to launch and market a new offering, firms typically require assurances that the individual(s) will not misappropriate the firm’s existing or future proprietary information and strategies.
The Competition Review recites two reasons why non-compete clauses may in fact impede new
firm formation: first, workers would be unable to launch new firms to compete with their former employer, and second, firms would be less willing to enter markets in which potential sources of labor are restricted by non-compete clauses.[4] However, these rationales are largely inapposite in the alternative asset management industry. Often, it is the employee’s former employer that seeds the new fund launch in return for an economic interest in the general partner entity, as well as the typical exposure of a limited partner and additional, preferential fund-level rights. Further contrary to these rationales, firms in this industry are generally unwilling to enter the market unless they can reach a sufficient comfort-level that their highly-compensated, highly-skilled workforce cannot immediately take the firm’s proprietary information and strategies to a competitor.
To be sure, strategies employed by fund managers vary widely and are highly proprietary. In fact,
investors in funds are subject to confidentiality and non-disclosure agreements when they receive confidential information from these funds. It often takes a considerable investment of time, effort, and
4 Issues Paper, at 19 (“The direct consequence of a non-compete clause is that it hinders competition among businesses: it disincentivises workers from leaving their current job, creating a barrier to the entry of new businesses
and the expansion of existing businesses.”).
resources to develop and refine a strategy, and to develop a track record and sufficient reputation, to
market that strategy to potential investors. Non-compete clauses protect this investment by MFA members.
Non-compete clauses also benefit employees in the alternative asset management industry
because non-compete clauses are frequently supported by consideration, thereby enhancing wages. Employees who are subject to non-compete clauses are typically sophisticated, highly-compensated investment professionals who can negotiate higher wages based, in part, on the requirement that they execute non-compete clauses. The same is also true when non-compete clauses are added or extended
while such professionals are employed by MFA members. In the absence of non-compete clauses, a likely result would be downward pressure on the wages paid to such employees. Indeed, increased weighting toward deferred compensation may be substituted for non-compete clauses,[5] and in such cases, departing employees receive neither the compensation associated with a non-compete clause nor unvested awards of deferred compensation.[6] Moreover, absent non-compete clauses, employers would be likely to condition significant incentive compensation on remaining employed, which would result in individuals forfeiting significant compensation on resignation—regardless of whether they went to work at a competitor immediately after or not.
Further, many fund managers rely heavily on their traders’ and developers’ knowledge and
innovation in developing algorithms for quantitative trading. If a developer were to leave and join another firm, they would be taking that key asset with them, thereby exposing, and immediately devaluing, their former employer’s trading strategy and harming its competitive position. Consequently, investors, as the clients of those firms, ultimately bear the costs resulting from the firms’ loss of intellectual property and the increased costs of doing business. More broadly, absent non-compete clauses, firms would be forced to keep proprietary information limited to only a very select group of employees, stifling the flow of valuable information and ideas that support innovation and bring value to investors.
In practice, confidentiality, non-disclosure, and non-solicitation agreements do not afford MFA
members the same level of protection as non-compete clauses. Putting aside the difficulties with detecting misuse of proprietary information, even if detected, it is often too late to do anything meaningful about it. After-the-fact litigation is often an inadequate alternative because the harm has already occurred once the information has been divulged. Moreover, complicated assessments of ownership of investment algorithms
5 See Richard A. Booth, Give Me Equity or Give Me Death—the Role of Competition and Compensation in Building Silicon Valley, 1 ENTREPRENEURIAL BUS. L. J. 265, 271 (2006) (arguing that deferred equity compensation is used as a replacement for non-compete clauses for purposes of retaining employees).
6 See Jonathan M. Barnett & Ted Sichelman, The Case for Noncompetes, 87 U. CHI. L. REV. 953, 991 (2020).
can be costly, lengthy, and potentially result in disclosure of proprietary information as part of the litigation
process.
Further, the cost and business disruption that engaging in litigation would bring hurts the firm and
has a negative impact on the alternative asset management industry as a whole. To the extent that MFA members cannot rely on non-compete clauses, they would be forced to litigate alleged confidentiality breaches much more frequently to protect their proprietary information. There have been many wellpublicised cases of such trade secret litigation and the great expense at which the firms involved enforced their rights, including both core litigation expenses (which may be incurred over many years) and collateral
expenses, such as those associated with internal investigations, cooperation with law enforcement, etc.
We appreciate the opportunity to submit our comments in response to the Government’s request
for feedback and comments, and we would be pleased to meet with the Competition Taskforce to discuss our comments. If your staff have questions or comments, please do not hesitate to call Joseph Schwartz, Vice president and Senior Counsel, or the undersigned at (202) 730-2600.
Respectfully submitted,
/s/ Jillien Flores
Jillien Flores Executive Vice President & Managing Director Head of Global Government Affairs Managed Funds Association
END DOCUMENT 6
BEGIN DOCUMENT 7
Submission to the Treasury Issues Paper on Non-Compete Clauses and Other Restraints
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Table of Contents
Executive Summary 1
Part 1 3
Prevalence of Restraint Clauses and Litigation 3
Non-Compete Clauses 4
Non-Solicitation Clauses 6
Non-Disclosure Clauses 7
Wage-Fixing and No-Poach Agreements 8
Enforceability of Restraint Clauses 10
Overseas Research 12
Deficiencies in the Issues Paper 13
Preferred Approach – Codification of the Common Law 15
Part 2 17
Discussion Questions 17
Part 3 24
Relevant Common Law Principles 24
Examples of the Application of the Principles Recorded Above to Particular Facts 26
Cases in which a Restraint was Ruled Unenforceable 26
Cases where the Restraint was Upheld 28
ANNEXURE A – CASE DATA 32
Methodology 32
List of Cases 32
About ACCI 35
i ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Executive Summary
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The Australian Chamber of Commerce and Industry (ACCI) supports the codification of the current common law with respect to non-compete and non-solicitation clauses (“restraints of trade”) in an employment context. ACCI does not support the inclusion of non-disclosure agreements (NDA) or confidentiality clauses in this Competition Review, noting that they have no impact on labour mobility, the purported purpose of the review. Additionally, ACCI urges the Federal Government to undertake an educative process to inform employers about restraints of trade clauses, including educating businesses about how to use restraint of trade clauses appropriately and reasonably within the current common law construction.
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ACCI supports the proposition that labour mobility is a critical part of any high-functioning economy. Low friction job mobility allows resources to be deployed where they are most efficiently utilised, and assists more productive firms to expand operations with a broader benefit to the economy.
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Restraint of trade provisions are an important tool for employers to protect their legitimate business interests. The key aim for policymakers should be setting policies such that legitimate business interests are protected while fostering labour mobility in the economy. This balance is already routinely upheld by the Courts when tasked with enforcing restraint of trade provisions, and it must be allowed to continue, uninterrupted by policymakers.
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Codifying the existing parameters with respect to employment contexts is not only a sensible policy approach given the sober manner in which Courts currently enforce noncompete and non-solicitation clauses but would also have the downstream impact of providing greater certainty to both employers and employees about their use and enforceability. Employees and employers would have clear, easily accessible rules by reading the relevant legislation, and could be further be supported in this task by additional education material from the Government.
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In this sense, non-compete and non-solicitation clauses, if codified via the current common law understanding, can be a win-win for both employees and employers to the degree that greater certainty will follow and ensure that they are implemented fairly in the future. Such clauses protect companies from unfair practices or outcomes while allowing employees the freedom to pursue new opportunities within reasonable, clearly outlined boundaries.
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Respectfully, ACCI has concerns with the relevance of the evidence used in the Issues Paper, particularly the reliance on international examples and case studies to justify change in the Australian context. Australia has a unique workplace relations system, and its regulatory settings are not comparable to the countries cited by Treasury as models for change. Similarly, ACCI is concerned that individual case studies have been given greater weight by Treasury than economic data. This has had the effect of potentially overstating the issue.
1 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
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For instance, an ABS survey of business confirms that only 1 per cent of Australian businesses said that a potential employee had turned down their job offer because of a non-compete clause.[1] Use of non-competes does not appear to have the chilling effect on labour mobility that those advocating change suggest.
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This Submission will first set out some general observations and submissions (Part 1), will then answer those questions posed by the Issues Paper (Part 2) and finally it will provide an overview of how the Courts treat restraints of trade (Part 3).
1 Restraint Clauses, Australia, Australian Bureau of Statistics, released 21 February 2024
2 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Part 1
Prevalence of Restraint Clauses and Litigation
-
The vast minority of businesses use non-solicitation of client clauses (25.4%), noncompetes clauses (20.8%) and non-solicitation of co-workers clauses (18%).[2] As ACCI has already submitted, the fact that many business – although still a minority at 45.3% – use non-disclosure agreements is irrelevant. The Commonwealth frequently relies on such clauses as do businesses; it is only natural for organisations to protect their confidential information. In ACCI’s view there should not be an attempt to make reform with respect to these clauses.
-
Hence, if reform to the functioning of non-solicitation and non-competes in employment contexts is to be contemplated by the Government, then the limited prevalence of these clauses weighs in favour of nothing further than codification of the common law.
-
In addition, a very limited number of disputes ever reach litigation. ACCI’s own research indicates that in the previous three years to 2024, there was only an average of 12 cases each year and there have only been a mere 2 cases in 2024 thus far.[3] This accords with research undertaken several years ago, which indicated that in the period of 1989 until 2012, there had never been more than 20 employment restraint of trade cases in a given year.[4] In most years it was below 10.
-
ACCI would here submit that the limited prevalence exhibited in the court system of restraint disputes further supports no further reform than a simple codification of current common law as it relates to non-solicitation and non-compete clauses.
The Variety of Restraint Clauses
- The Issues Paper raises several types of common contract clauses throughout its discussion including:
a) Non-compete clauses;
b) Non-solicitation clauses (both of co-workers and clients);
c) Non-disclosure clauses; and
d) Wage-fixing and no-poach agreements.
- ACCI will deal with each of these separately below. The Issues Paper does not separately deal with those restraints deriving from a business-sale agreement. It is highly important that the Government is cautious about not impacting on restraints deriving from businesssale agreements. ACCI will raise such clauses where relevant.
2 Restraint Clauses, Australia, Australian Bureau of Statistics, released 21 February 2024. 3 See annexure A for methodology and case information. 4 Chia, Hui and Ian Ramsay, ‘Employment Restraints of Trade: An Empirical Study of Australian Court Judgments’, Australian Journal of Labour Law, 2016.
3 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Non-Compete Clauses
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Non-compete clauses are a legitimate form of ensuring that business interests can be protected once an employee concludes their employment with a particular employer. This is due to the fact that employees develop significant knowledge about that employer’s practices, operations, relationships, clients, suppliers, and other matters.
-
Currently with respect to a given a non-compete clause, the starting presumption is that the given clause is unenforceable. The employer must prove that the clause restrains the former employee to a degree that is no more than what is reasonable to protect a business’ legitimate protectable interests.[5]
-
Non-compete restraints cannot prevent an employee from establishing a competing business, beginning employment with a competitor, or using personal skills and experience gained during employment. Non-compete restraints are only typically valid when used to protect business interests, for example knowledge of an advantage or asset innate to the business.[6] Not only must non-competes have the direct purpose of protecting a legitimate business interest but non-compete restraints must be reasonably necessary, meaning that they must:
a) Not be for an unlimited period of time;[7] and
b) Be limited to a geographical area within which it genuinely protects the specific
interests of a given business.[8]
-
A clause that is too lengthy or too expansive in its geographical coverage will not be enforceable at common law. These matters are expanded upon further below, where specific cases are presented. In addition, to the extent reasonably necessary will also consider the level and position of the employee to which the restraint applies and the level of contact that the employee has or had with customers or clients.
-
It is ACCI’s view that this threshold is appropriate and is appropriate for codification without amendment because the courts dispense with these matters in a fair and reasonable fashion in Australia – this is evidenced through this paper’s discussion of the relevant case law below (Part 3).
-
Any non-compete restraint clauses that do not protect legitimate business interests or that are unreasonable in their attempts to do so are not enforceable. This common law construction should be codified into legislation.
Non-Competes Derived from Business-Sale Agreements
- The Government should not attempt any reform to non-competes deriving from businesssale agreements as opposed to employment contexts. Any changes to such restraints could have devastating impacts on entrepreneurship.
5 Allied Express Transport Pty Ltd v Braim [2022] NSWSC 1298. 6 ‘Restraints of trade in the employment context 02: Understanding non-compete clauses’, Clayton Utz, 28 April 2022. 7 Habitat 1 Pty Ltd v Formby [No 2] [2017] WASC 33. 8 ECI Australia Pty Ltd v Convey [2020] QSC 207.
4 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
- This is because restraint clauses in this context are in the interests of both the vendor (usually a small business) and the purchaser (usually the larger business). When most small businesses grow their enterprise to the point it can be sold, the purchaser buys the business subject to a few conditions:
a) There is usually an ‘earn out’, which is a mechanism that provides for part of the
agreed purchase price of the business to be paid out contingent on certain future conditions being met.
b) The vendor usually has to commit to not compete in the same space for a period
following the sale, otherwise they would undermine the very asset that they have just sold.
c) Typically, but not always, the vendor’s key shareholder or directors will need to
remain as employees in the purchased business for a period of time as well as be subject to restraints so that the true value of the business can be transferred to the purchaser.
-
These arrangements are critical for the transaction and transfer of small businesses and support entrepreneurship. Without these measures available, the price that vendors can sell their businesses for will likely be substantially affected. Similarly, it would act as a disincentive for purchasers who would be less likely to have any certainty over the competitiveness of the asset that they have just acquired.
-
It should be noted that even the radical reforms which the US Federal Trade Commission implemented decided to exclude non-competes related to the sale of a business from the blanket ban set to come into force on 04 September 2024.[9]
-
Unlike most employment restraints, where an employee is subject to a restraint because of a business sale agreement, Courts are far more likely to enforce the restraint. ACCI impresses upon the Government that it is critical that these arrangements are unaffected by any new regulation.
9 ‘FTC’s near-total ban on noncompete agreements challenged’, Norton Rose Fulbright, April 2024.
5 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Non-Solicitation Clauses
-
Non-solicitation clauses, in their enforceability, function as non-compete restraints do. They must protect legitimate business interests only to the extent reasonably necessary. Non-solicitation agreements stop employees from actively trying to lure away an employer's clients or colleagues after having left the company.
-
It is legitimate for an employer to seek to protect client relationships, preserve goodwill and reduce disruption. A well-defined non-solicitation agreement sets clear boundaries for what's acceptable after leaving a job and can help employees avoid unintentionally violating any agreements and potential legal issues.
-
Reasonable non-solicitation agreements will not prevent employees from using their skills and experience in new roles. Workers can and should focus on building new relationships while respecting their previous employer's boundaries.
-
Overall, non-solicitation agreements can be a win-win when implemented fairly. They protect companies from unfair competition while allowing employees the freedom to pursue new opportunities within reasonable boundaries.
-
It is ACCI’s position that the courts currently enforce such clauses fairly in the employment context and supports the common law construction as it stands. This was explicated by way of discussion in the preceding discussion on non-compete clauses. To that end, codification should simply implement that common law construction.
Non-Solicitation Clauses Derived from Business-Sale Agreements
-
ACCI submits that, as with non-competes derived from business-sale agreements, nonsolicitation clauses that are also derived from business-sale agreements should not be reformed in any way.
-
A big part of a business's worth is to be found in its customer base and in its team. A nonsolicitation clause, whether that be in respect of clients or co-workers, prevents the vendor from undermining these very assets, which could cripple the business after the sale. A loyal clientele may be part of what attracted the purchaser to a business in the first instance. If the vendor simply begins to solicit all the previous clients or customers to follow into a new business then the purchaser has lost significant proportions of the value of the business. Non-solicitation clauses discourage this kind of scenario.
-
Furthermore, co-worker non-solicitation clauses derived from business-sale agreements can help retain employees during a period of change. As with clients, part of what may attract a purchaser to a particular business is its talent or workforce. If a purchaser believes a vendor can simply try to win them back to a new, competing business, then they would be far less likely to purchase a business – this would therefore represent a major disincentive to entrepreneurialism.
-
Hence, non-solicitation clauses derived from business-sale agreements are crucial to preserving entrepreneurialism. Without such protections, the value of businesses would reduce. Codification of the common law with respect to non-solicitation clauses should not extend to those that are derived from business-sale agreements.
6 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Non-Disclosure Clauses
-
ACCI is disappointed by the Issues Paper attempt to include NDAs and confidentiality agreements in this process. These clauses have no impact on labour mobility, the purported purpose of investigation through the Issues Paper.
-
NDAs do not attempt to restrict employees in their ability to move to a competing business or to create a business that operates in competition with a former employer. These agreements have zero impact on labour mobility.
-
NDAs and confidentiality clauses are simply designed to restrict employees from sharing confidential information or other sensitive information with others. They are the most frequently used restraint in Australia.[10] Such agreements safeguard confidential business information, like trade secrets, client lists, or marketing strategies.
-
Employees agree to keep this confidential information secret and not disclose it to anyone outside the company without permission. This applies even after employees leave or have their employment terminated.
-
NDAs cannot indefinitely limit employees from disclosing information or impose unreasonable geographical limitations, neither can they restrict employees from sharing general knowledge or skills that an employee may have learned on the job.[11] NDAs that are not reasonable will not be upheld at common law, as with the previously discussed forms of restraint of trade clauses.[12]
-
These agreements can provide significant benefits to employers. They safeguard an employer's competitive edge by keeping sensitive information like trade secrets, client lists, formulas, or marketing strategies under wraps. This helps prevent industrial espionage and maintains a level playing field.
-
NDAs also discourage employees from sharing confidential information with competitors or unauthorised individuals – the Commonwealth also uses confidentiality clauses in order to prevent the sharing of confidential information.[13]
-
When used properly these agreements can clearly outline expectations and set clear boundaries for what information is confidential and what can be shared. This helps employees avoid unintentionally breaching the agreement and potential legal issues. NDAs are also often used to protect the privacy and reputation of employees. They are agreements, which employees have to freely enter into in addition to their employment contracts.
10 ‘Restraint Clauses, Australia’, ABS, Released 21 February 2024. 11 Robinson v Waco Kwik-Fit Pty Ltd (2008); Bell Helicopter Australia Pty Ltd v Nguyen [2009] NSWSC 104. 12 Ibid. 13 ‘Albanese vowed his government wouldn’t happen in secret — this week showed how far they've strayed from that promise’, Brett Worthington, Australian Broadcasting Channel, 28 March 2024.
7 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Wage-Fixing and No-Poach Agreements
-
There is no evidence of widespread use of wage fixing or no-poach agreements in Australia. Such agreements between businesses may raise some competition issues and should be used with caution.
-
Wage-fixing agreements are agreements between two or more businesses to put a cap on the wages and conditions of their employees.
-
No-poach agreements are agreements between two or more businesses to refrain from recruiting from the other’s workforces or to prohibit hiring from each other’s workers altogether.
-
There has been a proliferation of actions throughout overseas jurisdictions in attempts to limit the use of either no-poach or wage fixing agreements, or both. Those jurisdictions include Canada, the US, the United Kingdom, France, the Netherlands, Portugal, Switzerland, the European Commission, and others.[14]
-
The UK specifically urged businesses to avoid these practices labelling them anticompetitive and an example of business cartels. This is due to the notion that when companies agree on wages, they eliminate the incentive to offer higher salaries or better benefits to attract top talent. This may stifle innovation because competition for skilled workers can drive companies to improve their work environment, offer training opportunities, and develop new technologies to attract and retain talent. Wage fixing agreements remove this pressure to innovate, potentially leading to stagnation in the workplace.
-
ACCI would here draw the attention of the Treasury to the practical effect of multiemployer bargaining, which recent changes made by the Government to the Fair Work Act encourage. These enterprise agreements result in multiple employers, with ‘clearly identifiable common interests’ – i.e., competitors in the same industry or geographical area – having the same wages, terms and conditions applied to their workforce, sometimes without their consent. The Minister for Employment and Workplace Relations indicated as much (emphasis added):[15]
The single-interest stream is still important. You’ll get – and not only for workers; you’ll also, for example, get a series of employers – take industries like sheet metal or air-conditioning where the industry standard is well above the award and multi-employer bargaining allows the different competitors to have an agreement where they’re not competing on a race for the bottom on wages, where people aren’t just undercutting each other, that standard above-award industry standard gets reflected and then they compete on quality and everything else.
- This would appear to contradict many of the alleged problems which the Treasury Issues Paper is attempting to ameliorate because the Minister is, in effect, advocating for a form of wage-fixing to be implemented by employers and employees. He states that employers
14 Issues Paper, ‘Non-competes and other restraints: understanding the impacts on jobs, business and productivity’, the Treasury, April 2024, page 37. 15 Interview - ABC RN Breakfast with Patricia Karvelas, The Hon Tony Burke MP, 08 November 2022.
8 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
will not be competing on wages under a multi-employer agreement. ACCI would ask Treasury to investigate whether these changes, and changes empowering the Fair Work Commission to set minimum standards for independent contracts in the road transport and “gig” sectors are potentially implementing an uncompetitive practice, namely that they may result in wage-fixing, and investigate whether those legislative changes need to be repealed to prevent anti-competitive outcomes.
- To reiterate, throughout this paper the term ‘restraint of trades’ or ‘restraint clauses’ does not refer to or include in its meaning wage-fixing or no-poach agreements.
9 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Enforceability of Restraint Clauses
-
The majority of restraints are clearly unenforceable, as actual case law demonstrates (examined further below at Part 3), examples such as a yoga instructor or a lash technician having a non-compete or other restraint clause would in all likelihood never be upheld at common law.
-
The Issues Paper references instances where non-competes have been used in what could only be described as an unreasonable fashion – this is directly contrary to the common law principles associated with restraint clauses, which emphasise that clauses must be reasonable.
-
In this sense, ACCI asserts that some of the cases discussed are sensationalist. It is potentially disingenuous to rely on such examples when there is no legal basis on which such matters, in all likelihood, could ever be enforced successfully if pursued to their legal finality.
-
Furthermore, while the Issues Paper does acknowledge that many clauses are unenforceable, it goes on to state that workers would not be able to afford the costs associated with disputing said enforceability. ACCI would submit that it is in fact the party interested in enforcing the clause, i.e., the employer, that must begin proceedings and there are several processes to take place before a matter ever arrives at court.
-
In addition, an employer must act quickly to take Court action to enforce a restraint otherwise a Court will not be persuaded that the balance of convenience favours the granting of an injunction in favour of the employer. All the onus is on the employer to act swiftly as soon it becomes aware of the employee joining a competitor. In practice, when the employee gives notice, this plays out rapidly.
-
The starting presumption is that restraint of trade clauses are unenforceable, the employer must prove that the clause is necessary to protect the legitimate protectable interests of the business and that the clause is no more than reasonable for purpose of protecting those interests.[16] This is a very high threshold that the employer must demonstrate, not the employee.
-
ACCI would also point out, to that end, a quote from the Issues Paper itself:
“The Competition Review heard that of those restraint of trade matters which escalate to engaging barristers, fewer than half proceed to court, and only half of those cases reach interlocutory stage and seldom proceeded to full trial.”[17]
- Evidently, of the minority of businesses that use restraint clauses, not only have around 95 per cent of those businesses never sought to enforce their restraint clauses in any way,[18] and not only does onus rest with the employer but seldom does enforcement action where taken even proceed to trial. The issues which arise around the interlocutory stage for workers, which the Paper raises, therefore can only concern the smallest
16 ‘Restraints of trade in the employment context 01: What do I need to know?’, Clayton Utz, 31 March 2022. 17 Issues Paper, ‘Non-competes and other restraints: understanding the impacts on jobs, business and productivity’, the Treasury, April 2024, page 15. 18 See footnote 1.
10 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
fraction of workers with restraint clauses. Even though the Issues Paper acknowledges its many research limitations, from merely a logical standpoint the notion that such a fraction of the population is having a material economic impact on job mobility and wages growth is dubious.
- To that end, although the Issues Paper frequently asserts a so-called “chilling effect”, it also admits that certainly the ABS data would indicate otherwise, as the Issues Paper itself suggests at page 22:[19]
“However, the recent ABS restraint clause survey suggests employers may not have experienced significant barrier in attracting talent due to the use of non-competes.”
- Codifying the common law construction would eliminate any ability for unenforceable clauses to maintain ambiguity by shrouding themselves in common law. Codifying the common law would provide practical guidance and clarity to both employers and employees, allowing businesses to protect legitimate interests while giving both workers and employers the ability to understand when clauses are being implemented fairly and when they are not.
19 Issues Paper, ‘Non-competes and other restraints: understanding the impacts on jobs, business and productivity’, the Treasury, April 2024, page 22.
11 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Overseas Research
-
ACCI would here express its concern at the extent to which the Issues Paper relies on overseas developments and examples. These examples have limited relevance to the Australian legal system, which treats workers very differently and practices enforcement sensibly and reasonably in regard to restraint clauses.
-
The repeated references to the US economy and its functions have limited importance given the marked and material differences between the Australian and US economies’ employment laws. Employees in the Australian labour market have been provided significant protections from dismissal and adverse action under a range of circumstances. The US economy is strikingly different, the vast majority of workers, 74 per cent according to job listing site Betterteam, are on at-will agreements.[20]
-
These agreements allow employers to terminate the employment of employees at any time and without cause, explication, or warning. In addition, employers are able to change the terms of employment, such as wages, or shift schedules, without notice or consequence.[21] Similarly, these agreements allow an employee to leave their employment at-will. Under such a hire and fire set of circumstances, it is far more obvious that non-competes may have a superfluously disproportionate impact on job mobility, however, Australia is very different.
-
Additionally, in the US, restraint clauses have been found to largely apply to high paid, highly skilled workers whereas the Treasury Issues Paper argues that restraint of trade clauses disproportionately impact the lower paid in Australia.[22]
-
All this to say that, in ACCI’s view, it is not an appropriate comparison that the Issues Paper attempts to make by highlighting research into the use of restraint clauses in the US as a means to infer the potential economic impacts which clauses of the same name may have in Australia.
20 ‘At-Will Employment: Complete Guide with State Information and Definition’, Betterteam, 20 January 2021, accessible here: https://www.betterteam.com/at-will-employment. 21 Ibid. 22 Starr, Evan et al ‘Noncompete Agreements in the U.S. Labor Force’, Journal of Law and Economics, October 2020; Issues Paper, ‘Non-competes and other restraints: understanding the impacts on jobs, business and productivity’, the Treasury, April 2024, page 8.
12 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Deficiencies in the Issues Paper
-
It is ACCI’s position that the Issues Paper does not make a strong case that a problem exists in Australia. an ABS survey of business confirms that only 1 per cent of Australian businesses said that a potential employee had turned down their job offer because of a non-compete clause.[23] Of the minority of Australian businesses that actually use at least one form of restraint clause, only 5.1 per cent of that minority indicated having threatened to take or had taken legal action to enforce a restraint clause.
-
The Issues Paper highlights data deficiencies on a number of occasions (emphasis added):
-
“Empirical evidence on the long-term economic consequences of non-compete clauses on business productivity is relatively limited”;[24]
-
“There is limited empirical evidence on the impacts of client (or other business contacts) non-solicitation”.[25]
-
“There is limited empirical research that exists on the impact of co-worker nonsolicitation clauses on businesses and workers”;[26]
-
“It is difficult to estimate the prevalence of either no-poach or wage-fixing agreements in the economy as these agreements are often made in secret and may be unwritten. Even if not unlawful, businesses will typically avoid publicising these arrangements if they impose a cap (as opposed to a floor) on worker wages (and other benefits). Consequently, there is limited evidence of their use.”;[27]
-
With respect to prevalence of restraints in the franchising sector, the Paper states “However, details on the specific type of restraint are limited, such as whether these restraints impact workers (e.g. no-poach agreements), intrabrand competition (non-compete clauses between franchises), or overall business dynamism (non-compete clauses post termination of the franchise relationship).”;[28]
-
“Evidence from overseas finds that workers with a non-compete clause have lower job mobility and bargaining power during employment and experience lower wages growth than workers without a non-compete clause. However, there is a lack of similar research in the Australian context.”;[29]
-
“In the same way that evidence on the prevalence of no-poach and wage-fixing agreements is scarce, there are few measurements of the impact of these
23 Restraint Clauses, Australia, Australian Bureau of Statistics, released 21 February 2024 24 Issues Paper, ‘Non-competes and other restraints: understanding the impacts on jobs, business and productivity’, the Treasury, April 2024, page 19. 25 Ibid, page 26. 26 Ibid, page 27. 27 Ibid, page 33. 28 Ibid, page 34.
29 Ibid, page 22.
13 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
agreements on wages and other outcomes, due to the secrecy of these arrangements”;[30]
- “Little empirical research has been identified on the impacts on workers and businesses of non-disclosure clauses which restrict former workers disclosing the confidential information of the business”;[31]
- In ACCI’s view, that the economic case has not been appropriately made to justify reform beyond codification of the common law.
30 Ibid, page 36. 31 Ibid, page 29.
14 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Preferred Approach – Codification of the Common Law
- To the extent that it has been exhibited that there is a lack of understanding among employees about restraint of trade clauses in contracts, an educational approach may be undertaken to address this issue. The Issues Paper, highlights the lack of understanding at page 22:
“Australian research has found that, while uncertainty impacts both businesses and workers, it weighs more heavily on workers who lack the knowledge of court proceedings and decisions, and the financial, psychological, and reputational resources to bargain and undertake litigation.”
-
Clearly then, the issue is not so much the clauses themselves and the law surrounding them but rather that workers do not clearly understand how the enforceability of these clauses functions in practice. The obvious solution, therefore, is a dual approach.
-
Firstly, codification of the current common law with respect to non-competes and nonsolicitation clauses will provide both employers and employees certainty about how these clauses may be implemented fairly and reasonably.
-
As canvassed earlier in the submission at paragraphs [16] to [18], not only must restraints have the direct purpose of protecting a legitimate business interest but non-compete restraints must be reasonably necessary, meaning that they must:
c) Not be for an unlimited period of time;[32] and
d) Be limited to a geographical area within which it genuinely protects the specific
interests of a given business.[33]
-
A clause that is too lengthy or too expansive in its geographical coverage will not be enforceable at common law. These matters are expanded upon further below, where specific cases are presented.
-
In addition, to the extent reasonably necessary will also consider the level and position of the employee to which the restraint applies and the level of contact that the employee has or had with customers or clients.
-
These are all factors that must be considered when determining how to codify the common law. These principles should be a key part of any legislative infrastructure that the Government may intend to institute. Treading along the current common law understanding would have both the effect of being fair alongside providing much needed certainty to employees and employers.
-
Secondly, the Treasury should undertake educational activities so that workers and employers are provided a more thorough understanding. This would solve two problems. One, it would inform workers to be aware of restraint clauses that may not be reasonable and therefore enforceable. Two, it would assist employers to understand that some clauses are unreasonable and prevent them from including such clauses in future contracts.
32 Habitat 1 Pty Ltd v Formby [No 2] [2017] WASC 33. 33 ECI Australia Pty Ltd v Convey [2020] QSC 207.
15 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
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Organisations such as ACCI would be able to assist the Department in outreach activities.
-
ACCI outlines the relevant common law principles below, these could form the basis for the Treasury to begin thinking about codification.
16 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Part 2
Discussion Questions
Question 1
Does the common law restraint of trade doctrine strike an appropriate balance between the interests of businesses, workers and the wider community? If no, what alternative options are there?
-
The common law restraint of trade doctrine already strikes the appropriate balance between the interests of businesses, workers and the wider community.
-
ACCI refers to its submissions at [72] to [74]. The courts system will only uphold noncompetes or non-solicitation clauses in circumstances where they extend only to a business’ legitimate protectable interests and where they only do so to the extent reasonably necessary to protect those interests. Clauses which extend beyond these parameters are unenforceable and are regularly deemed so by the courts.
-
When these clauses are used in a lawful manner, they protect business from unfair competition. They cannot prevent a person from simply using their skills and experience with a competitor.
-
As previously submitted, these clauses can be a win-win for employees and employers when implemented fairly and clearly. In ACCI’s view this patently strikes the correct balance between the interests of businesses, workers and the wider community.
Question 2
Do you think the Restraints of Trade Act 1976 (NSW) strikes the right balance between the interest of businesses, workers and the wider community? Please provide reasons. If not, what alternative options are there?
- ACCI resubmits that its preferred approach is codification of the common law principles as referred to at [69] to [78].
Question 3
Are current approaches suitable for all workers, or only certain types of workers? For example, senior management, low-income workers, or care workers etc?
-
Current approaches are suitable for all workers. ACCI submits that the focus must remain on whether or not a legitimate protectable interest exists, the type of worker and their seniority already plays into this consideration.
-
See paragraphs [132] to [143] for further explication of the common law principles.
Question 4
Would the policy approaches of other countries be suitable in the Australian context? Please provide reasons.
17 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
-
No, the approach of the US, for example, would be highly unsuitable. Not only might the recent FTC decision be thrown out in the courts system, but the US labour market functions very differently and those policy approaches have very limited relevance.
-
To name a few of many differences, the US labour system, for example, does not have a modern awards system, has most workers on at-will agreements, has a presumption that all workers (except in Montana) are at-will employees, and has no federal laws requiring paid holidays.[34]
-
See paragraphs [6], [61] to [65] where ACCI discusses this in greater detail.
-
Furthermore, the Australian employment system is highly unique. Any reforms must be unique to the system itself, which differs significantly from other systems across the world. For example, Australia is the only country which has a modern awards system.
-
To that end, ACCI submits that the policy approaches of other countries should not be provided significant weight in the consideration of any reform.
Question 5
Are there other experiences or relevant policy options (legislative or non-legislative) that the Competition Review should be aware of?
- ACCI submits its preferred approach from paragraph [69] to [78].
Question 6
What considerations lead businesses to include client non-solicitation in employment contracts? Are there alternative protections available?
-
Non-solicitation clauses are important for multiple reasons.
-
Businesses invest significant time and resources into building relationships with their clients, staff and others. These relationships are considered valuable assets, and nonsolicitation clauses help prevent former employees from leveraging those connections to take clients away to a competitor or their own venture.
-
This is a legitimate avenue through which businesses can protect their interests. ACCI refers to its substantive submission at [26] to [34] where this is discussed further.
Question 7
Is the impact on clients appropriately considered? Is this more acute in certain sectors, for example the care sector? Please provide reasons.
- The impact of client non-solicitation clauses already appropriate consider the impacts on clients. Client non-solicitation clauses can provide benefits to clients, not simply to an employer. They ensure stability of service and protection from inappropriate sales tactics.
34 ‘At-Will Employment: Complete Guide with State Information and Definition’, Betterteam, 20 January 2021, accessible here: https://www.betterteam.com/at-will-employment; ‘Holiday Pay’, US Department of Labor, accessible here:
https://www.dol.gov/general/topic/wages/holiday;
18 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
-
When a trusted employee leaves a company, a non-solicitation clause can help ensure continued stability in client service. The client can expect to keep working with the same team they've built a rapport with, minimising disruption.
-
Additionally, client non-solicitation clauses can discourage former employees from using their insider knowledge to pressure clients into switching to a competitor. This helps protect clients from potentially misleading sales tactics that rely on personal connections rather than the merits of the new product or service.
-
Furthermore, it is crucial that it be recognised that client non-solicitation clauses do not prevent clients from choosing to switch providers if they're unhappy. They simply prevent former employees from directly soliciting them. To that end, it is incontrovertible that the impacts on clients are appropriately considered.
-
Finally, ACCI submits that the suitability of restraints has less to do with the given worker or client in question and more to do with whether or not a legitimate protectable interest exists. This is how the common law currently deals with these matters and ACCI supports that approach.
Question 8
What considerations lead businesses to include co-worker non-solicitation in employment contracts? Are there alternative protections available?
- Co-worker non-solicitation clauses are a legitimate manner of protecting business
interests in a reasonable fashion.
- Co-worker non-solicitation clauses promote workforce stability, reduce turnover and
protect team cohesion. Such clauses therefore are regularly used not only to maintain stability within the workforce of a particular enterprise, but they also protect the business from losing out on skilled employees it has invested time and money in through training and development.
- It is important to note that, and has been canvassed already, non-solicitation clauses
have limitations and need to be carefully crafted to be enforceable. They typically only apply to colleagues the employee had direct dealings with, and courts generally favour a reasonable scope that protects legitimate business interests without unduly restricting the employee's ability to find new work.
- Again, it is crucial that it be recognised that these clauses cannot prevent employees from
simply leaving for a competitor. To that end, these clauses strike the appropriate balance between the needs of an employer and certain employees.
- ACCI would support codification of the common law and refers back to its preferred
approach at [73] to [82].
Question 9
Is the impact of co-worker non-solicitation clauses more acute for start-ups/new firm creation or in areas with skills shortages in Australia?
19 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
- ACCI submits that this is a contrived issue. Co-worker non-solicitation clauses are only
enforceable where they are used to reasonably protect legitimate business interests. In that sense, the size of a particular business matters less than whether a given business has a legitimate protectable interest and whether they are seeking to protect that interest in a reasonable fashion.
- There is no evidence that co-worker non-solicitation clauses materially impact on the
ability of businesses to attract staff – as previously canvassed the ABS survey of business confirms that only 1 per cent of Australian businesses said that a potential employee had turned down their job offer because of a non-compete clause.[35]
- Additionally, such clauses in the realm of business-sale agreements may in fact protect
new owners and encourage entrepreneurialism. A part of what may attract a purchaser to a particular business is its talent or workforce. If a purchaser believes a vendor can simply try to win them back to a new, competing business, then they would be far less likely to purchase a business – this would therefore represent a major disincentive to entrepreneurialism and non-solicitation clauses help prevent against this.
- ACCI refers to paragraphs [139] to [150] where the relevant common law principles are
discussed in further detail, which ACCI supports the codification of.
Question 10
What considerations drive businesses to include non-disclosure clauses in employment contracts? Are there alternative protections, such as s183 of Corporations Act 2001 available?
- Any notion that businesses should not be able to protect their legitimate interests through
the use of an NDA or confidentiality clause is opposed. ACCI is disappointed by the Issues Paper’s attempts to include NDAs and confidentiality agreements in this process. These clauses have no impact on labour mobility, the purported purpose of investigation through the Issues Paper.
- NDAs do not attempt to restrict employees in their ability to move to a competing
business or to create a business that operates in competition with a former employer. These agreements have zero impact on labour mobility.
- NDAs and confidentiality clauses are simply designed to restrict employees from sharing
confidential information or other sensitive information with others. They are the most frequently used restraint in Australia.[36] Such agreements safeguard confidential business information, like trade secrets, client lists, or marketing strategies.
- The Commonwealth itself has repeatedly relied on these important clauses to protect
their own confidential information.[37] Businesses have a right to protect confidential information just as the Commonwealth does.
- ACCI refers to its substantive submission from [38] to [44], which canvasses this topic.
35 Restraint Clauses, Australia, Australian Bureau of Statistics, released 21 February 2024 36 ‘Restraint Clauses, Australia’, ABS, Released 21 February 2024. 37 ‘Albanese vowed his government wouldn’t happen in secret — this week showed how far they've strayed from that promise’, Brett Worthington, Australian Broadcasting Channel, 28 March 2024.
20 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Question 11
How do non-disclosure agreements impact worker mobility?
- NDAs do not impact worker mobility. Confidentiality clauses aim to protect a company's
sensitive information, like trade secrets or customer lists. They do not restrict where an employee can work, only what information they can use in new roles.
- Any suggestion that these clauses impact worker mobility should not be accepted. ACCI
would assert that any NDA which sought to enforce restrictions on future employment opportunities would not be, by nature, classified as an NDA – it would be a non-compete clause. NDAs should not be confused with non-compete clauses.
- Confidentiality clauses do in fact allow employees the freedom to pursue new
opportunities while safeguarding a company's legitimate confidential information.
- ACCI refers to its substantive submission at [38] to [44], which discusses NDAs in detail.
Question 12
How do non-disclosure agreements impact the creation of new businesses?
-
NDAs do not have a material impact on the creation of new businesses.
-
Confidentiality clauses in an employment context aim to protect a company's sensitive
information, like trade secrets or customer lists. They do not restrict an employee from using their skills and experience to start a competing business.
- So long as a former employee avoids using or disclosing trade secrets or other protected
information, then a reasonable, enforceable NDA will not prevent that person from creating a new business.
- NDAs may also serve to protect against disincentives to entrepreneurialism. In terms of
business-sale agreements, NDAs provide significant certainty to a purchaser. They ensure that commercially sensitive or confidential information is protected. If a vendor could simply use such information to start up a competing business then this would not only reduce the value of the business but also discourage any potential purchaser.
- As outlined previously, and as is the case with other restraints, these clauses must also
be reasonable and only extend to legitimate protectable interests. ACCI refers to paragraphs [35] to [42] of its submission where NDAs are discussed in greater detail.
Question 13
When is it appropriate for workers to be restrained during employment?
- Such matters are already dealt with appropriately at common law as has been discussed
below at paragraphs [151] and [152] of ACCI’s submission.
Question 14
Is it appropriate for part-time, casual and gig workers to be bound by a restraint of trade clause?
21 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
- As discussed, ACCI submits that the appropriateness of a clause has less to do with the
worker in question and more to do with whether or not a legitimate protectable interest exists. Current approaches are suitable for codification because a business may only use a restraint clause in order to reasonably protect a legitimate protectable interest as required under the common law. This is a fair and consistent approach, which frequently already accounts for an employee’s unique characteristics such as seniority and business connections.[38]
- See paragraphs [139] to [150] where the relevant common law principles are discussed in
further detail.
Question 15
Should there be a role for no-poach and wage-fixing agreements in certain circumstances, for example:
a) If the agreement is between unrelated businesses (e.g., competitors)?
b) If agreement is between businesses that are co-operating in some way (e.g., joint venture partners)?
c) If it is part of a franchise agreement, either horizontally (where franchisees through a common agreement do not to poach each other’s staff) or vertically (where franchisors make agreements with each franchisee)?
-
ACCI refers to paragraphs [43] to [50], which addresses these matters.
-
With specific reference to franchisees and those businesses engaging in joint ventures or
partnerships, ACCI foresees these issues having a far more inconsequential impact where there is agreement not to poach staff within a single brand. In these instances, such agreements may produce positive effects by protecting workforce cohesion and stability. Wage-fixing concerns are likely to be completely irrelevant in franchise settings as franchisees would be likely to have substantially similar terms and conditions and may be on the same enterprise agreement. In such cases, employees would be less likely to obtain the benefits that may usually be derived from exercising mobility in the labour market due to the very nature of franchising. Additionally, in circumstances such as a joint venture, partnership, or franchise setting there is a definitive need to conserve harmony between businesses that need to operate with significant cooperation.
Question 16
Are there alternative mechanisms available to businesses to reduce staff turnover costs without relying on an agreement between competitors?
- As discussed, ACCI submits that such clauses may raise some competition issues and
should be used cautiously. Such agreements may hinder healthy competition.
- ACCI would here again call on the Treasury to investigate whether the Fair Work
Commission’s new ability to make minimum standards orders for employee-like workers and road transport contractors, or the recent reforms to multi-employer bargaining are in fact a form of anti-competitive wage-fixing, as canvassed at paragraphs [48] to [49].
38 ‘Restraints of trade in the employment context 01: What do I need to know?’, Clayton Utz, 31 March 2022.
22 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Question 17
Should any regulation of no-poach and wage-fixing agreements that harm workers be considered under competition law as an agreement between businesses (for example reconsidering the current exemption), or under an industrial relations framework?
- With respect to the industrial relations framework, ACCI would here again call on the
Treasury to investigate whether the Fair Work Commission’s new ability to make minimum standards orders for employee-like workers and road transport contractors, or the recent reforms to multi-employer bargaining are in fact a form of anti-competitive wage-fixing, as canvassed at paragraphs [48] to [49].
- Beyond that, as ACCI has submitted, this is an issue of limited prevalence in Australia and
the Government would be better suited pursuing other reforms.
- ACCI refers to its submission at paragraph [43] to [50].
Question 18
Should franchisors be required to disclose the use of no-poach or wage-fixing agreements with franchisees?
- If the franchisors are on the same enterprise agreement, then this consideration is largely
redundant. Furthermore, as previously submitted, this is an issue of limited prevalence in Australia and the Government would be better suited pursuing other reforms.
- ACCI refers to its submission at paragraph [127].
Question 19
Are there lessons Australia can learn from the regulatory and enforcement approach of no- poach and wage-fixing agreements in other countries?
- As discussed, the use of wage-fixing agreements or no-poach agreements between
competitors may raise competition issues. Such agreements may hinder healthy competition.
- ACCI would here again call on the Treasury to investigate whether Fair Work Commission’s
new ability to make minimum standards orders for employee-like workers and road transport contractors, or the recent reforms to multi-employer bargaining are in fact a form of anti-competitive wage-fixing, as canvassed at paragraphs [48] to [49].
- Beyond that, as ACCI has submitted, this is an issue of limited prevalence in Australia and
the Government would be better suited pursuing other reforms.
- ACCI refers to its submission at paragraph [45] through to [54].
23 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Part 3
Relevant Common Law Principles
- The principles relevant to the validity of restraint of trade clauses in an employment law
context are as follows.
- At common law, a restraint of trade is contrary to public policy and void, unless it can be
shown that the restraint is, in the circumstances of the particular case, reasonable[39].
- The onus at common law of showing that the restraint goes no further than is reasonably
necessary to protect the interests of the person, lies on the party seeking to support the restraint as reasonable, i.e. the employer.[40]
- The validity of the restraint is to be tested at the time of entering into the contract and by
reference to what the restraint entitled or required the parties to do rather than what they intend to do[41].
- The Court gives considerable weight to what parties have negotiated and embodied in
their contracts, but a contractual agreement cannot be regarded as conclusive, even where there is a contractual admission as to reasonableness[42].
- The test of reasonableness is measured by reference to the interests of the parties
concerned and the interests of the public. The requirement that the restraint be reasonable in the interests of the parties means that the restraint must afford no more than adequate protection to the party in whose favour it is imposed, i.e. the employer, in terms of geographic scope and time.
- An employer is not entitled to require protection against mere competition[43]. Post employment restraints that restrain competition are invalid unless they are reasonably necessary to protect an employer’s legitimate business interests.
What are these legitimate business interests an employer can seek to protect?
- A restraint clause will be invalid unless it is necessary to prevent:
(a) disclosure of confidential information and trade secrets; and/or
(b) use of a connection built up by the employee with customers/clients[44].
- With respect to (a), the relevant knowledge must be more than simply the skill and
knowledge necessary to equip the employee as a possible competitor in the trade. It must be such an acquaintance with his employer's trade secrets as would enable him to take
39 Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] 1 AC 535 at 565. 40 Adamson v New South Wales Rugby League Limited [1991] FCA 9; (1981). 41 Woolworths Ltd v Olson [2004] NSWCA 372 at [40]. 42 Woolworths Ltd v Olson [2004] NSWCA 372 at [39]. 43 Dewes v Fitch (1920) 2 Ch 159 at 181. 44 Aussie Home Loans v X Inc Services [2005] NSWSC 285 at [14] per White J.
24 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
advantage of his employer's confidential information and/or trade connection or utilise information confidentially obtained[45].
- With respect to (b), an employer’s customer connection is an interest which can support a
reasonable restraint of trade, but only if the employee has become, vis-a-vis the client, the human face of the business, namely the person who represents the business to the customer[46].
- In New South Wales, the effect of the Restraints of Trade Act 1976 (NSW) is to allow a
post-employment restraint to be read down by the NSW Supreme Court so as to be valid. However, the Act does not allow the Court to re-draft the restraint[47].
- Put simply, not every restraint of trade term is enforceable. Much depends upon the
evidence in each case and whether the employer can establish that the restraint is reasonable in terms of geographic scope and duration and that the employee could disclose confidential information or “take clients with him/her”. Obviously, this will be fact dependent and certainly junior and non-senior employees will not satisfy the heavy onus an employer must overcome to enforce the restraint.
Restraints during an employment relationship
- The duty of fidelity and confidence which an employee owes to his/her employer is limited
in operation. It is unlikely to prevent an employee from engaging in secondary employment unless that engagement is contrary to the employer’s interests, such as when the employee is behaving competitively against the employer. It ends at the cessation of the employment contract and does not forbid certain preparatory work in setting up a competing business to the employer’s.[48] Generally, more senior employees will be subject to a more onerous duty of fidelity, compared to junior employees.[49] Similarly, the duty of confidence more strictly restrains employees with greater seniority than junior employees.[50] Accordingly, the duty of fidelity and confidence does not restrict employee behaviour unvaryingly. For example, a clerical employee’s obligations “may vary drastically” from an unsupervised professional employee in direct contact with clients.[51]
- Courts will examine the particular facts and circumstances when determining the scope
an employee’s duty of fidelity and confidence, including the character of the employer’s business, the employee’s position and the actual and potential impact of the employee’s conduct on the employer’s interests. One judge has said that for many skilled and manual workers, they have successfully discharged if they have worked “according to their ability for their stipulated hours” and what they do in their free time is not the employer’s concern.[52]
45 Dewes v Fitch (1920) 2 Ch 159 at 181. 46 Cactus Imaging Pty Ltd v Peters [2006] NSWSC 717; (2006) 71 NSWLR 9 at [25] per Brereton J. 47 Orton v Melman (1981) 1 NSWLR 583; Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 329. 48 Griffiths & Beerens Pty Ltd v Duggan (2008) 66 ACSR 472 at [146]. 49 Plus One international Pty Ltd v Ching (No 3) [2020] NSWSC 1598 at [448] citing Prestige Lifting Services Pty Ltd v Williams (2015) 333 ALR 674 at 701 [198]. 50 Plus One international at [449] citing Del Casale v Artedomus (Aust) Pty Ltd (2007) 73 IPR 326; [2007] NSWCA 172 at [32]. 51 Plus One international at [450]. 52 Plus One International at [452] quoting Weldon & Co v Harbinson [2000] NSWSC 272 at [26].
25 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Examples of the Application of the Principles Recorded Above to Particular Facts
- The following cases are examples of how the principles recorded above have been applied
by the courts. In some cases, depending upon the facts and the drafting, the restraints were enforced and in others, not enforced. Where they were enforced, it was because there was cogent and probative evidence that there was a legitimate interest to be protected, and not a mere restraint against competition.
Cases in which a Restraint was Ruled Unenforceable
Just Group Limited v Peck (2016) 264 IR 425
Facts
Ms Peck was employed as Just Group’s CFO from January 2016. She resigned to take up a position with a competitor.
Just Group sought to enforce restraint clauses, including restraints which prevented Ms Peck from working with 50 retailers (including the employer she had just commenced working with) anywhere in Australia and New Zealand for a period of 12 to 24 months.
Decision
In ruling the restraint unenforceable, the Court ruled that its various permutations, as drafted, were excessive and led to ambiguity.
The Court also ruled that the restraint prevented Ms Peck from engaging in any activity that was "the same as, or similar to" the work she undertook, and would unreasonably preclude her from working with entities where the confidential information she had obtained during her employment was irrelevant.
Commsupport Pty Ltd v Mirow [2018] QDC 134
Facts
Commsupport Pty Ltd operated an information technology services business. It employed Mr Mirow as a computer technician. The Restraint Clause prevented Mr Mirow for a period of three months doing the following:
“1. Act for any person or entity (natural or otherwise) that the employer had or has as a client during the six-month period immediately prior to the employment with the employer concluding; or
2. Contact or cause another to make contact with any person or entity (natural or otherwise) that the employer had as a client during the six-month period immediately prior to the employees employment with the employer concluding, with a view to enticing that person or entity to use the professional services of the employee or a third party”
Decision
26 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
The restraint clause which prevented an employee from acting for or contacting any client of the employer who was a client of the employer in the six-months prior to the employee departing was unenforceable.
This was because the restraint was not limited to those clients of the employer with whom the employee had a client relationship with or influence over. The restraint had been drawn too broadly, and as drafted, “the legitimacy of the interest [sought to be protected, being customer connections] gives way to the restraint being seen as one merely against competition.”
Evans Road Medical Centre Pty Ltd v Faisal Siddiqi [2021] VCC 546
Facts
A medical centre sought to restrain one of its doctors, Dr Siddiqi, from joining another rival medical clinic approximately 5km away. The medical clinic was also concerned about patients being solicited away to the rival clinic.
Decision
The court declined to enforce the restraints. First, the court ruled that it was too broad because, as drafted, it covered patients who had not been seen by Dr Siddiqi. It could cover a patient he had not even met.
Second, the court ruled that the restraint sought to confer greater protection for the medical clinic could be justified. The restraint was poorly drafted so that there was no time limit imposed as to when the 5km restraint was to continue. This was unreasonable.
Third, the court ruled that because Dr Siddiqi’s financial position was weak, and that he had a young family to support and limited work options, that the balance of convenience favoured the injunction not being granted.
Australian Regional Wholesalers v Stafford [2007] NSWSC 572
Facts
Mr Stafford was an assistant branch manager employed by a wholesaler of electrical supplies, Turk. Mr Stafford prepared quotes for clients, had access to prices, margins, discounts, projects and accounts. Mr Stafford informed Turk that he was resigning and at the end of a three months’ notice period, would commence employment with a competitor. He was not prepared to comply with his six months’ non-competition restraint.
Decision
The court ruled that the non-competition was in excess of that required to provide adequate protection for its confidential information. The court ruled that Turk sold 400,000 products, and that Mr Stafford could not recall any of those details and those details changed from time to time. Accordingly, as there was no evidence that Mr Stafford took copies of confidential information and that he could not exploit the confidential information, that the restraint was excessive and unreasonable in the circumstances.
27 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
The court also ruled that the non-solicitation restraint was also excessive because “Mr Stafford was not the face of Turk so far as [Turk’s major customers] was concerned and he was not in a position to control [the major customers’] business”.
Lochdyl Ltd v Lind [2024] SAMC 43
Facts
Ms Lind was a casual hairdresser at Lochdyl Pty Ltd, trading as Changing Looks Hair Salon. The owner purchased the business from Ms Lind’s sister and mother and continued to casually employ her on a new contract with a non-compete clause which included a two-year restraint on poaching clients. Approximately 6 months after the new owner purchased the business, Ms Lind resigned at the owner’s request and agreed to tell customers she planned to pursue a new career.
The day after Ms Lind began renting a chair at another salon and advertised a new business on Facebook. In this post she announced that she was opening her own business. In a following post she thanked customers that had stayed with her. Changing Looks alleged that a significant number of customers cancelled their continuing appointments and moved their business to Ms Lind, causing it to lose future earnings. The new owner of Changing Looks submitted that at purchase she bought "goodwill" that "was largely comprised of the existing Changing Looks customer base".
Decision
Although the Court ruled that Changing Looks had a legitimate interest in protecting its customer connections acquired through purchasing the business by restraining the hairdresser, it nonetheless found that the restraint clause was “void and unenforceable".
The Court found that the clause was "significantly longer" than necessary to protect Changing Looks's legitimate business interests, taking into account the absence of compensation for the non-compete clause, the hairdresser’s low pay and the nature of client relationships:
"A hairdresser would usually be able to establish a connection with a 'new' customer, if not on the first appointment, by the second appointment.
"In my view, these key aspects of the patterns of customer behaviour suggest that the repeat customer base were exposed to more than [the hairdresser] in the usual course and that ordinarily a close connection could be formed by another hairdresser by the second appointment at the latest."
Cases where the Restraint was Upheld
DP World Sydney Ltd v Guy [2016] NSWSC 1072
Facts
Mr Guy was a General Manager of a logistics company, DP World Sydney Ltd. In his role, he had access to confidential business information concerning the way in which tariffs, incentives and penalties were calculated and charged to clients. Mr Guy also had access to business plans and
28 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
financial information, including data concerning past and anticipated earnings, costs, budgets, capital expenditure and expansion plans.
Mr Guy had also developed a range of connections with customers and clients of DPW by attending pitch meetings.
In breach of his post-employment restraint, Mr Guy accepted employment with a competitor, Asciano Executive Services Pty Ltd.
Decision
In granting the injunction, the Court found that the employer had a right to protect its legitimate business interests because:
My Guy had access to confidential information;
The industry in which DPW operated in was small with only a few competitors;
Mr Guy had built significant client relationships during his employment;
DPW offered to pay Mr Guy 3 months salary during the restraint, mitigating any financial hardship.
Justice White at [30] affirmed:
“Although an employer is not entitled to protection from competition, a restraint for a limited period against a former employee working for a competitor may be justified on the grounds that such a restraint is necessary to protect trade secrets, or confidential information. This is because of the difficulty of proving a breach of an obligation not to disclose or use such confidential information.”
And at [50]:
“Having regard to the seniority of Mr Guy’s position, the nature of the plaintiff’s business, the small number of competitors operating in the same port as DP World and, in particular, the confidentiality of the information that Mr Guy would be expected to obtain and use and which he did so acquire, I think such a six-month restraint is not larger than is reasonably necessary to protect DP World’s legitimate interests in preserving its confidential information.”
McMurphy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201
Facts
The first employee, Mr McMurphy, was appointed as Outbound Sales Manager for Employsure in February 2018. This senior role involved the development and execution of the company’s business strategy.
His 2018 employment contract contained a post-employment restraint that he would not be engaged in a business in competition with Employsure for a period of 12, 9, 6 or 3 months.
The second employee, Mr Kumaran, commenced employment with Employsure in February 2018 as an Outbound Sales Consultant and, in November 2019, became a Business Sales
29 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
Partner, the most senior level of sales employee. His 2018 employment contract contained a confidentiality covenant and a post-employment restraint similar to Mr McMurphy.
In December 2020, Mr McMurphy accepted a position with ELMO Software, a direct competitor to Employsure, managing a sales team. He also offered to supply ELMO with the names of potential Employsure sales employees and provided Mr Kumaran’s name, whom he had already approached about a role with ELMO.
Subsequently, in January 2021, Mr Kumaran accepted a position with ELMO as an account executive and ended his employment with Employsure on 10 February 2021.
Decision
At first instance, the court ruled that the restraints were reasonable, and Mr McMurphy had breached those restraints by commencing employment with ELMO while still employed by Employsure.
A post-employment restraint of nine months for Mr McMurphy was reasonable. Mr McMurphy breached his contract of employment by encouraging and inducing Mr Kumaran to leave his employment.
A post-employment restraint of nine months was also reasonable for Mr Kumaran, effectively delaying his start with ELMO until 10 November 2021.
The appeal judges, Gleeson JA, Leeming and Kirk JJA, supported the initial decision in all respects regarding Mr McMurphy. They noted:
“By taking up employment with ELMO to manage a sales team selling a competing
software product while still employed by Employsure, Mr (M) proposed to engage in another business that may hinder or interfere with the performance of his duties to Employsure… Employsure had a legitimate interest in protecting its confidential information through a restraint against competition after the departure of an employee”.
Pearson v HRX Holdings Pty Ltd [2012] FCAFC 111
Facts
Mr Pearson was a co-founder, director and employee of a human resources consultancy called HRX Holdings. Despite a two year restraint, he left to join a competitor.
The industry saw him as a leading innovator in the HR consulting field, was the primary presenter to HRX’s clients, and had an ability to establish and renew contacts with the senior executives of HRX’s clients. He was the “face of the business”.
He also had full access to all of HRX’s confidential information, particularly its techniques for establishing and developing client relationships.
The limitation of the definition to businesses in which HRX was operating at the time of departure made the clause self-limiting, and less vulnerable to offending the rule against public policy.
Decision
30 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
In applying the principle that the restraint would be permitted if it were reasonable, the Court relied on the following matters:
The restraint clause expressly acknowledged that Mr Pearson was the key employee of the business and set out the reasons for that in some detail;
The two-year restraint clause was a particularly heavily negotiated point when his contract was drafted;
The duration of the restraint was specifically negotiated;
Pearson was, in effect, paid or to be paid during the restraint period;
Pearson had sought and obtained independent legal and accounting advice, and the parties expressly agreed that the restraints were reasonable.
31 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
ANNEXURE A – CASE DATA
Methodology
ACCI used the AustLII database for its legal research. There are 256 documents in AustLII case law databases under an advanced search, under the auto search function for the term ‘restraint! of trade’ between 1 January 2021 and 28 May 2024. The only selected database was “All Case Law Databases”.
ACCI has only included those cases which are related to restraint of trades in an employment context and for which there has been a judgement. This therefore does not include those cases involving a contractor, a business sale, or where a complaint has been lodged and withdrawn or settled. This list also does not reference costs decisions arising from finalised cases.
This list, however, does include those cases where interlocutory hearing occurred, and an injunction or interim injunctive relief was granted to enforce a restraint.
List of Cases
2 cases thus far in 2024:
-
Samsung Electronics Australia Pty Ltd v Grenville [2024] NSWSC 608 (21 May 2024)[53]
-
Scyne Advisory Business Services Pty Ltd v Heaney [2024] NSWSC 275 (20 March 2024)[54]
12 cases in 2023:
-
Techforce Personnel Pty Ltd v Jaffer [2023] FCA 1674 (21 December 2023)[55]
-
2nd Chapter Pty Ltd & Ors v Sealey & Ors [2023] VSC 599 (10 October 2023)[56]
-
Smart EV Solutions Pty Ltd v Guy [2023] FCA 1580 (6 October 2023)[57]
-
Pellet Experts Pty Ltd v Smith [2023] NSWSC 1170 (28 September 2023)[58]
-
AEI Insurance Group Pty Ltd v Martin [2023] FCA 914 (1 August 2023)[59]
-
Cushman & Wakefield Agency (NSW) Pty Ltd v Hudson (No 2) [2023] NSWSC 884 (28 July 2023)[60]
-
Avant Group Pty Ltd v Kiddle [2023] FCA 685 (23 June 2023)[61]
-
KPW Law Pty Ltd v Patel [2023] NSWSC 617 (9 June 2023)[62]
-
Janala Pty Limited v Hardaker (No 3) [2023] NSWSC 446 (2 May 2023)[63]
-
Cushman & Wakefield Agency (NSW) Pty Ltd v Hudson [2023] NSWSC 218 (14 March 2023)[64]
53 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2024/608.html 54 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2024/275.html 55 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2023/1674.html 56 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSC/2023/599.html 57 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2023/1580.html 58 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2023/1170.html 59 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2023/914.html 60 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2023/884.html 61 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2023/685.html 62 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2023/617.html 63 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2023/446.html 64 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2023/218.html
32 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
-
W284 Pty Ltd v MRES Pty Ltd & Ors [2023] VCC 181 (17 February 2023)[65]
-
Fortrend Securities Pty Ltd v Wollermann [2023] FCA 70 (9 February 2023)[66]
11 cases in 2022:
-
Your Nurse Australia Pty Ltd v Carpenter [2022] NSWSC 1788 (29 December 2022)[67]
-
Luvalot Clothing Pty Ltd v Dong [2022] FCA 1411 (28 November 2022)[68]
-
Singh v Khanna & Ors [2022] VCC 1726 (13 October 2022)[69]
-
McMurchy v Employsure Pty Ltd; Kumaran v Employsure Pty Ltd [2022] NSWCA 201 (11 October 2022)[70]
-
One Stop Warehouse Pty Ltd v Zhang [2022] QSC 207 (28 September 2022)[71]
-
Allied Express Transport Pty Ltd v Braim [2022] NSWSC 1298 (27 September 2022)[72]
-
Label Manufacturers Australia Pty Ltd v Chatzopoulos [2022] NSWSC 1059 (6 September 2022)[73]
-
Janala Pty Ltd v Hardaker [2022] NSWSC 822 (22 June 2022)[74]
-
TALENT KONNECTS PTY LTD -v- MARVELLI [2022] WASC 128 (12 April 2022)[75]
-
Nexgen Sydney Pty Ltd v Barakat [2022] NSWSC 312 (24 March 2022)[76]
-
United Petroleum Pty Ltd v Barrie [2022] FCA 818 (21 March 2022)[77]
-
Allied Express Transport Pty Ltd ACN 001 787 962 v Braim [2022] NSWSC 286 (10 March 2022)[78]
13 cases in 2021:
-
Virtual IT Services Pty Ltd v Hamilton [2021] FCA 1637 (22 December 2021)[79]
-
NOVA Employment Ltd v Michelle Hira & Ors [2021] NSWSC 1337 (15 October 2021)[80]
-
Australian Timber Supplies Pty Ltd v Duncan Welsh [2021] QSC 266 (15 October 2021)[81]
-
HiTech Group Australia Ltd v Riachi [2021] NSWSC 1212 (24 September 2021)[82]
-
Shire Real Estate Pty Limited v Kersten [2021] NSWSC 1255 (23 September 2021)[83]
-
Employsure Ltd v McMurchy; Employsure Ltd v Kumaran [2021] NSWSC 1179 (17 September 2021)[84]
-
Harden v Willis Australia Group Services Pty Ltd; Willis Australia Group Services Pty Ltd v Harden [2021] NSWSC 939 (30 July 2021)[85]
-
Liberty Financial Pty Ltd v Jugovic [2021] FCA 607 (4 June 2021)[86]
65 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VCC/2023/181.html 66 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2023/70.html 67 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2022/1788.html 68 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2022/1411.html 69 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VCC/2022/1726.html 70 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWCA/2022/201.html 71 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/qld/QSC/2022/207.html 72 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2022/1298.html 73 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2022/1059.html 74 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2022/822.html 75 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/wa/WASC/2022/128.html 76 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2022/312.html 77 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2022/818.html 78 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2022/286.html 79 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2021/1637.html 80 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2021/1337.html 81 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/qld/QSC/2021/266.html 82 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2021/1212.html 83 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2021/1255.html 84 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2021/1179.html 85 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2021/939.html 86 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2021/607.html
33 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
-
Cushman & Wakefield v Patterson [2021] NSWSC 672 (3 June 2021)[87]
-
R T Forsyth Real Estate Pty Ltd v Psaltis [2021] NSWSC 332 (6 April 2021)[88]
-
Qantas Airways Ltd v Rohrlach [2021] NSWCA 48 (26 March 2021)[89]
-
Agha v Devine Real Estate Concord Pty Ltd & Ors [2021] NSWCA 29 (9 March 2021)[90]
-
Employsure Pty Ltd v McMurchy [2021] NSWSC 139 (24 February 2021)[91]
-
Vergara v Chartered Accountants ANZ [2021] VSC 34 (23 February 2021)[92]
87 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2021/672.html 88 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2021/332.html 89 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWCA/2021/48.html 90 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWCA/2021/29.html 91 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2021/139.html 92 https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSC/2021/34.html
34 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
About ACCI
The Australian Chamber of Commerce and Industry represents hundreds of thousands of businesses in every state and territory and across all industries. Ranging from small and medium enterprises to the largest companies, our network employs millions of people.
ACCI strives to make Australia the best place in the world to do business – so that Australians have the jobs, living standards and opportunities to which they aspire.
We seek to create an environment in which businesspeople, employees and independent contractors can achieve their potential as part of a dynamic private sector. We encourage entrepreneurship and innovation to achieve prosperity, economic growth, and jobs.
We focus on issues that impact on business, including economics, trade, workplace relations, work health and safety, and employment, education, and training.
We advocate for Australian business in public debate and to policy decision-makers, including ministers, shadow ministers, other members of parliament, ministerial policy advisors, public servants, regulators and other national agencies. We represent Australian business in international forums.
We represent the broad interests of the private sector rather than individual clients or a narrow sectional interest.
35 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
36 ACCI: Submission to the Treasury Issues Paper on Non Compete Clauses and Other Restraints
END DOCUMENT 7
BEGIN DOCUMENT 8 retail.org.au/policy
ARA SUBMISSION
WORKER NON-COMPETE CLAUSES AND OTHER RESTRAINTS
MAY 2024
EXECUTIVE SUMMARY
The Australian Retailers Association (ARA) welcomes the opportunity to make a submission to Treasury in response to its issues paper in relation to worker non-compete clauses and other restraints.
The ARA is the oldest, largest and most diverse national retail body, representing a $420 billion sector that employs 1.4 million Australians – making retail the largest private sector employer in the country.
As Australia’s peak retail body, representing more than 120,000 retail shop fronts and online stores, the ARA represents the full spectrum of Australian retail, from our largest national and international retailers to our small and medium sized members, who make up 95% of our membership. Our members operate in all states and across all categories - from food to fashion, hairdressing to hardware, and everything in between.
Treasury’s Competition Review Taskforce has released an issues paper and called for interested parties to make submissions in response to 19 questions outlined in the paper in relation to non-compete and other restraint of trade agreements between businesses and workers and, no-poach and wage-fixing agreements between businesses.[1]
In its response to this issues paper, the ARA affirms the importance of non-compete clauses and other restraints in protecting businesses from the risk of harm that can result from a previous employee misusing sensitive business information, circulating intellectual property or otherwise conducting themselves in an unethical manner.
However, the ARA understands the importance of balancing both employer and employee interests in these considerations and, for this reason, present the following recommendations, if reform was deemed necessary.
RECOMMENDATIONS
The ARA has adopted a principles-based approach to reply to the questions contained within the issues paper, which have informed the following recommendations.
These recommendations are made to address the balance between protection of sensitive business information and worker mobility, enabling employers and employees to better understand the operation of restraints and promote the efficient allocation of labour.
In making these recommendations, we observe that it is unlikely the Australian Government would seek to completely override the common law and wrongfully take established power away from individual employers.
1 Treasury I Worker non-compete clauses and other restraints | Treasury.gov.au
Australian Retailers Association (ABN 99 064 713 718)
retail.org.au/policy
- Further research should be conducted on the importance, effects and impacts of worker restraint clauses to
better inform policy decisions, ensuring that policy decisions are wholly evidence-based.
- Additional investigation should be undertaken into how frequently employers endeavour to enforce these
provisions and the value of deterring behaviour before it has occurred.
- The consideration of all the elements, including the importance of these provisions as protections for
employers, must be considered within the review.
- The operation and enforceability of these restraints must be preserved but, if further regulation is to be
adopted, the ARA recommends that:
a) Post-employment restraints to be applicable to individuals occupying senior positions or those who, by
virtue of their roles, have access to client data, trade secrets, business strategies or other sensitive or confidential business information.
b) Post-employment restraints to have a 12-month maximum period of enforceability.
c) Any further future regulation to post-employment restraints to be limited.
d) A two-year transitional period must be observed, if policy changes to worker non-compete and other
restraint clauses were enacted, without retrospective application.
e) No-poach and wage fixing agreements to be preserved within franchise agreements where there is a
reasonable need to prevent workforce insecurity or mitigate skill-shortages.
f) Further education to be made available to employers and employees as to the operation, useability, and enforceability of non-compete and other worker restraints.
g) If codification of the common law principles was sought in legislation, decision-makers should prefer
that the common law principles are wholly adopted in legislation, in no way should the legislation differ, vary, or change the original legal principles.
h) If solely additional regulation of worker non-competes is required, this should not unnecessarily extend
to other business protection mechanisms that do not unreasonably interfere with job mobility.
PRINCIPLES
As noted, these recommendations are informed by the following principles, which reflect the importance of businesses being able to protect legitimate interests, current effective legislative parameters on restraint clauses within employment contracts, insights as to the enforcement and useability of these provisions and the reality that there is limited empirical data available on their use and impact.
PRINCIPLE 1: THE MERITS OF RESTRAINTS WITHIN EMPLOYMENT CONTRACTS
Worker non-compete clauses
Contractual non-compete clauses preserve the legitimate interests of businesses by ensuring that an employee’s insider knowledge into the workings of their employer’s business cannot be leveraged for a competitor or to establish a competitive business.
Australian Retailers Association (ABN 99 064 713 718)
retail.org.au/policy
There are several justifications that support the need for non-compete clauses within employment contracts and the preservation of this legal principle.
First, the restraints protect the intellectual property of a business from being exposed, used and copied by a competitor. Second, for businesses with commercially sensitive information, it prevents an employee from sharing this information with a competitor or establishing a competing business. Third, the restraint can prevent an employee from poaching clients or other employers of the employer for a competitor.
Fourth, and arguably, most importantly, this restraint prevents businesses from being adversely impacted economically, reputationally, and operationally, by a decision by an employee or previous employee, to share trade secrets, confidential information or privileged information with other competitors in the market.
The common law has long accepted the enforceability of such restraints, where reasonably necessary, because of these considerations and the fact that businesses also have legitimate interests requiring protection.
Non-solicitation clauses
As noted by the Issues paper, a valid non-solicitation clause can restrict a former employee from soliciting a former businesses’ clients, customers, co-workers, and other business contacts. [2]
This restraint operates to ensure employers can manage the real risk that an employee could choose to take customers, co-workers or other business contacts with them upon the cessation of their employment with their employer. In doing so, without adequate protections, a business could be detrimentally impacted through a reduction in profit, reputation, and even operational capacity. The existence of this risk has been proven over time, as employers face former employees soliciting the business of valued clients.[3]
Non-solicitation clauses, similar to non-compete clauses, are not easily or readily enforceable. In assessing the lawfulness of these contract provisions, regard will be had to a myriad of factors including what the solicitation involved, whether the employee was in a position of trust and confidence, and whether there was a risk that the client may actually be solicited.[4] These restraints typically are only reasonably enforceable for a 12-month period.[5]
These clauses are also fundamentally important in mitigating skills shortages as former employees can be restricted from approaching and poaching former colleagues. In certain industries and geographies (for example rural and remote locations) where there is a limitation on skilled workers available, these contractual prohibitions prevent ‘staff-stealing’ in roles that cannot be easily filled, thus preserving the sustainability of the workforce.
It cannot be assumed that these restraints are enforceable and thereby, can restrain conduct or individual freedoms in every instance.[ 6] These restraints are subject to an assessment of all the relevant legal elements including whether the restraint is reasonably necessary and solicitation actually took place. [7] Simultaneously, the purpose of non-solicitation clauses is to protect businesses from a real risk of undue harm and for this reason, they should be preserved.
2 Treasury Competition Review Issues paper I Worker non-compete clauses and other restraints | Treasury.gov.au 3 See Planet Fitness Ply Ltd v Brooke & Dunlap & Drs [20121 4 Entello Pty Ltd v Firooztash [2016] QDC 050 5 AGA Assistance Australia Pty Ltd v Tokody [2012] QSC 176. 6 See Rushleigh Services Pty Ltd v Quarry Mining & Construction Equipment Pty Ltd [2011] NSWSC 382; Harrison v Schipp [1975] 2 7 Australian Clinical Labs Pty Ltd v Glew [2019] FCAFC 124
Australian Retailers Association (ABN 99 064 713 718)
retail.org.au/policy
Non-disclosure clauses
Non-disclosure clauses (NDC) in employment contracts seek to protect a business against the sharing of confidential information by an employee or former employee. This ensures that company trade secrets, financial information or customer details, another other sensitive data, are kept confidential.
These restraints safeguard business information-based assets from being disclosed to competitors or individuals outside the organisation. This also ensures that unique processes, intellectual property, or sensitive client information that a company owns, or stores is not circulated. This preserves a competitive advantage for the business, prevents intellectual property being copied and preserves client trust.
Without these restraints in employment contracts, client data could be misused, the business reputation impaired and intellectual property of the company stolen. The merits of these restraints is further emphasised by the fact the Australian Government often uses these provisions in the course of employment with their own APS staff to protect the misuse of public data.
At common law, obligations of confidence can arise in contract and equity by way of express terms in a contract or implication.[8] While this is evidence of the existence of the duty of confidentiality in other forms, this common law element is not sufficient to solely protect the unauthorised disclosure of information[9] the way that nondisclosure clauses can.
While other protections exist against the improper use of information by an employee or former employer, NDC’s are a more effective protection. The Corporations Act 2001 (Cth) s183 can offer protections against the improper use of information by employees in the pursuit of gaining an advantage for themselves or another, or for the intended purpose of causing a detriment to a person.
However, many times over, employees are not aware of this obligation, and therefore, it is difficult to prevent this behaviour from occurring. Secondly, unlike a contractual term such as an NDC, the legal elements may be difficult to prove and by the time, an employer could obtain a remedy, commercially sensitive and confidential information would have already been circulated, and the corresponding impact to businesses, sustained.
These clauses cannot be construed to easily impact worker mobility or the creation of a new business. The obligation typically exists to protect the sharing of privileged information. While perhaps the argument can be made this could potentially limit the information an employee can circulate this is often within narrow limits, for a defined purpose and prescribed time.
No-poach agreements
The purpose of a no-poach agreement between businesses is to deter one business poaching another’s workforce. This agreement prevents businesses, that may have difficulties hiring or retaining staff for certain roles, within certain industries or at certain times of the year, from being adversely affected by staff shortages.
For example, in rural locations, whereby the local labour market can be more limited, these agreements work to ensure the workforce remains stable. These agreements also ensure that a business’s sensitive information or intellectual property is not shared with competitors.
8 Australian Law Reform Commission I Obligations of confidence | ALRC 9 Australian Law Reform Commission I Obligations of confidence | ALRC
Australian Retailers Association (ABN 99 064 713 718)
retail.org.au/policy
Another important consideration, relative to their use, is the fact that such covenants prevent staff turnover in industries faced with constant workforce insecurity, or skill-shortages in operationally essential roles.
As noted by the issues paper, these agreements can also protect businesses from incurring costs without the pay-off of being able to keep the staff they trained. In rural locations, within small businesses, or involving roles of a particular speciality, this is of particular importance.
As no-poach agreements are regulated under the common law restraints of trade doctrine, with the exception of New South Wales, these covenants are recognised as difficult to enforce. For this reason, the regulation of such agreements under competition law or for instance, the Fair Work Act 2009 (Cth), would be unnecessary, cause greater complexity and not give regard for the reality that these covenants are already adequately regulated for.
Wage-fixing agreements
Wage fixing agreements are agreements between two businesses or more that set a cap on wages and/or employment conditions for employees.[10] These agreements are often used to prevent staff turnover or mitigate skills shortages in businesses.
While there is the reality that these agreements can place a cap on the compensation available to employees, employee wages and entitlements can never fall below the law, regardless of agreement and therefore, an employee’s entitlements must meet the minimums under the Fair Work Act 2009 (Cth) and modern awards. Another relevant consideration is the fact these agreements are still subject to the common law restraints of trade doctrine.
Within Australia, these employment contract terms are likely more practiced between franchises. The effect of which is that staff will not seek to change roles from one franchise to another, which is an important protection for businesses that share employees under service agreements.
For businesses in industries suffering skill shortages, or barriers to hiring staff, these agreements are important to protect the sustainability of the workforce. Relatedly, these agreements are often only used for employees of a certain classification, role or occupation, so for instance, were an employee to move to a different role or be promoted, the agreement would likely no longer apply. Moreover, these agreements only typically operate within a company that has franchises, or between a limited number of businesses.
PRINCIPLE 2: REGULATION OF WORKER-NON COMPETE AND OTHER RESTRAINTS OF TRADE
As it currently stands, the law on worker non-compete clauses and other restraints safeguards employee interests by regulating their use by businesses to be for the purpose of protecting a legitimate business interest.
This regulation protects against the misuse of these provisions, ensuring their use is limited to that which is reasonably necessary; and courts have long identified the validity of these restraints to the extent they are not unreasonable or contrary to the other necessary legal elements.
However, these risks to business interests cannot be overstated.
Australian Retailers Association (ABN 99 064 713 718)
retail.org.au/policy
These restraints safeguard business reputation, sustainability and profitability and prevent a business from incurring any undue detriment resulting from a current or past employee’s actions. These provisions provide employers with a mechanism for legal recourse only where a legitimate business interest is observed.
The common law restraint of trade doctrine recognises that ‘worker restraints of trade are presumed to be against the public interest and therefore void and unenforceable unless they are reasonably necessary to protect the legitimate interest of the employer’.[11]
The legal test for determining the validity of a restraint of trade clause is therefore as follows:
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there must be a protectable legitimate interest, as not just any business interest will suffice and
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the restraint must be reasonably necessary to protect those interests. As remarked by Lord Parker in Herbest
Morris Limited v Saxelby worker restraints ‘afford no more than adequate protection to the party in whose favour it is imposed’.
The consideration of public interest, as explored in Buckley v Tutty (1971)[12], is founded upon the understanding that a person should not unreasonably be prevented from earning a living in whichever way lawful, and the public should not be unreasonably deprived of the services of a person prepared to engage in employment.
These prohibitions on the lawfulness and enforceability of non-compete and other restraints of trade clauses firmly regard their use is only suitable when reasonably necessary to protect a legitimate interest. The scope of this common law legal protection is therefore rendered narrow, and consequently, it should be no surprise that on average across Australia only 33% of these restraints are upheld.[13]
In a recent case example, Just Group Limited v Peck (2016),[14] a non-solicitation clause was rendered unenforceable because the restraint would prevent an ex-employee from being able to engage in activity which was the ‘same as or similar’ to the work she undertook, and it would unreasonably preclude her from working for other businesses where the confidential information obtained in the course of employment was irrelevant. This is clear evidence that there are already sufficient safeguards to ensure that restraints are restricted to reasonable use.
In New South Wales, the Restraints of Trade Act 1976 (NSW) applies instead of the common law doctrine, presuming these restraints are valid to the extent they are not against public policy. However, while the presumption is different to the common law doctrine, the consideration of public policy is still prevalent. For this reason, consistent throughout Australia, the enforceability of such restraints presents challenges.
PRINCIPLE 3: RESEARCH ON WORKER NON-COMPETE CLAUSES AND OTHER RESTRAINTS WITHIN AUSTRALIA
As noted by Treasury, research on non-compete clauses and other restraints is relatively limited within Australia. This presents challenges when it comes to assessing the actual impact, influence and enforceability of these provisions which, in turn, creates challenges for government making data-driven policy decisions.
The issues paper does present some data but the ability to rely upon this data, with confidence, is questionable.
Saxelby [1916] 1 AC 688
12 Buckley v Tutty (1971) 125 CLR 353 13 University of Melbourne I Employment Restraints of Trade: An Empirical Study of Australian Court Judgments by Hui Chia, Ian Ramsay: 14 264 IR 425
Australian Retailers Association (ABN 99 064 713 718)
retail.org.au/policy
The issues paper[15] cites a survey conducted by e61 Institute,[16] which concluded that around 1 in 5 Australian workers are subject to a non-compete clause, spanning a diverse range of sectors from professional services to childcare workers and yoga instructors.
The research conducted by the e61 Institute surveyed 3,000 participants and of those surveyed, there was no clear empirical data on the duties undertaken by these individuals and/or the information that they had access to. For this reason, it would be wrong to assume that, from this data, 1 in 5 Australians are truly subject to these restraints without a greater understanding of the ins and outs of their roles, and their relationship to the business
- factors which can influence the need for inclusion of restraints within employment contracts.
Additionally, there is a difference, which is not explored in the survey, between an employee believing they cannot share confidential business information post-employment and an actual restraint being included within their employment contract.
However, as the issues paper observes, the issue as to the enforceability of the provisions (whether they be real or perceived restraints) is unclear can restrict employee mobility or the creation of a new business. This would support the proposition that there should be greater clarity as to enforceability for both employers and employees, as per the ARA’s recommendations outlined herein.
It must be noted, the importance of these restraints as a deterrent of unethical behaviour is valuable and should be preserved.
PRINCIPLE 4: USEABILITY AND ENFORCEABILITY OF NON-COMPETE & OTHER RESTRAINTS
As noted above, there is limited data on the prevalence, use and impact of worker restraint clauses. For this reason, it is imperative for Treasury to consider the fact that these contractual provisions also have a useful role in deterring unethical behaviours from current or past employees that would otherwise harm a business.
While the law recognises reasonable restraints as the basis of a legitimate and important cause of action, in practice, an equally important function is to provide an employee with the full terms of their employment obligations, removing any ambiguity as to what conduct is inappropriate. An employee’s duties, such as fidelity and good faith, can also be implied by common law, therefore, the inclusion of some of these elements in writing is crucial for an employee to understand them.
When speaking with retailers, we noted specifically that businesses would rarely seek to try and enforce restraints of trade in contracts. There are several reasons for this, including the fact that the law is complex, and it is therefore hard to determine whether a provision will be deemed enforceable. Another reason is that a single breach of a clause or multiple small breaches will not warrant the commencement of costly and uncertain legal proceedings.
Retailers have also reported to us, through discussions and consultations, that if a breach did occur, in many instances the employers first course of action would be to simply send a cease-and-desist type letter. In doing
15 Treasury Competition Review Issues paper I Worker non-compete clauses and other restraints | Treasury.gov.au 16 E61 Institute I The ghosts of employers’ past: how prevalent are non-compete clauses in Australia? (e61.in)
Australian Retailers Association (ABN 99 064 713 718)
retail.org.au/policy
so, an employer would state their entitlement to legal recourse if the action(s) contrary to the employment contract did not cease, and in many cases, this would resolve the issue in the first instance.
It is important to also note that these contractual provisions are only enforceable against employees that are participating in wrongful behaviour. For other employees, the contractual provisions are merely rules established to protect employer interests in circumstances whereby an employer interest could be unduly harmed.
Restraint of trade clauses provide a mechanism for the adequate protection of employer interests. They do this by deterring unethical behaviour by employees, often without any need to enforce contractual provisions. This deterrence is valuable to ensure that businesses are protected from harm, by limiting the likelihood of individuals engaging in such behaviours. While as noted previously, providing only for an avenue of legal recourse for a business once harm has already been done, is ineffective, unfair and does not afford a proper protection.
The ARA warns against adopting international standards within Australia because the legal landscape in other countries is different to that of Australia. We note that there is currently no uniform international approach to worker non-compete clauses and similar restrictions. Where there are legal measures in place - for instance in the United States - restrictive covenants are thought to be generally enforceable if they are narrowed to protect legitimate business interests and if they do not unreasonably restrict an employee earning a living.[17].
This approach can easily be observed to yield the result that these contract terms are enforceable. This means that the need for the regulation of worker non-compete clauses and other restraints in other countries is not readily comparable. For this reason, caution should be exercised in comparing policy decisions in other countries, especially when the economic, legal and labour-market environment is different and thus, can yield vastly diverse results for Australia.
HYPOTHESISED OUTCOMES FROM ARA’S RECOMMENDATIONS
If the ARA’s recommendations were to be adopted, the outcome would be greater clarification as to the operation of non-compete clauses and other restraints for employees and employers. In doing so, this would enable employees and employers to better understand their lawful use, and enforceability, ensuring the misuse of such provisions is limited.
If regulation of worker non-compete clauses and other restraints is required, restricting the use of postemployment restraints on certain individuals and for a prescribed time, would ensure that any alleged adverse effects on job mobility is restricted, and at the same time, business interests can still be protected.
However, enacting any policy changes within this area requires a transitional period so that businesses and employees can adapt to these changes and make appropriate updates to employment contracts and business processes so-to avoid adverse impacts.
Correspondingly, if only non-compete clauses require legislative reformation, this should not extend to other restraints unnecessarily. Thus, striking a balance between what policy reformation is required and the perseverance of business-based protections so businesses can rightfully mitigate vulnerability.
17 American Bar Association I Comparative Perspectives on Non-Compete Clauses in the United States, United Kingdom, and Singapore (americanbar.org)
Australian Retailers Association (ABN 99 064 713 718)
retail.org.au/policy
The strict codification of the common law legal principles would also work to ensure that ambiguity as to the lawfulness, operation and enforceability of these provisions was removed, creating greater transparency for their use within employment contracts.
Preserving the use of no-poach and wage fixing agreements within franchise agreements and to the reasonably necessary extent to preserve workforce insecurity and mitigate skill-shortages would also work to balance employer and employee interests. This would ensure only a limited number of employees would be subject to such restraints, and only where reasonably necessary, reducing any alleged adverse effects on job mobility.
CONCLUSION
The importance of worker non-compete clauses and other restraints is undeniable in the protection of legitimate business interests. However, existing regulation and convention ensures they are only used where needed to reasonably protect legitimate business interests or in New South Wales, to the extent they are not contrary to public interest.
As there is limited empirical data available on their actual impact, use and enforceability, the ARA warns that changing laws without proper investigation and research could create unintended adverse outcomes.
The ARA thanks Treasury for the opportunity to make a submission in response to its issues paper on noncompete clauses and other restraints. Any queries can be directed to [email protected].
Australian Retailers Association (ABN 99 064 713 718)
END DOCUMENT 8
BEGIN DOCUMENT 9 Secretariat: PO Box 463
Canberra ACT 2600
Our advocacy team is based in Canberra
29 May 2024
Competition Taskforce Via email: [email protected]
Dear Competition Taskforce
Re: Worker non-compete clauses and other restraints
The Council of Small Business Organisations Australia (COSBOA) is the peak industry body representing 97 per cent of all Australian businesses. The ATO define a small business as one with an aggregated turnover of less than $10 million and the ABS defines a small business as those with 0-19 employees. Depending on the definition used, the number of small businesses being referenced can vary.
Small businesses in Australia are faced with a multitude of complexities in running their businesses. From complex industrial relations reforms to changing privacy laws, to increased insurance, energy and wage costs. Small businesses do everything they can to protect their interests and the interests of their staff.
The following part of COSBOAs submission answers some of the questions raised in the Issues Paper
Discussion Questions
- Common law restraint of trade and the Restraints of Trade Act 1976 (NSW) including
suitability
Both the common law restraint of trade and the NSW legislative restraint of trade prevent a party from restricting another party’s ability to engage in trade or employment unless there is reasonable interest of the parties involved or a reasonable public interest.
Non-compete clauses and other restraint of trade clauses are used by small businesses for a variety of reasons; to protect trade secrets and confidential information especially in industries where this is your comparative advantage, to safeguard client relationships, and to retain talent and protect investments undertaken in training where a lot of personal time and effort is given to upskill an employee.
COSBOA is sure the Taskforce is aware that in considering reasonableness, the Courts will assess whether there is a legitimate interest requiring protection and then whether the restriction protects the interest or does more than what is necessary. Where the restraint is
more than what is necessary, then the restraint is deemed unreasonable. More often than not, it will be the business who is wanting to enforce the restraint of trade that has the onus to prove there is a legitimate interest to protect.
Whilst small businesses do not always have large sums of money sitting to be used in legal cases, there are times when enforcement of the restraint is necessary. For example, where an employee holds a position that gives them access to particular confidential information and the industry they are operate in is small.
The question whether the current approach is suitable for all workers is questionable and will vary in answer depending on who is asked. Consideration has to be given to the restriction that is wanting to be enforced, the information held by the employee and their role. Businesses are likely to include non-compete clauses in contracts for all employees where the industry is small and there may only be a few operators. Alternatively, businesses may decide to only add in non-compete clauses for senior management and not other roles. COSBOA recommends that if a limitation on non-compete clauses is being considered, to ensure there is narrow application and to protect the genuine interests a business is trying to protect through the use of a non-compete clause.
- Policy approaches in other countries
COSBOA understands that while on 23 April 2024, the US Federal Trade Commission (FTC) made its final rule to ban non-competes nationwide. The rule becomes effective 120 days after publication, therefore coming into effect on 4[th] September 2024.
The FTC ruling is being challenged currently in the court with injunctions being sought. However, COSBOA notes that the FTC ruling will make all non-competes ineffective after 4[th] September except for those senior executives who have non-competes currently in place. Senior executives earning more than $151,164 and who have non-compete clauses currently in their employment contracts are still valid (and will be even after the effective date).
As mentioned previously by COSBOA in consultation with the Taskforce members, comparison of the economic benefits of banning non-competes in the US with Australia is not very useful. Australia’s economy and population is significantly smaller. Of the 7,000 businesses interviewed regarding restraint clauses, ABS finds that small businesses had the lowest use of non-compete clauses (20.2 per cent) with larger businesses (more than 1,000 employees) used non-compete clauses 40 per cent of the time. Only one percent of Australian businesses said that a potential employee had turned down their job offer because of a non-compete clause.
The UK proposal to limit non-competes to 3 months is an alternative that is more suited than a blanket ban, however, there have been no updates on proposed legislation since the proposal in 2023.
Following a time-limit ban to non-competes, the Netherlands’ approach to limit noncompetes to 12 months alongside inclusion of geographical scope, a written justification for
the business interest may be more appropriate in the Australian context. However, the Netherlands have also included a provision for mandatory compensation for the employee when invoking the non-competition clause, this is at least 50 per cent of the employee’s monthly salary. COSBOA is certain that small businesses will not support the inclusion of mandatory compensation for an employee of a small business and recommends the Taskforce not consider mandatory compensation as an option.
- Non-solicitation of co-workers, clients and other business contacts
Some COSBOA members note that non-solicitation clauses are used to protect the small businesses from staff members and clients being poached. The enforceability of nonsolicitation clauses (including non-competes) were seen as having more of a deterrent effect than something that is enforceable (or worthwhile trying to enforce given timeliness and cost). However, even with the possibility that a clause may not be enforced, it was important to ensure that businesses were able to continue operating in certain geographical locations without the loss of clientele when a staff member moves.
Non-solicitation clauses can frequently be seen in the finance, hairdressing and allied healthcare settings. The use of these clauses is not limited to just the aforementioned industries.
Additionally, small businesses may use non-solicitation clauses for co-workers to protect the loss of a skilled workforce. It is not only acute for start-ups/new firms. As previously mentioned, small businesses are already struggling with skilled shortages and these clauses are used to safeguard a businesses’ investment in its workforce, its confidential information and avoid disruptions to client relationships.
- Non-disclosure clauses
Small businesses use non-disclosure clauses in employment contracts even where protections such as s183 of the Corporations Act 2001 are available because it provides tailored protection for the business whilst also clearly notifying an employee of their obligations. Some small businesses may use standard template employment contracts, and some small businesses use tailored templates which identify and stipulate the type of confidential information an employee may be privy to and remind them of their obligation to keep this information confidential.
It also provides small businesses employers with the ability to clearly stipulate in the contract that breach of the non-disclosure clause may result in termination of employment and/or damages being sought in court.
The combination of s183 alongside the use within the employment contract provides additional security for a small business owner that finds an employee using confidential information for personal gain outside of their employment.
It is COSBOAs view that the use of non-disclosure clauses does not impact worker mobility where the non-disclosure clause is written in specific terms related to confidential information held by the business that is not readily available publicly. The skills and knowledge that an employee holds and develops at a place of employment can easily find them a new job, however, the previous employer’s confidential information regarding intellectual property or finances etc do not impact an employee’s mobility.
- Restraint of trade clauses
COSBOA is of the view that restraint of trade clauses are appropriate where an employee has access to confidential information that could be used if engaging in part-time work within the same area. Similar to how the public service requires approval if an employee is engaging in a secondary or voluntary job, it may be appropriate in some industries for an employee to be limited from engaging in part-time work within the same industry where one job provides access to information that can result in personal gain (e.g. an individual working at the ATO should not be assisting a family member at their accounting firm as confidential information may be leaked, even if inadvertently.)
Restraint of trade clauses have to be determined on a per case basis depending on the industry in which one is operating in.
- COSBOA member commentary
COSBOA spoke to members in writing this submission and the follow general comments were made:
- Most members noted that non-compete and non-solicitation clauses were seen as
having more of a deterrent effect than something that is enforceable (or worthwhile trying to enforce given timeliness and cost).
- Banning non-compete/restraint of trade clauses can impact the capital value of a
small business (specifically where another business is wanting to buy a small business, key personnel with no restrictions can be deemed as a risk to the potential buyer).
Conclusion
COSBOA has been supportive of the Government’s Competition Review and has always said that the Australian economy is best served by markets that compromise of big and small businesses. This includes mobility of staff to ensure even the smallest of businesses are given opportunities to grow into big businesses. However, whilst the Taskforce notes that noncompetes and other restraints are impacting employee mobility, wages and productivity, there are significant other improvements that can be made than limiting some protections employers put in place to preserve their business.
Fewer Australians are changing jobs in the last few years due to a variety of reasons such as economic uncertainty and the flow on effects of the pandemic. The way in which people work has changed drastically and government needs to consider alternate ways to increase innovation and productivity within the Australian community.
Small businesses are also becoming less innovative given the complex regulatory frameworks they have to operate it; this therefore also impacts start-ups to form given the regulatory burden of running a business. Technological adaption and weak business investment are also impacting innovation, productivity and therefore competition in Australia.
COSBOA recommends the Taskforce also consider how Government can assist small businesses by creating a more favourable environment to run a business.
COSBOA welcomes any further consultation the Taskforce may have on this topic, or any topic related to how the small business environment can be improved.
Yours sincerely,
Luke Achterstraat CEO, COSBOA
END DOCUMENT 9
BEGIN DOCUMENT 10
Worker non-compete clauses and other restraints
Response to the Competition Review Taskforce Issues Paper
31 May 2024
Acknowledgements
We acknowledge the Traditional Owners of Country, recognise their continuing connection to land, water, and community, and pay respect to Elders past and present.
We acknowledge the victim-survivors of domestic, family, and sexual violence who we work with and their voices and experiences which inform our advocacy for justice, equality, and safety for women.
About Women’s Legal Services Australia
Women’s Legal Services Australia (WLSA) is the national peak body for 13 specialist Women’s Legal Services in each state and territory across Australia, including two First Nations Women’s Legal Services. We provide a national voice for Women’s Legal Services to influence policy and law reform, and advocate to increase access to gender-specialist, integrated legal services for women.
About Women’s Legal Services
Women’s Legal Services provide high quality free legal services for women, including legal advice and representation, support services and financial counselling, community legal education, training for professionals, and engage in advocacy for policy and law reform. Some Women’s Legal Services have operated for more than 40 years.
WLSA members include:
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Women’s Legal Service Victoria
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Women’s Legal Service Tasmania
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Women’s Legal Service NSW
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Women’s Legal Service WA
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Women's Legal Service SA
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Women's Legal Service Queensland
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North Queensland Women's Legal Service
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First Nations Women's Legal Service Queensland
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Women's Legal Centre ACT
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Wirringa Baiya Aboriginal Women's Legal Centre NSW
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Top End Women's Legal Service
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Central Australian Women's Legal Service
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Katherine Women's Information and Legal Service
Contact us
For further information, please contact:
Lara Freidin Executive Officer Women’s Legal Services Australia
Executive Summary
Women’s Legal Services Australia (WLSA) welcomes the Competition Review’s consideration of noncompete clauses and other restraints used in employment and other contracts that restrict workers from shifting to better-paying jobs. In our experience these types of clauses are over-used, regularly misused, and have a significant impact on workers. These clauses and other restraints go further than what courts will usually consider to be enforceable to protect the legitimate business interests of the restrainer.
This submission responds to the Competition Review’s Issues Paper and discussion questions on the following topics:
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Impacts of restraint of trade clauses on workers; and
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Restraints on workers during employment.
In preparing this submission, Women’s Legal Services engaged in a survey of the clauses that appear in our clients’ contracts. The outcomes of this survey demonstrate that non-compete clauses and other restraints are excessive in every aspect – length, geographic location, and scope of activities restrained – for workers in the relevant job type, salary, seniority, and industry.
Non-compete clauses and other restraints act ‘in terrorem’ to create fear in the hope of compelling our clients into compliance. This fear persists in our clients despite our advice that the clauses would not be enforceable by the courts. In our experience, it is simple and easy for employers to write a legal letter on termination of a worker reminding them of the operation of these clauses, or setting out concerns regarding possible breaches, and this creates further fear in our clients and restricts their ability to shift to better-paying jobs.
We strongly recommend there should be a strict ban on non-compete clauses and other restraints on workers that prevent them from shifting to better-paid jobs. We also recommend this include a ban on any ‘work arounds’ to the ban on non-compete clauses, such as imposing excessively long notice periods on workers and restrictions on workers having multiple employers. We suggest these bans are implemented through a staged approach, like the approach adopted for the new prohibition on pay secrecy clauses in contracts of employment. This will lead to better outcomes for women in the workforce.
There are existing legal principles that impose obligations on employees to protect confidential information and trade secrets. Employees also have obligations under the Corporations Act 2001 (Cth). These are sufficient to achieve any legitimate policy intent behind non-compete clauses and other restraints.
Key recommendations:
- The Fair Work Act 2009 (Cth) should be amended to impose a strict ban non-compete and
other restraint of trade clauses. The use of such clauses should be unlawful and any contract that contains such terms should have no effect.
- There should be a civil remedy provision which allows for employers to be fined if they
breach the ban, and this should be drafted similarly to the pay secrecy provisions in the Fair Work Act in section 333C and 333D.
Impacts of non-compete clauses on workers
Analysis of impacts on Women’s Legal Service clients
Many Women’s Legal Services across Australia provide legal assistance and support services to women who are seeking employment advice, including Women’s Legal Centre ACT, Women’s Legal Service Tasmania, Women’s Legal Service NSW, and Women’s Legal Services in the Northern Territory. Women often provide their contract of employment to their lawyer for the purpose of seeking that advice. In many cases the advice may not be about the contractual terms, however this information forms a rich source of base material which can be examined by the lawyer.
Attachment 1 is a table with analysis of the types of restraint clauses seen in the contracts and other documents provided by clients of Women’s Legal Centre ACT for the period from 5 August 2024 to 31 May 2024.
This table demonstrates that the use of restraints is extensive and often the restraints bear no real connection to the type of work, type of employment, seniority of the worker, or industry in which the employee works. They are broad ranging and often cascading, with many restraints said to operate for two years across a wide geographic region. We note 12 months is the most common period of restraint. While many restraints list specific activities like non-solicitation of clients or employees, a significant proportion also impose a bare restraint in competition and working for similar or competing businesses to the employer.
In almost all cases, no effort has been made by the employer to identify with any specificity the business interest that is intended to be protected by the clause. Instead, we see employers adopting a cookiecutter approach and relying on standard templates.
Example of an egregious restraint clause
We have provided below an example of a restraint clause, extracted in full, from a client’s contract of employment. According to Women’s Legal Centre ACT, this is one of the most egregious examples of a restraint clause they have seen, and the client was earning $80,000 as a low-level IT Officer in an Australian based IT company with offices in Canberra and Sydney.
Example of a restraint clause in the employment contract of a Women’s Legal Centre ACT client
Restraint of Trade: You must not during or after termination or expiry of your employment, without our prior written consent, in the Restraint Area and for the Restraint Period, either directly or indirectly, alone or jointly with or on behalf of any other person in any capacity, including:
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in partnership or in association with any other person;
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as agent, representative, director, officer or employee of any other person;
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as member or shareholder of or holder of any other security in or from any other person; or
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as trustee of or as a consultant or adviser to any other person:
(1) carry on, operate or be engaged or interested or employed in any business which carries on a business the same as or similar to our business or the part of our business in which you were involved while employed by us.
(2) interfere with, disrupt or attempt to disrupt, or procure or solicit any other person to interfere with, disrupt or attempt to disrupt the relationship, contractual or otherwise, between us and any of our clients with whom you were introduced to or had business contact with during your employment;
(3) induce, encourage or solicit any of our employees, contractors or agents to leave our employment or agency or to cease providing services to us; and
(4) procure or solicit any other person to induce, encourage or solicit any of our employees, contractors or agents to leave our employment or agency or to cease providing services to us.
This restraint does not prevent you from owning shares in publicly listed companies.
Each of the restraints contained in this clause has effect as a separate, severable and independent restraint and is intended by the parties to be enforceable accordingly, so that the invalidity or unenforceability of any restraint, in whole or part, does not affect the validity or enforceability of any other restraint.
You acknowledge that each of these separate provisions is a fair and reasonable restraint of trade.
If there is any inconsistency or contradiction between several restraints which are not invalid or unenforceable, the restraint with the widest Restraint Area and the longest Restraint Period, to the exclusion of any other restraint, constitutes the agreed restraint.
This provision continues to apply after this agreement comes to an end.
"Restraint Area" means:
(1) the World;
(2) Europe, North America and Oceania;
(3) Oceania;
(4) Australia;
(5) Australian Capital Territory, New South Wales, Queensland and Victoria;
(6) Australian Capital Territory; or
(7) the area within twenty kilometres from the Canberra GPO.
"Restraint Period" means:
(1) two years;
(2) twelve months;
(3) six months;
(4) three months; or
(5) one month.
Lack of enforceability and creating unnecessary fear
It is very rare that a bare restraint on competition would be held to be enforceable in the absence of any compelling and protectable legitimate business interest. The majority of Women’s Legal Service clients are not highly paid senior employees in specialised niche industries. Their ability to cause any damage to the businesses they leave is minimal or non-existent. They do not have access to confidential information or trade secrets, or relationships with key clients, suppliers or customers.
In general, the advice of Women’s Legal Services in respect of these clauses falls into three categories:
(a) that the clause is patently unenforceable as it is too extreme and unreasonable;
(b) that there may be some limited application of the restraint, but that it requires the employer
to take some kind of court action against the former employee, either by getting an injunction to restrain the offending conduct, and/or seek damages for any loss that has been suffered, and this may never happen; or
(c) due to the cascading drafting of many restraint clauses it is not possible to give definitive
advice as the clause can operate in so many different permutations and combinations. The uncertainty with the advice adds to the client’s confusion because they usually just want to know what they can or cannot do.
Despite our best efforts at advising with as much certainty as is reasonably possible, these clauses operate ‘in terrorem’ to create fear in the hope of compelling our clients into compliance – clients are frightened that they may still operate despite our advice and therefore comply with the restrictions, either wholly or in part, when legally they do not need to.
Many clients assisted by Women’s Legal Services are not aware that there are any post-employment restrictions in their employment contract, and only become aware of the clauses after they are terminated. It is not uncommon for the employer to include in a termination letter language that brings the clause to their attention and operates as a threat of legal action. This often adds to the distress of the termination, and again terrorises the client into thinking they have to modify their behaviour posttermination in order to avoid legal action.
The below example demonstrates the type of language often used in termination letters.
Example of language in a client’s termination letter
……….
We also take this opportunity to draw your attention to sections 182 and 183 of the
Corporations Act 2001 (Cth) (Act). In particular, section 183 of the Act prohibits an
employee of a corporation from improperly using information obtained by reason of their
employment to gain an advantage for themselves or someone else, or to cause
detriment to the corporation.
We further want to remind you of your enduring obligations to our organisation to not
engage in any attempts to compete with our organisation, solicit clients or engage in any
anti-competitive behaviour in line with clauses 13.1 to 13.8 of your employment
contract.
Following termination, a client may receive a letter threatening legal action if they breach the restraints in their employment agreement, particularly after the employer becomes aware that they have found another job. These letters are sometimes written by lawyers, but often come from the employer directly, and further add to the distress of employees, causing them to modify their behaviour even though the legality of the restraint has not yet been established by any court, and is most likely unenforceable.
The Fair Work Act 2009 (Cth) should be amended to impose a strict ban non-compete and other restraint of trade clauses. The use of such clauses should be unlawful and any contract that contains such terms should have no effect. There should be a civil remedy provision which allows for employers to be fined if they breach the ban, and this should be drafted similarly to the pay secrecy provisions in the Fair Work Act in section 333C and 333D.
Responses to Discussion Questions
1. Does the common law restraint of trade doctrine strike an appropriate balance between the
interests of business, workers and the wider community? If so, what alternative options are there?
The common law restraint of trade doctrine strikes an appropriate balance between the interests of business, workers, and the wider community however it is not applied appropriately in practice. The doctrine is applied more widely than the law would recognise as being appropriate, and operates unchecked in many cases. Workers often modify their behaviour due to employers applying the doctrine incorrectly, and without any legal certainty or ruling on the enforceability of the restraint clauses.
The common law restraint of trade doctrine also reverses the presumption that restraint clauses are against the public interest, and reverses the obligation on employers to only impose restraint of trade where it is enforceable because they can easily impact the behaviour of workers through fear, and can avoid establishing the validity of their employment contracts.
2. Do you think the Restraints of Trade Act 1976 (NSW) strikes the right balance between the
interests of business, workers and the wider community? Please provide reasons. If not, what alternative options are there?
The Restraints of Trade Act 1976 (NSW) provides that drafting of employment contracts does not need to be done in a cascading fashion and this allows for severability of any over-reach provisions. While it is an improvement that cascading clauses are not required in NSW, there is still uncertainty as to the
operation of these clauses – clauses can be read down by a Court, modifying the operation of these clauses.
In practice, restraint clauses are still drafted unlawfully in NSW and often go further than what would be enforceable.
3. Are current approaches suitable for all workers, or only types of workers? For example, senior
management, low-income workers, or care-workers etc?
Non-compete clauses and other restraints should be banned for all employees. Employees have obligations of fidelity to their employer, and coupled with existing rights under the Corporations Act, and protections of confidentiality and intellectual property, these measures are suitable to protect the abuse of legitimate business interests.
4. Would the policy approaches of other countries be suitable in the Australian context? Please
provide reasons.
The total ban being proposed in the United States should be adopted in Australia for the reasons outlined above.
5. Are there other experiences or relevant policy options (legislative or non-legislative) that the
Competition Review should be aware of?
The Fair Work Act 2009 (Cth) should be amended to impose a strict ban non-compete and other restraint of trade clauses. The use of such clauses should be unlawful and any contract that contains such terms should have no effect. There should be a civil remedy provision which allows for employers to be fined if they breach the ban, and this should be drafted similarly to the pay secrecy provisions in the Fair Work Act in section 333C and 333D.
Restraints on workers during employment
Secondary employment
Women’s Legal Services regularly assist clients who have multiple casual jobs, or a mix of traditional employment and gig work. In those situations, most clients are able to manage the competing obligations, such as confidentiality, that they have to each employer.
Any effort to outlaw or restrict the possibility of more than one type of ‘work’ can operate as a restraint and unduly restrict a workers’ ability to engage in other work. This particularly impacts workers in precarious or more fragmented employment, many of whom are women.
One way that employers (including Government) try to manage any conflict between roles during employment is that approval is required for secondary employment. This can be a way to manage any possible conflict in loyalty, however it can also be used to restrict employee activity. Sometimes the secondary employment rules are set out in a Code of Conduct. This can be a more transparent way to deal with competing interests than through restrictive covenants, although Women’s Legal Services have also advised clients where a very heavy-handed approach to the interpretation of the secondary employment policy has restricted the client’s ability to work in that secondary role.
If the first employer does not grant approval for the secondary employment, the employee does not have any real way to challenge that decision as it is matter of employer discretion.
Below is an example of a secondary employment clause in an employment contract for a client of Women’s Legal Centre ACT.
Example of a secondary employment clause
SECONDARY EMPLOYMENT & CONFLICT OF INTEREST
You agree to seek the Society’s consent prior to undertaking secondary employment. The Society may decide to approve secondary employment, or conditionally approve secondary employment if a conflict of interest, whether perceived or real arises.
You agree to notify the Society in writing of any conflict of interest, pecuniary or non- pecuniary, that may arise during your employment with the Society. You agree to take any reasonable action the Society may require for the management of the conflict of interest.
The current legal framework for dealing with work, health and safety concerns, misuse of confidential information and intellectual property is sufficient to capture circumstances in which an employee is working in a second role that would create a conflict with the first employer.
Instead of asking the employee to get permission, at its highest the only obligation on the employee should be to notify the first employer if they have secondary employment. The employer can use existing legal rights to assess if that presents any problems. The employee should not have to seek permission to engage in other work.
If an employee is terminated from their first employer because of their secondary employment they can bring an unfair dismissal claim. This would look at whether there was a ‘valid reason’ for the termination and would examine whether there was any conflict of obligations, or a need to stop the employee from taking up secondary employment.
If a decision is made that an employee must not take up secondary employment because it is not ‘permitted’, that decision to not allow secondary employment should be reviewable under the Fair Work Act, in the General Protections provisions.
Currently these decisions are not reviewable as they relate to a current employer making a decision that will impact prospective employment with another employer, not the employee’s existing employment. This could be amended by adding another category of adverse action to section 342 of the Fair Work Act to cover action taken by an employer against an employee who is a prospective employee of another employer. This would make the decision to not allow secondary employment reviewable by the Fair Work Commission.
Lengthy notice periods
The use of lengthy notice periods is another type of restriction imposed during employment. Lengthy notice periods can be used as a way to keep an employee out of the labour market.
While employed, an employee still has all the existing obligations of good faith and fidelity to their employer, even if they are not actively working. This is sometime called ‘garden leave’ and in the experience of Women’s Legal Services it is much more common with senior management roles than junior staff. If coupled with a post-employment restraint of any kind, a lengthy notice period can extend the operation of the restraint for effectively the length of the extended notice period. This can impact on the ability of the employee to remain current, and depending on the nature of the restraint, may keep them out of the market.
Some courts have been prepared to recognise that the restraint period should take into account any period of ‘garden leave’ (see for example: Tullett Prebon (Australia) Pty Limited v Simon Purcell [2008] NSW SC852), which addressed the enforcement of non-competition obligations during the term of an employment contract, in circumstances where the employee was on ‘garden leave’ (although it should be noted that this was a decision in NSW).
The use of extended notice periods could be curtailed by legislative reform to provide that any notice period that is a prescribed multiple of the Fair Work Act National Employment Standards (NES) notice periods will be valid, but any notice period above that will be subject to approval by the Fair Work Commission.
For example:
-
For an employee under the high-income threshold in the Fair Work Act: maximum notice 3 times the NES maximum period for that employee is automatically valid (this would mean a maximum of 15 weeks for an employee over 45 years of age with more than 5 years service)
-
For an employee over the high-income threshold: maximum notice 5 times the NES maximum for that employee is automatically valid (meaning a maximum of 25 months for an employee over 45 years of age with more than 5 years service)
-
If an employer wants to impose a longer period of notice they can apply to the Fair Work Commission to approve a longer notice period, taking into account the role, seniority, and any employer justification for any longer period and employee opposition.
If part of the purpose of a notice period is to allow the employer time to find a replacement employee, yet at the same time the employer insists on a long notice period in which that employee does not work, then it is hard to argue that there would be many situations where more than nearly 6 months notice would be appropriate.
Responses to Discussion Questions
13. When is it appropriate for workers to be restrained during employment?
It is appropriate for workers to be restrained during employment if their activity poses a risk to their workplace health and safety or the safety of others in the workplace, or their activity is in breach of their duty of fidelity to their employer. However, this can be managed with existing laws instead of by imposing restraints during employment.
14. Is it appropriate for part-time, casual and gig workers to be bound by a restraint of trade?
It is not appropriate for part-time, casual and gig workers to be bound by a restraint of trade and to do so limits their ability to find other work. There are other remedies available to an employer who considers that there has been a breach of the employee’s duty of fidelity, confidentiality, or infringement of intellectual property rights of their former employer.
| Source of restraint | Job title | Employment status | Remuneration (per annum FTE or per hour) | Type of restraint | Max restraint area | Max restraint length from termination | If cascading - specify details |
|---|---|---|---|---|---|---|---|
| Letter of post- employment restraints | Supervisor | casual | $36.20 per hour | Non-solicitation of clients, non interference with clients, employees or suppliers except three clients named. | indefinite | indefinite | No |
| Employment Contract | Deployment Officer | Full-time | $80,000 | not to be engaged in competing business, non-solicitation of clients, non-solicitation of employees, non- interference with clients | the world | two years | Yes, world; Europe, Oceania, north America; Oceania; Australia; ACT, NSW, QLD, VIC; ACT; 20km of Canberra GPO. 2 years, 12 months, 6 months, 3 months, one month. |
Attachment A: Analysis of restraint clauses for Women’s Legal Centre ACT clients
| Employment Contract | Technical Solution Officer | Full-time | Col4 | not to engage in competing business, non-solicitation of clients or suppliers, non-solicitation of employees, non- interference with clients, suppliers, employees, contractors. | The World | 24 months | Yes, world; Europe, Oceania, north America; Oceania; Australia; ACT, NSW, QLD, VIC; ACT; 20km of Canberra GPO. 2 years, 12 months, 6 months, 3 months, one month. |
|---|---|---|---|---|---|---|---|
| Employment Contract | Director - Corporate Affairs | Full-time and made redundant | $130,000 | not to engage in any competing activity, non-solicitation of employees, non- solicitation of clients. | Whole World | 24 months | Yes: world, Aus, NSW VIC ACT QLD, NSW VIC ACT, NSW ACT. 24, 20, 16, 12, 8, 6, 4 months |
| Employment Contract | Customer Service Specialist | Part-time | $39,977.60 | not to engage in similar or competing business, non-interference with clients, employees, suppliers, non- solicitation of employees. | Any country in which the company or group operates and sells products | 24 months | Yes: any country in which company operates, Australia, VIC NSW QLD, VIC NSW, VIC; and 24, 12, 9, 6, 3 months |
Full-time not to engage in The World 24 months Yes, world;
competing business, Europe,
| Employment Contract | Photographer | casual | $29.20 per hour or $32.00 per hour | Non-solicitation of clients not to be engaged by any competing business non-solicitation of employees non interferences with clients, employees or suppliers | Victoria | 2 years | yes, 24m for Kindergarten and Family Portrait Fundraiser work, 12 months for commercial and privately commissioned family and children portrait work, 12 months for kindergarten and family portrait work, 6 months for commercial and privately commissioned family and children portrait work. Victoria, Melbourne, 20km, 10km from any location worked. |
|---|
casual $29.20 per hour Non-solicitation of Victoria 2 years yes, 24m for or $32.00 per clients Kindergarten
| employment contract | Cyber Security Trainee | full-time | $55,000 | Non-compete non-solicitation of clients non-solicitation of employees and clients, directors, agents, reps, widely defined non-interference with relationships | 100km | 2 years | yes, 100km, 50 km, 25 km for 2 years, 12 months, 6 months |
|---|---|---|---|---|---|---|---|
| Employment Contract | Area Manager | full time | per award | Non-solicitation of clients or suppliers, non- solicitation of employees, engage in a competing business | 100km | 2 years | yes, 100, 50, 25, 10km and 24, 18, 12, 6 months |
| Employment Contract | NDIS Support Worker | casual | per award | non-solicitation of clients, non-solicitation of employees, not to engage in competing business | 100km | 24 months | Yes: 100, 50, 25, 10km. 24, 18, 12, 6 months |
| Employment Contract | NDIS Support Worker | casual | per award | non-solicitation of clients, non-solicitation of employees, not to engage in competing business | 100km | 24 months | Yes: 100, 50, 25, 10km. 24, 18, 12, 6 months |
| Employment Contract | NDIS Team Leader | Part-time | per award | non-solicitation of clients, non-solicitation of employees, not to engage in competing business | 100km | 24 months | Yes: 100, 50, 25, 10km. 24, 18, 12, 6 months |
full-time $55,000 Non-compete 100km 2 years yes, 100km, 50 non-solicitation of km, 25 km for
| Employment Contract | Dentist | Full-time | $144,000 | not to be engaged in competing business, non-solicitation of clients, suppliers, non- solicitation of employees, non- interference with clients, employees, suppliers. | 5km | 2 years | No. |
|---|---|---|---|---|---|---|---|
| Employment Contract | Consultant | Full-time and made redundant | $82,500 | non-solicitation/non- canvass of clients, non- solicitation of employees | Australia | 12 months | Yes: 12, 6, 3 months. Australia, the state or territory in which you predominately worked during last 12 months of employment. |
| Employment Contract | Vacation Planner | Full-time | $24.76 per hour | not to carry on, be interested in any capacity, be engaged in competing business, non-solicitation of employees, non- solicitation of clients. | Australia | 12 months | Yes: Aus, QLD, Gold Coast. 12, 6, 3 months |
| Employment Contract | Account Manager | Full-time | $93,636 | non-solicitation of clients, not to engage in competing business, non-solicitation of employees. | Australia | 12 months | Yes: Aus, ACT, 10km. 12, 9, 6, 3 months |
Full-time $144,000 not to be engaged in 5km 2 years No. competing business,
Full-time $68,000 Not to be engaged in Australia 12 months Yes: Aus, ACT. competing business, 12, 6, 3
| Employment Contract | Business Travel Consultant | Full-time | $68,000 | Not to be engaged in competing business, non-solicitation of clients, non-solicitation of suppliers, work in any position in which you may be able to use confidential information, non- interference with employees, clients, suppliers non- solicitation of employees, non- disparagement. | Australia | 12 months | Yes: Aus, ACT. 12, 6, 3 months. |
|---|---|---|---|---|---|---|---|
| Employment Contract | Training Assistant Manager | Full-time | not to engage in similar business, non- solicitation of clients, non-solicitation of employees. | "within the area of any cities where English Wise branches are located" | 12 months | No. |
| Employment contract | Beauty Therapist | full-time | per award | Non-solicitation of clients not to be engaged by any competing business non-solicitation of employees non interferences with clients, employees or suppliers | 50 km | 12 months | yes, 50, 25, 10 km for 12, 6 or 3 months |
|---|---|---|---|---|---|---|---|
| Employment Contract | Practice Manager | Part-time | $35 per hour | non-solicitation of clients, not to engage in competing business, non-solicitation of employees, non- interference with clients, employees or suppliers. | 50km | 12 months | Yes: 50, 25, 10km and 12, 9, 6 months |
| Employment Contract | Therapy Assistant | Full-time | $32 per hour | non-solicitation of clients, not to engage in competing business, non-solicitation of employees, non- interference with clients, employees or suppliers. | 50km | 12 months | Yes: 50, 25, 10km and 12, 9, 6 months |
| Employment Contract | Professional Organiser | Part-time | $40 per hour | not to engage in competing business, non-solicitation of employees, non- solicitation of clients. | 50km | 12 months | No. |
full-time per award Non-solicitation of 50 km 12 months yes, 50, 25, 10 clients km for 12, 6 or
| Employment Contract | 1st year Apprentice Hairdresser | Full-time | $39,559 | non-solicitation of clients, not to engage in competing business, non-solicitation of employees, non- interference with clients, employees or suppliers. | 30km | 12 months | Yes: 30, 20, 10km and 12, 6, 3 months |
|---|---|---|---|---|---|---|---|
| Employment Contract | Patient Services Administrator | Full-time | $79,560 | Non-solicitation of clients, not to be engaged in any competing business, non-solicitation of employees, non interference with clients, employees, or s uppliers. | 25km | 12 months | No |
| Contractor Agreement | Real Estate Salesperson | Commission | not to be engaged in competing business, non-solicitation of clients and suppliers, non-solicitation of employees, non- interference with clients, suppliers, employees. | 20km | 12 months | Yes: 20, 10, 5km. 12, 6, 3 months | |
| Employment Contract | Women's & Pelvic Health Physiotherapist | Part-time | $35 per hour | not to establish a business in direct competition, non- solicitation of clients, non-solicitation of employees. | 5km | 12 months | No. |
Full-time $39,559 non-solicitation of 30km 12 months Yes: 30, 20, clients, not to engage 10km and 12,
| Col1 | Col2 | Col3 | Col4 | Col5 | Col6 | Col7 | Col8 |
|---|---|---|---|---|---|---|---|
| Employment Contract | Educator | casual | $32.14 per hour | non-solicitation of employees, suppliers, clients, not to be engaged in competing business | 2km | 12 months | No. |
| Settlement deed | Family Day Care provider | part-time and made redundant | per child/day | limit on communication with Stakeholders non-solicitation of employees non-solicitation on attempting to persuade Stakeholders to cease services to or from NFP | 12 | yes on time only - 12, 9 or 6 months | |
| Settlement deed | Family Day Care provider | part-time and made redundant | per child/day | limit on communication with Stakeholders non-solicitation of employees non-solicitation on attempting to persuade Stakeholders to cease services to or from NFP | 12 | yes on time only - 12, 9 or 6 months |
| Employment Contract | Cardiac Scientist and Clinical Trials and Research Assistant | Full-time | $50,000 | non-solicitation of clients, non-solicitation of employees, not to do business dealings with a client, not to be an employee or contractor of a client. Non-interference with clients. | Col6 | 12 months | Yes: 12, 9, 6, 3 months |
|---|---|---|---|---|---|---|---|
| Employment Contract | Cardiac Scientist | Full-time | $50,000 | non-solicitation of clients, non-solicitation of employees, not to do business dealings with a client, not to be an employee or contractor of a client. Non-interference with c lients. | 12 months | Yes: 12, 9, 6, 3 months | |
| Employment Contract | Cardiac Scientists and Medical Administration + Receptionist | Full-time | $55,000 | non-solicitation of clients, non-solicitation of employees, not to do business dealings with a client, not to be an employee or contractor of a client. Non-interference with c lients. | 12 months | Yes: 12, 9, 6, 3 months | |
| Employment Contract | Associate Research Manager | part-time and made redundant | $58.20 per hour | non-solicitation of clients, non-solicitation of employees. | 12 months | No |
Full-time $50,000 non-solicitation of 12 months Yes: 12, 9, 6, 3 clients, non-solicitation months
| Employment Contract | Practice Manager | Full-time | $100,000 | non-solicitation of clients, non- interference with clients | Col6 | 12 months | Yes: 12, 9, 6, 3 months. |
|---|---|---|---|---|---|---|---|
| Employment Contract | Executive Assistant to Managing Director | Full-time | $90,000 | non-solicitation of clients, not to be engaged in competing business, non- interference with clients, non-solicitation of prospective employees. | "Each state and territory in which you had business dealings during the last 12 months of employment" | 6 months | Yes: 6 months, 3 months |
| Employment Contract | Rehabilitation Consultant | Full-time | $65,000 | non-solicitation of employees, non- solicitation of clients, non-interference with clients, employees, suppliers, be interested in competing business. | NSW | 6 months | Yes: NSW, Sydney, 25, 15, 5km. 6, 3 months. |
| Employment Contract | Reception/Administration Officer | Full-time | $54,750 | non-solicitation of clients | ACT | 6 months | No. |
| Employment Contract | Airline Services Trainee | Part-time | per enterprise agreement | Non-solicitation of clients, non-solicitation of employees, non- interference with clients, suppliers. | Any airport in a capital city in Australia (excl Darwin and Hobart) | 6 months | Yes: Any airport in a capital city in Australia (excl Darwin and Hobart), Canberra airport. 6, 3 months |
Full-time $100,000 non-solicitation of 12 months Yes: 12, 9, 6, 3 clients, non- months.
| Employment Contract | HCA - Key Worker | Part time | $31.41 per hour | non-solicitation of clients, not to be engaged with any competing business, non-solicitation of employees, non- interference with clients, employees or suppliers. | 50km | 6 months | No. |
|---|---|---|---|---|---|---|---|
| Employment Contract | Home Care Worker | Part-time | $29.51 per hour | non-solicitation of clients, non-solicitation of employees/contractors | 50km | 6 months | Yes, 50, 25, 10km and 6, 4, 3 months |
| Employment Contract | Home Care Worker | casual | $37.64 per hour | not to provide the same or similar services to any client, non- solicitation of clients, non-solicitation of employees, non- interference with clients, employees, suppliers | Canberra | 6 months | Yes: Cbr, 30km, 10km. 6, 3 months |
| Employment Contract | Pilates Instructor | casual | $31.09 per hour | not induce employees to leave not be employed by a client not become an employee of a client not be associated with or engaged by a competing business | 5km from work | 6 months | no |
Part time $31.41 per hour non-solicitation of 50km 6 months No. clients, not to be
| Col1 | Col2 | Col3 | Col4 | Col5 | Col6 | Col7 | Col8 |
|---|---|---|---|---|---|---|---|
| Employment Contract | Administration Assistant | Full-time | $49,400 | non-solicitations of clients, non-solicitation of employees, non- interference with clients, employees, suppliers | 6 months | No. | |
| Employment Contract | Project Coordinator and Class Coordinator | Part-time | $24.67 per hour | non-solicitation of clients. | 6 months | Yes: 6, 3 months. | |
| Employment Contract | Chef de Partie | Full-time | $60,000 | Non-solicitation of clients, suppliers, contractors, investors. Non-solicitation of employees. | 6 months | No. | |
| Employment Contract | Account Manager | Full-time | $85,000 | not to engage in competing organisation, not to be involved with clients, non-solicitation of clients. | N/A | 6 months | No |
END DOCUMENT 10
BEGIN DOCUMENT 11
Worker non-competes and other restraints
Legal Aid NSW submission to Competition Review - Treasury
May 2024
323 Castlereagh Street Haymarket NSW 2000 www.legalaid.nsw.gov.au
Contents
Acknowledgement ..................................................................................... 4
-
About Legal Aid NSW .......................................................................... 5
-
Introduction .......................................................................................... 6
-
Current State: Restraint of Trade ......................................................... 8
3.1 Does the common law restraint of trade doctrine strike an appropriate balance
between the interests of businesses, workers and the wider community? If no, what alternative options are there? ........................................................................ 8
3.1.1 Employer Interests Prioritised ..................................................................... 8 3.1.2 Non-competes are Widespread .................................................................. 9 3.1.3 Chilling Effect ............................................................................................ 12
3.1.4 Enforcing Non-competes .......................................................................... 16 3.1.5 Alternative Options ................................................................................... 17 Recommendation 1: Implement a national uniform law that bans the use of non-
compete clauses in Australia. ...................................................................... 18
Recommendation 2: Any policy response should apply to all employees and also
extend to independent contractors and ‘employee-like’ workers .................. 19
Recommendation 3: Implement civil penalties to deter employers from using
unenforceable restraints. ............................................................................. 19
Recommendation 4: Require employers to inform workers in writing when a non-
compete is unenforceable. .......................................................................... 20
3.2 Do you think the Restraints of Trade Act 1976 (NSW) strikes the right balance
between the interest of businesses, workers and the wider community? Please provide reasons. If not, what alternative options are there? ................................. 20
3.3 Are current approaches suitable for all workers, or only certain types of workers?
For example, senior management, low-income workers, or care workers etc? ..... 21
3.4 Would the policy approaches of other countries be suitable in the Australian
context? Please provide reasons. ........................................................................ 22
3.4.1 Complete ban ........................................................................................... 22 3.4.2 Partial Ban ................................................................................................ 23
3.5 Are there other experiences or relevant policy options (legislative or non legislative) that the Competition Review should be aware of? .............................. 24
3.5.1 Bargaining power ...................................................................................... 24
3.5.2 Limited access to legal aid ........................................................................ 24
3.5.3 Boilerplate contracts ................................................................................. 24
4. Non-solicitation of clients and other business contacts ..................... 26
4.1 What considerations lead businesses to include client non-solicitation in
employment contracts? Are there alternative protections available? .................... 26
Consultation Paper: Worker non-competes and other restraints
Recommendation 5: Ban the use of client non-solicitation clauses for low-income
workers and insecure workers. .................................................................... 27
4.2 Is the impact on clients appropriately considered? Is this more acute in certain
sectors, for example the care sector? Please provide reasons. ............................ 27
Recommendation 6: Ensure any policy response has regard to the prevalence of
client non-solicitation clauses in the care sector and the detrimental effect of such clauses on NDIS participants and their quality of care. ....................... 28
5. Non-solicitation of co-workers ............................................................ 29
5.1 What considerations lead businesses to include co-worker non-solicitation in
employment contracts? Are there alternative protections available? .................... 29
Recommendation 7: Introduce a national uniform law banning the use of co-
worker non-solicitation clauses. In the alternative, prohibit their use for lowincome and insecure workers. ..................................................................... 30
6. Non-disclosure clauses ...................................................................... 31
6.1 What considerations drive businesses to include non-disclosure clauses in
employment contracts? Are there alternative protections, such as s183 of the Corporations Act 2001 that are available? ............................................................ 31
6.1.1 The prevalence and impact of non-disclosure clauses .............................. 31
6.1.2 Alternative protections available to businesses ......................................... 31
7. Restraints on workers during employment......................................... 33
7.1 When is it appropriate for workers to be restrained during employment? ............. 33 7.2 Is it appropriate for part-time, casual and gig workers to be bound by a restraint of
trade clause? ....................................................................................................... 33
Recommendation 8: Implement a complete ban on the use of restraint of trade
clauses for insecure workers including casual workers, gig workers, and other workers engaged in employee-like work. ............................................ 34
8. No-poach and wage-fixing agreements ............................................. 35
Consultation Paper: Worker non-competes and other restraints
Acknowledgement
We acknowledge the traditional owners of the land we live and work on within New South Wales. We recognise continuing connection to land, water and community.
We pay our respects to Elders both past and present and extend that respect to all Aboriginal and Torres Strait Islander people.
Legal Aid NSW is committed to working in partnership with community and providing culturally competent services to Aboriginal and Torres Strait Islander people.
Consultation Paper: Worker non-competes and other restraints
1. About Legal Aid NSW
The Legal Aid Commission of New South Wales (Legal Aid NSW) is an independent statutory body established under the Legal Aid Commission Act 1979 (NSW). We provide legal services across New South Wales through a state-wide network of 25 offices and 243 regular outreach locations, with a particular focus on the needs of people who are socially and economically disadvantaged. We offer telephone advice through our free legal helpline LawAccess NSW.
We assist with legal problems through a comprehensive suite of services across criminal, family and civil law. Our services range from legal information, education, advice, minor assistance, dispute resolution and duty services, through to an extensive litigation practice. We work in partnership with private lawyers who receive funding from Legal Aid NSW to represent legally aided clients.
We also work in close partnership with community legal centres, the Aboriginal Legal Service (NSW/ACT) Limited and pro bono legal services. Our community partnerships include 27 Women’s Domestic Violence Court Advocacy Services, and health services with a range of Health Justice Partnerships.
The Legal Aid NSW Family Law Division provides services in Commonwealth family law and state child protection law.
Specialist services focus on the provision of family dispute resolution services, family violence services, services to Aboriginal families and the early triaging of clients with legal problems.
Legal Aid NSW provides duty services at all Family and Federal Circuit Court registries and circuit locations through the Family Advocacy and Support Services, all six
specialist Children’s Courts, and in some Local Courts alongside the Apprehended Domestic Violence Order lists. Legal Aid NSW also provides specialist representation for children in both the family law and care and protection jurisdiction
The Civil Law Division provides advice, minor assistance, duty and casework services from the Central Sydney office and most regional offices. The purpose of the Civil Law Division is to improve the lives of people experiencing deep and persistent disadvantage or dislocation by using civil law to meet their fundamental needs. Our civil lawyers focus on legal problems that impact on the everyday lives of disadvantaged clients and communities in areas such as housing, social security, financial hardship, consumer protection, employment, immigration, mental health, discrimination and fines. The Civil Law practice includes dedicated services for Aboriginal communities, children, refugees, prisoners, older people experiencing elder abuse and people impacted by disasters.
The Criminal Law Division assists people charged with criminal offences appearing before the Local Court, Children’s Court, District Court, Supreme Court, Court of Criminal Appeal and the High Court. The Criminal Law Division also provides advice and representation in specialist jurisdictions including the State Parole Authority and Drug Court.
Should you require any further information, please contact:
Bridget Akers
Employment Law Team – Civil Law
Phone (02) 4725 4609
Consultation Paper: Worker non-competes and other restraints
2. Introduction
Employment law is consistently in the top three areas of civil law advice with Legal Aid NSW providing 2548 advice services in 22/23, 2267 in 22/21 and 2965 in 21/20. The most common areas of employment legal help are about unfair dismissal, underpayment of wages and general protections claims.
The specialist Employment Law Team in Legal Aid NSW’s Civil Law Division undertakes advice and case work for priority clients and provides training and support to generalist civil lawyers about employment law. We use our practice experience, advising and representing some of the most disadvantaged workers in NSW, as a foundation for our law reform work and systemic advocacy.
While acknowledging the policy behind restraint of trade clauses in employment contracts, Legal Aid NSW is concerned about the increasing prevalence of these clauses and their impact on disadvantaged and low-income workers. In our experience these clauses are increasingly widespread and not limited to particular industries or occupation types. We routinely advise our clients that the clauses in their contracts are likely to be unenforceable. However, in our experience, workers are intimidated when faced with the risk of having to defend themselves in costly litigation and are more likely to adhere to the terms of a restraint. This intimidation is compounded for workers who have fewer employment choices, lower capability and less access to legal knowledge.
Legal Aid NSW welcomes the Competition Review’s investigation into non-compete clauses and the opportunity to provide a submission based on the experiences of our clients.
Recommendation 1: Implement a national uniform law that bans the use of non-compete
clauses in Australia.
Recommendation 2: Any policy response should apply to all employees and extend to
independent contractors and ‘employee-like’ workers.
Recommendation 3: Implement civil penalties to deter employers from using unenforceable
restraints.
Consultation Paper: Worker non-competes and other restraints
Recommendation 4: Require employers to inform workers in writing when a non-compete is
unenforceable.
Recommendation 5: Ban the use of client non-solicitation clauses for low-income workers
and insecure workers.
Recommendation 6: Ensure any policy response has regard to the prevalence of client non-
solicitation clauses in the care sector and the detrimental effect of such clauses on NDIS
participants and their quality of care.
Recommendation 7: Introduce a national uniform law banning the use of co-worker non-
solicitation clauses. In the alternative, prohibit their use for low-income and insecure workers.
Recommendation 8: Implement a complete ban on the use of restraint of trade clauses for
insecure workers including casual workers, gig workers, and other workers engaged in
employee-like work.
Consultation Paper: Worker non-competes and other restraints
3. Current State: Restraint of Trade
3.1 Does the common law restraint of trade doctrine strike an appropriate balance between the interests of businesses, workers and the wider community? If no, what alternative options are there?
Legal Aid NSW considers that the common law restraint of trade doctrine prioritises the interests of businesses over workers and the wider community, and that a policy response is needed to address the inherent unfairness in the existing law and practice with respect to the use of non-competes. Our concerns are broadly divided into four categories:
3.1.1 Employer Interests Prioritised
The starting point for the common law doctrine is that a restraint is invalid on the basis it is contrary to the public interest, unless the employer seeking to rely on the restraint can establish that it is reasonably necessary to protect a legitimate business interest.[1]
In theory, the doctrine should strike a balance between three values that are often in tension in the context of employment: the interests of businesses in protecting against being undercut by their rivals; an individual’s right to ‘use and exploit for the purpose of earning a living all the skills, knowledge and experience they have acquired during their education and working lives’;[2] and the broader public’s interest in the economic development that is considered more likely to occur if everyone in society can participate to the fullest extent in the economy.[3]
However, there has been judicial and academic criticism that the doctrine has developed to focus on employers’ interests with little consideration given to the interests of workers, or the relative bargaining power between the parties. As Dr Ian Ross states, ‘the common law’s primary concern is to assess whether the employer has a legitimate interest and to determine if the non-compete is commensurate with the interest. The employee’s position is generally treated as irrelevant, and consequently the majority of non-competes are upheld.’[4]
1 Herbert Morris Ltd v Saxelby [1916] 1 AC 688.
2 Hugh Collins, Employment Law (Oxford University Press, 2nd ed, 2010) 156.
3 Christopher McMahon and Alan Eustace, ‘Nothing to Lose to Lose but Their Restraints of Trade: Lessons for Employment
Non-Compete Clauses from EU Competition Law’ (2023) 52(2) Industrial Law Journal 2.
4 Ian Ross, ‘Non-compete Clauses in Employment Contracts: The Case for Regulatory Response’ (Working Paper No
4/2024, Tax and Transfer Policy Institute Working Paper, Australian National University, March 2024) 2.
Consultation Paper: Worker non-competes and other restraints
Further, as Andrew Stewart notes, ‘it is rare for a court to concern itself in any detail with the relative bargaining power of the parties; or with the overall ‘fairness’ of the agreement; nor is it necessary that the employee receive any additional consideration for entering into the restraint.’[5]
The doctrine should also be considered within the broader context of Australian contract law which has developed a focus on the primacy of the contract without consideration of the relative bargaining power of the parties. Recent High Court Judgments[6] have had seismic impacts in the employment law context given the High Court’s clear intent to focus on construing the contractual terms and avoiding an inquiry into the bargaining power of the parties to the dispute. The current Federal Government has recently introduced legislation to undo the impact of these decisions.[7]
Given the doctrine’s limited consideration of the interests of workers and the relative bargaining power of the parties, we consider that reform is necessary to address this emerging trend which is clearly not in the public interest.
3.1.2 Non-competes are Widespread
The use of non-competes by Australian businesses has increased over the last five years with nearly 1 in 5 Australian workers currently covered by a non-compete.[8] A 2023 ABS survey revealed that 46.9% of Australian businesses reported using at least one type of restraint clause in their employment contracts, with non-competes used across all industries and somewhat indiscriminately across occupation types.[9] Overall, the data indicates there is an increasing tendency to use non-competes, and absent a policy response, this trend is likely to continue.[10]
Non-compete clauses are no longer confined to senior level executives but are instead used across all industries and occupation types, including for low-income workers. It is our experience that non-competes are commonplace in employment contracts for workers earning less than $80,000[11] and affect all occupation types including, among
5 Andrew Stewart ‘Drafting and Enforcing Post-Employment Restraints’ 1997 10 Australian Journal of Labour Law 184.
6 WorkPac Pty Ltd v Rossato [2021] HCA 23, Construction, Forestry, Maritime, Mining and Energy Union v Personnel
Contracting Pty Ltd [2022] HCA 1; ZG Operations Australia Pty Ltd v Jamsek [2022] HCA 2.
7 Fair Work Legislation Amendment (Closing Loopholes) Act 2023 (Cth) and Fair Work Legislation Amendment (Closing
Loopholes No. 2) Act 2024 (Cth).
8 Dan Andrews and Bjorn Jarvis, ‘The Ghosts of Employers Past: How Prevalent are Not-compete Clauses in Australia?’
(2023) e61 Institute.
9 Restraint Clauses, Australia 2023, Australian Bureau of Statistics, Cat. No. 6306.0.
10 Ross (n 4) 1.
11 Noting that $80,000 is the current annual salary threshold to receive advice from a Legal Aid NSW lawyer about an
employment law issue.
Consultation Paper: Worker non-competes and other restraints
other examples, disability and aged care workers, yoga instructors, early childcare workers, and hairdressers.
Case Study – Manager of a laundromat in a small regional town
Our client was employed as a laundromat manager in a small regional town under an oral contract. Our client was made redundant and was given a letter by her former employer entitled "Confirmation of Redundancy". The letter referred to our client’s “implied employment obligation” and stated that our client was subject to a non-solicitation restraint. The letter stated that the implied restraint prohibited our client from soliciting, canvassing, approaching, or accepting any approaches from clients of her former employer for a period of 12 months. No restraint area was specified. The letter stated that her former employer may take steps to enforce the obligation if her former employer were to become aware of any breach.
Our client sought legal advice as the “implied employment obligation” had never been discussed with her during her employment. Our client was concerned that the restraint would affect her prospects of employment as she intended to work in the same industry within her town.
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Case Study – Casual Brow and Lash Technician
Our client, a young single parent, was employed as a casual brow specialist and lash technician in a brow and eyelash boutique pursuant to a written employment contract and was covered by the Hair and Beauty Industry Award. Our client was paid a base rate of $28.58 per hour with penalty rates applying on weekends and public holidays.
Our client’s employment contract contained a cascading non-compete clause and a cascading non-solicitation clause preventing our client from engaging with a competing business or soliciting former clients:
⎯ At a maximum, within 30 kilometres of any of the 10 locations in NSW and
QLD owned by her previous employer for 6 months; and
⎯ At a minimum, within 15 kilometres of any of the 10 locations in NSW and
QLD owned by her previous employer for 3 months.
During her employment, our client established her own at-home lash and brow business. When our client’s employer became aware of our client’s at-home business, our client was called into a disciplinary meeting where our client’s employer reminded her of the restraint of trade clause in her employment contract. Our client received a letter from her employer requiring her to cease operating her business.
Our client subsequently resigned and sought legal advice about whether legal action would be taken against her. Our client stated while she had not contacted any former clients, some former clients had found her independently.
Non-competes are also no longer confined to individual employment contracts. They can now be found in independent contractor agreements for low-paid gig workers, in enterprise agreements which cover large cohorts of workers,[12] and they have become a common feature in settlement agreements or exit agreements. In our experience, this includes:
⎯ Employers restating or extending a restraint from the contract in a settlement
agreement upon the resolution of a dispute. In some cases, this includes extending the scope of the restraint for a longer duration and commencing from the date of the settlement agreement, not the cessation of employment. To a
12 Ross (n 4) 1.
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lesser extent, we have also seen restraints included in settlement agreements despite the employment contract not containing any restraints.
⎯ Employers providing employees with ‘exit agreements’ whereby employees
sign restraints upon cessation of employment in return for being paid their lawful entitlements (e.g. notice, accrued annual leave, redundancy).
While non-competes have proliferated in Australia, the types of interests that may be protected by such restraints have also increased. Historically, the common law restraint of trade doctrine held that the types of interests that could be legitimately protected by restraints included confidential information, trade secrets, and client lists or customer connections. However, courts in Australia have more recently acknowledged that an employer’s interest in a ‘stable workforce’ is also sufficient to justify restraints as reasonable.[13]
Overall, non-competes have become more prevalent, apply to a broader cohort of workers including low-income workers, and can be found in a wide number of scenarios.
3.1.3 Chilling Effect
Under the common law doctrine, workers face inherent uncertainty and confusion about whether the restraints in their contracts are enforceable and whether their former employer will seek to enforce the restraint. This creates a chilling or intimidating effect whereby workers avoid challenging the validity of restraints and instead change their behaviour, even when the restraint in question is unlikely to be enforceable.[14]
Our experience is that non-competes cause employees to turn down job offers, avoid looking for new jobs, resign from new jobs, seek employment in different industries, or not start their own businesses. This can compound the impact of discriminatory, or hostile work environments because workers believe they are unable to leave due to the non-compete clauses in their contracts.
13 Ross (n 4) 17.
14 Christopher Arup et al, ‘Restraints of Trade: The Legal Practice’ 2013 36(1) UNSW Law Journal 1.
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Case Study – Casual NDIS Disability Support Worker
Our client was employed as a casual Disability Support Worker for a NDISregistered disability service provider of in-home support services on the south coast of NSW. Our client commenced employment in March 2023 pursuant to a written employment contract and was covered by the SCHADS Award and paid $40.46 per hour. There was a transmission of business, and our client was offered casual employment with the new employer.
Less than two weeks after the transmission of business, our client was dismissed for alleged misconduct. After the termination of her employment, our client began providing disability support services as an independent contractor. Some of the participants our client worked with during her employment sought services from our client.
Our client later commenced employment with a different NDIS-registered disability service provider. More of the people with disability that our client had provided services to during her employment sought to transfer their NDIS plans to our client’s new employer.
Our client received a letter from her former employer stating that our client had breached the restraint of trade clauses in her employment contract which at a maximum restrained our client from competing with the former employer in Australia or New Zealand, or soliciting clients, for a period of 6 months.
Our client sought legal advice from us about the enforceability of the restraints and whether she could remain working in the disability support sector. Our client was particularly stressed by the experience and was fearful of accepting work from her new employer, in case her former employer decided to commence legal action.
There are two broad reasons why the existing law and practice regarding restraints of trade is plagued with confusion and uncertainty. Firstly, the doctrine has not developed to set out clear rules about what constitutes a ‘reasonable’ geographic area or duration of a non-compete. Rather, the doctrine is a subjective and highly fact-dependent test that considers the ‘reasonableness’ of a non-compete having regard to the other elements of the restraint, and against the ‘legitimate interest’ the employer is seeking to protect. This has led to a diversity of judicial opinion and a general uncertainty about the enforceability of non-competes.
Secondly, the common law doctrine creates further confusion and uncertainty as courts can sever an invalid part of a non-compete without affecting the original nature of the
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clause and the contract (often referred to as a ‘blue pencil’ doctrine).[15] This encourages employers to draft non-competes broadly and increasingly rely on ‘cascading’ or ‘laddered’ restraint clauses to reduce the risk that a non-compete will be unenforceable.
It is our experience that employer overreach is common when drafting restraint clauses as we see cascading variations of the restraint’s duration, geographic area, as well as the activities affected. We commonly advise clients that the non-compete in their contract is unlikely to be enforceable due to the scope of restraints being unreasonable, however we are unable to give clients certainty, particularly where there are cascading or laddered restraints.
Case Study – The ‘Indefinite Restraint’
Our client was a health worker in a regional area earning less than $80,000.
Our client’s employment contract contained an extreme example of postemployment restraints including cascading non-solicitation and non-compete restraints which defined the maximum duration of the restraints as “indefinite” and the maximum geographical area as “Australia and New Zealand”.
Our client’s employer lost the contract with a major health service in the area. The company that won the contract offered our client a job. Our client’s former employer threatened to enforce the restraint of trade clause in our client’s contract. Despite our advice that the non-compete was highly unlikely to be enforceable in its entirety, our client did not accept the contract holder’s job offer for fear of legal action by their former employer.
The ‘chilling effect’ of broad non-compete clauses was made clear in a recent unfair dismissal decision where the Fair Work Commission (FWC) considered the effect of a non-compete on an employee’s efforts to find new work after being unfairly dismissed.[16] The non-compete in question was similar to those we commonly see as it stated that for a period of 12 months after the termination of his contract of employment, the employee was not to work as an employee or contractor or advisor or in any other capacity in any business which was “engaged in activities substantially
15 See Del Casale v Artedomus (Aust) Pty Ltd (2007) 165 IR 148, 132; Attwood v Lamont [1920] 3 KB 571, 578; SST
Consulting Services Pty Ltd v Rieson (2006) 225 CLR 516, 44–48.
16 Mr Andrew Goddard v Richtek Melbourne Pty Ltd [2024] FWC 979.
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similar or identical to the Company and provides services substantially similar or services offered by the Company.”
The employee in question had not applied for any jobs since being dismissed and remained unemployed at the time of hearing which would usually weigh against the FWC awarding compensation.[17] However, the FWC accepted the employee’s reasoning that he had not applied for jobs because he believed the non-compete prevented him from doing so and he was worried the employer would commence legal action. As Deputy President Colman noted at [27]:
Ordinarily, one would expect a person to have applied for jobs in the sector of their expertise as a reasonable step in mitigating loss. However, the presence of a non-compete provision in his contract explains Mr Goddard’s decision not to do so. Although the provision is most likely unenforceable on the basis that its scope is unreasonable, an ordinary worker cannot be expected to know this, and it is understandable that Mr Goddard would not want to risk embroiling himself in a legal controversy by acting contrary to an express provision in his contract. I therefore make no deduction in respect of Mr Goddard’s decision not to apply for jobs that might have involved a prima facie contravention of the restraint of trade provision in his contract of employment.
…
One wonders why such restraint of trade provisions are so commonly found in the contracts of ordinary workers and whether they really protect any legitimate business interest of the employer, or merely serve to fetter the ability of workers to ply their trade, and to reduce competition for labour and services.[18]
Ultimately, the uncertainty of non-competes operates to the benefit of businesses and the detriment of workers. This is because inherent uncertainty means that variables other than the legal merits of the restraint are active in determining the outcomes of disputes and the observance of contracts overall. As Christopher Arup et al note, ‘in restraint cases, these key variables can be characterised as the use of inside knowledge and hard bargaining – variables that on the whole appear to favour the employer over the employee.’[19]
Given the increased prevalence of non-competes in Australia, this disproportionately disadvantages low-income workers who do not have access to legal knowledge and advice, and who in our experience, commonly adhere to the terms of a restraint when
17 Fair Work Act 2009 (Cth) s 392(2)(d).
18 Goddard v Richtek [2024] FWC 979 at [27].
19 Arup et al (n 15) 5.
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threatened with enforcement action by an employer regardless of whether the restraint is enforceable at law.
3.1.4 Enforcing Non-competes
Under the common law doctrine, the task of enforcing a restraint is left to the courts. As noted above, however, non-competes are instead more commonly self-enforced by employees who are uncertain and confused, and ultimately prefer to avoid the risk of legal action. As noted by Arup et al, this practice is concerning because the courts’ policing of the public interest is routinely bypassed and the mobility of employees with their know-how and talent restricted by default.[20]
In our experience, it is rare for employers to commence court proceedings against ordinary workers as non-competes are difficult to enforce and litigation is expensive, complex, and time-consuming. However, it is common in our experience that employers use hard bargaining tactics to achieve either submission or settlement, including:
⎯ restating restraint clauses in termination letters or exit agreements and
reminding employees that they remain bound by the restraints; and
⎯ threatening legal action where the employer considers an employee has
engaged, or is likely to engage, in conduct that is said to be in breach of a restraint.
In light of the above, employers appear to clearly understand that they can obtain a result without proceeding to court, as even the threat of legal action is enough to change behaviour in most instances. It is little wonder then that ordinary workers tend to overestimate the likelihood of employers successfully enforcing a restraint and underestimate their own ability to push back on a threat of legal action or defend a claim by a former employer. Our advice to clients that the non-compete in their contract is probably unenforceable, but this is ultimately a question for the court, provides them with little comfort.
Where an employer does commence proceedings in court to enforce a non-compete, the initial enforcement action is usually an interlocutory application for injunctive relief. Most matters are determined at this stage without proceeding to a final determination. This tends to occur very quickly given the longer an employer leaves the application, the less convincing its argument for relief and the less practical utility it will have given the limited nature of most restraint periods.[21]
20 Ibid 6.
21 See, eg, Capgemini US LLC v Case [2004] NSWSC 674.
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Various commentators have criticised how commonly restraint of trade matters are determined by way of injunctive relief, as it means the merits of the employer’s case are not fully tested in court. Instead, an employer need only establish an arguable case on the merits for the balance of convenience test to favour the granting of injunctive relief.[22] As Arup et al argue:
if the court considers that an arguable case is made out, it is rare to see a decision in which the hardship to the employee tips the balance of convenience against granting the employer the injunction. Generally, the balance of convenience is weighed in the employer’s favour. The court is more concerned about the threat of an immediate injury to the employer’s interest.[23]
3.1.5 Alternative Options
1. Ban non-competes
We consider that a ban on non-compete clauses is the best policy response to address the increasing prevalence of non-competes.
Moreover, aside from the protective function of banning non-competes, a ban would also function to promote innovation and competition within the Australian context. Riley criticises the common law doctrine for contributing to the ‘the sterilisation of the talent of individuals, and the stifling of competition in the market for services.[24] Currently, the common law doctrine stifles the ability of workers with expertise, talent and industry insight from contributing to new and innovative projects.
To compare with other jurisdictions, California has had the longest and most robust history of prohibiting non-compete agreements amongst state jurisdictions in the United States and has become a centre for technological innovation. While Legal Aid NSW can best speak to the protective function of a non-compete ban, the Federal Government should not neglect the competitive function of such a ban by maximising the capacity of highly skilled workers to contribute to the national economy.
The Federal Government should be emboldened to implement a national ban on noncompetes in Australia, particularly after the United States Fair Trade Commission’s (FTC) recent decision to implement a federal ban in the United States. Several US states had already banned non-competes, and so the FTC had the benefit of comparative data between states that do and do not enforce non-competes to
22 See, eg, Arup et al (n 15).
23 Arup et al (n 15) 10.
24 Joellen Riley ‘Sterilising Talent: A Critical Assessment of Injunctions Enforcing Negative Covenants’ (2012) 34(4) Sydney
Law Review 617, 621.
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understand the potential economic impacts of a federal ban. Restraints are also largely prohibited in various other jurisdictions.[25]
Professor Alan Fels AO has recommended that non-compete clauses be banned in Australia in his Final Report on the ACTU commissioned Inquiry into Price Gouging and Unfair Pricing Practices.[26] Overall, the picture shows that a ban is likely to have a positive effect for workers in Australia and is unlikely to have a negative economic impact.
Recommendation 1: Implement a national uniform law that bans the use of
non-compete clauses in Australia.
2. Limit the use of non-competes
If the Federal Government does not introduce a complete ban on non-competes in Australia, it should consider implementing legislative reform to limit how non-competes can be used, and the workers who can be subject to such clauses. There are various policy options that could be applied concurrently to ensure that low paid workers are not subject to restraints.
a) Income threshold
As set out above, non-competes commonly apply to low-income workers who have less access to legal advice and limited bargaining power, and who are more likely to adhere to a non-compete even where it is likely to be unenforceable. A common policy response in other countries is to impose an income threshold so that non-competes are unenforceable for workers who earn less than the prescribed amount.[27] One option would be to implement a threshold based on the current ‘High Income Threshold’ in the Fair Work Act 2009 (Cth) (FW Act) which limits unfair dismissal protections to employees beneath the threshold.[28]
b) Limits on duration and compensation during restraint period
The ability of courts to sever unenforceable parts of a restraint has meant that employers frequently issue contracts with laddered or cascading restraint of trade clauses. A common policy response overseas is to implement a limit on the duration of restraints. For example, the United Kingdom has proposed to limit restraints to a 3 25 For example, Colombia, Malaysia, Mexico, India, and the Ontario province in Canada.
26 Alan Fels, ACTU Inquiry into price gouging and unfair pricing practices (Final Report, February 2024).
27 For example, Belgium. Also, various US states including Colorado, Illinois, Maryland, Massachusetts, New Hampshire,
Nevada, Oregon, Rhode Island, Virginia and Washington District of Columbia.
28 Fair Work Act 2009 (Cth) s 382.
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month term limit. In Spain, there is a 6-month limit with a graduated limit up to 24 months for technical employees.
Further, many countries require employers to pay extra compensation during a restraint period in order for it to be valid and enforceable.[29] This limitation could be applied in tandem with the limitation on restraint of trade to high income earners.
A complete or partial ban on non-competes should include all employees and extend to independent contractors and ‘employee-like’ workers, given the recent extension of protections under the FW Act to these cohorts of workers.[30] This is necessary because non-competes have become increasingly common for these workers, and they are often lowly paid, their work is insecure, and they have limited bargaining power.
Recommendation 2: Any policy response should apply to all employees and
also extend to independent contractors and ‘employee-like’ workers.
3. Other Matters
a) Civil penalties
Overseas research suggests that some employers are likely to continue issuing contracts with restraint of trade clauses even where a ban is introduced.[31] Any policy response to ban non-competes completely or partially should also expose employers to a civil penalty where they enter an unenforceable restraint.
Recommendation 3: Implement civil penalties to deter employers from using
unenforceable restraints.
b) Information
If the Government bans or limits the use of restraint of trade clauses, employers should be required to inform workers whether restraints found in existing employment contracts are enforceable by a prescribed date several months after any law receives royal assent.
29 For example, China, Belgium, Denmark (40 or 60% of salary), Finland (40% of salary), France, Germany (50% of salary),
Poland, Portugal, Spain (20-70% of salary), and Sweden.
30 Fair Work Legislation Amendment (Closing Loopholes No. 2) Act 2024 (Cth).
31 Evan Starr, Noncompete Clauses: A Policymaker’s Guide through the Key Questions and Evidence (Report, 31 October
2023).
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This, combined with an effective public relations strategy, will ensure the changes are clearly communicated and understood by all businesses, including small businesses, which will help ensure compliance and deter employers from knowingly or unknowingly continuing to use unenforceable restraints.
Recommendation 4: Require employers to inform workers in writing when a
non-compete is unenforceable.
c) Existing Employer Protections Sufficient
Employers would no doubt be concerned that any outright ban on non-competes is going to adversely affect their ability to protect their intellectual property, trade secrets, or client lists. However, we note that a ban would not leave employers without adequate protections for their legitimate business interests.
Employers could rely on targeted client non-solicitation clauses and protections for intellectual property, or the protections in equity against breach of obligations of confidence or fiduciary duties and duties of good faith and fidelity. We address these in more detail in our responses below. As Arup et al also note, 'employers also have strategies beyond the law, such as the use of attractive staff retention packages, to protect their interests. On this basis, reliance on non-competes is regarded as a lazy fallback option’.[32]
3.2 Do you think the Restraints of Trade Act 1976 (NSW) strikes the right balance between the interest of businesses, workers and the wider community? Please provide reasons. If not, what alternative options are there?
The Restraints of Trade Act 1976 (NSW) (RTA) does not strike the right balance between the interests of businesses, workers, and the wider community. Instead, the RTA entrenches the unfairness inherent in the common law doctrine by indirectly encouraging employer overreach and increasing employee uncertainty about the enforceability of restraints.
This is because under s 4 of the RTA, a restraint is valid to the extent to which it is not against public policy, whether it is in severable terms or not. The RTA gives courts discretionary power to partially enforce a restraint by reading it down to what is reasonable, even if it cannot be ‘blue pencilled.’
32 Arup et al (n 15) 26.
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The RTA was a product of law reform designed to combat the clear deficiencies of the common law doctrine as they were then perceived.[33] While courts have since struggled with the application of the RTA, the correct approach to the application of s 4 was settled in the 1980s and continues to be accepted today, which is as follows:[34]
- The Court determines whether the alleged breach infringes the terms of the
restraint.
- If there is an infringement, the Court determines whether the restraint is
against public policy.
- If the restraint is not against public policy, the restraint will be valid, subject to
any s 4(3) order detailing the extent of the invalidity.
- If there is no infringement, the RTA will have no function.
The practical operation of the RTA is that businesses are indirectly encouraged to draft non-competes as broadly as possible to ensure that if they litigate, they walk away with something. As Arup et al note from their interviews with employment law practitioners, the usual outcome of litigation under the RTA is that the court reduces the length of the restraint period. Because of this likely outcome, Arup’s interviewees considered that the NSW jurisdiction was more accommodating of employers than the other jurisdictions and so there was a lower risk factor attached to litigating there.[35]
As NSW has the highest rates of litigation for non-compete matters, this has a substantial impact on the development of the law and practice with respect to noncompetes. Should a complete ban on non-competes not be implemented, any implementation of a partial ban at the federal level will need to carefully consider the interaction with the RTA to avoid conflict between federal and state laws.
3.3 Are current approaches suitable for all workers, or only certain types of workers? For example, senior management, low-income workers, or care workers etc?
The prevalence of non-compete clauses has increased over the last 5 years, and absent a policy response, this trend is likely to continue.[36] Non-competes are no longer confined to senior level executives but are instead used across all industries and occupation types, including for low-income workers. We have detailed above various examples of broad ‘cascading’ restraints in contracts of ordinary and low-income employees, which has led to increased uncertainty and confusion about their
33 New South Wales, Parliamentary Debates, Legislative Assembly, 29 September 1976, 1179.
34 Orton v Melman [1981] 1 NSWLR 583.
35 Arup et al (n 15).
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enforceability and a ‘chilling effect’, whereby workers change their behaviour regardless.
Legal Aid NSW considers the current approach is inherently unfair for ordinary and low-income workers as the common law doctrine and the RTA in NSW fail to sufficiently consider the interests of workers, or the relative bargaining power between the parties. Given the clear imbalance in resources between workers and businesses, the current approaches encourage employers to overreach with broadly drafted restraints and discourage workers from challenging their validity, which results in workers passing up better job opportunities.
We consider that an immediate policy response is needed to ensure ordinary and lowincome workers are not subject to non-competes at all. In particular, non-competes should not apply at all to low-paid employees, casual employees, employees under 18 years of age, or gig workers.
3.4 Would the policy approaches of other countries be suitable in the Australian context? Please provide reasons.
3.4.1 Complete ban
Legal Aid NSW considers that a policy approach that bans non-competes completely could be modelled on the United States’ proposal to ban non-competes as detailed in the FTC’s Final Non-Compete Clause Rule on 23 April 2024 (Final Rule).[37] In summary, the Final Rule proposes to:
⎯ prohibit an employer from entering, or attempting to enter, a non-compete
clause with a “worker” (including an independent contractor) or representing that a worker is subject to a non-compete clause.
⎯ allow employers to maintain existing non-compete agreements with “senior
executives”, (those with over US$151,164 annual compensation and in a ‘policy making position’ for the business) but bars an employer from entering, or attempting to enter, a non-compete clause with a senior executive after the Effective Date of the Final Rule.
The Final Rule supersedes all state laws to the extent, and only to the extent, that a state’s laws permit or authorise conduct prohibited under the Final Rule or conflict with the Final Rule’s notice requirements. It also sets out exceptions including that it does not apply to non-competes entered by a person pursuant to a bona fide sale of a business entity.
37 Federal Trade Commission, Final Rule, Non-Compete Clause Rule, 16 CFR Part 910, RIN 3084-AB74, 23 April 2024.
Consultation Paper: Worker non-competes and other restraints 22
Further, the Final Rule requires an employer to provide clear notice to workers subject to a prohibited non-compete, in an individualised communication, that the worker’s non-compete clause will not be, and cannot legally be, enforced against the worker. An employer must also provide notice by the Final Rule’s Effective Date by hand-delivery, by mail at the worker’s last known street address, by email, or by text message.
3.4.2 Partial ban
There are various alternative policy approaches that can be drawn from should a partial ban on non-competes be implemented instead. We consider the primary focus of any policy approach should be to ensure that non-competes can no longer be used for low-income workers. For example, various US states have already banned noncompetes for low-income employees, casual employees, and employees under 18years old by implementing prohibitions that include income thresholds.[38] We refer to our recommendations above regarding the imposition of an income threshold in Australia.
We also refer to the policy approach of the United Kingdom which has proposed to limit non-competes to a 3 month term limit. In Spain, there is a 6-month limit with a graduated limit up to 24 months for technical employees. In Denmark, the Danish Act on Restrictive Covenants outlines specific requirements for a non-competition agreement, including the following:
⎯ the employee must hold a special position of trust
⎯ the clause must indicate the specific circumstances as to why such a clause is
necessary, and
⎯ certain compensation must be paid during the restricted period.39
Further, the approach in Australia should also consider the countries that have also
implemented a requirement that workers be compensated during the period of the
restraint period. For example, in Germany workers receive 50% of their regular salary
during the period of a restraint and in Finland workers receive 40%. In Spain, workers
are required to be paid ‘adequate compensation’ during a restraint period, which can
range from 20 – 70% of their regular salary. In Denmark, workers receive either 40 or
38 Several states and cities in the US (eg, Colorado, Illinois, Maryland, Massachusetts, New Hampshire, Nevada, Oregon,
Rhode Island, Virginia, Washington, District of Columbia) have enacted laws establishing salary thresholds or banning non-competes for workers deemed not to pose a competitive threat, such as employees who are 18 years old or younger and employees paid on an hourly basis.
39 The Danish Act on Restrictive Covenants.
Consultation Paper: Worker non-competes and other restraints 23
60% of their monthly salary (depending on the duration of the restriction) at the
effective date of termination of employment.
3.5 Are there other experiences or relevant policy options (legislative or non-legislative) that the Competition Review should be aware of?
It is our experience that non-competes are now common in the employment contracts of ordinary and low-income workers. While we have set out our primary policy options above, we consider the Competition Review should also consider the following.
3.5.1 Bargaining power
The Issues Paper refers to evidence that rising market concentration in Australia is giving employers more bargaining – or ‘monopsony’ – power in some markets. This can have disproportionate effects on certain workers subject to a non-compete based on the work they do, where they work, and their personal circumstances. It is our experience that workers in regional areas and small towns are particularly affected, as are workers with caring responsibilities, and CALD workers particularly migrant workers on sponsorship visas. Any policy response should have particular regard to these workers given the uncertainty of non-competes is heightened and the risk of challenging them is greater.
3.5.2 Limited access to legal aid
There are few avenues through which workers who are defendants to claims that they have breached a restraint of trade may obtain legal representation. Whilst Legal Aid NSW can provide some advice and limited assistance, a grant of legal aid is not available for defendants to breach of contract claims, including claims of breach of restraint of trade clause.
A defendant to a claim of breach of restraint of trade could attempt to obtain assistance from a community legal centre, but community legal centres typically do not represent defendants to breach of contract claims. The worker could attempt to obtain pro-bono assistance from a private solicitor, but most law firms have a limited capacity to provide pro-bono advice. Most frequently, if the client wishes to obtain legal representation, he or she will need to incur the significant cost of engaging a private solicitor.
3.5.3 Boilerplate contracts
It is apparent that many employers rely on boilerplate employment contracts that are readily available from online legal or human resources services. These often come standard with ‘laddered’ or ‘cascading’ restraint clauses and are drafted broadly. As Riley has observed,
Consultation Paper: Worker non-competes and other restraints 24
‘By the power of the word-processed precedent document, restraints that were once considered appropriate only to preserve the value of goodwill purchased from a business owner are now appearing in contracts for moderately paid salary earners.'[40]
We have set out examples above with ‘indefinite’ or 24-month restraints periods, and geographic areas that would, at a maximum, restrain working for a competitor in Australia and New Zealand. It is our experience that employers, particularly smaller businesses, often consider such restraints are enforceable precisely because they are in the contract. Our clients receive legal threats and letters of demand from business owners citing these maximum restraints and threatening legal action for perceived breaches.
While many of these clauses are unlikely to be enforceable, it is apparent that employers are aware that even the threat of legal action has a ‘chilling effect’ on ordinary workers.
40 Riley (n 25) 620.
Consultation Paper: Worker non-competes and other restraints 25
4. Non-solicitation of clients and other business contacts
4.1 What considerations lead businesses to include client non-solicitation in employment contracts? Are there alternative protections available?
Businesses use client non-solicitation clauses in employment contracts to protect their proprietary interests by seeking to prevent an employee from soliciting or enticing away their clients, customers, or suppliers if that employee leaves to set up their own business or join a competing business. A non-solicitation clause usually includes prohibitions on:
⎯ approaching former colleagues to entice them away from their employment;
⎯ approaching clients of a former employer with the intention to entice them to
use their products or services instead; and
⎯ approaching suppliers to provide their goods or services to them instead.
Legal Aid NSW acknowledges that non-solicitation clauses are a more targeted instrument than non-compete clauses and that there are legitimate business interests of employers that may be appropriately protected using non-solicitation clauses. However, as we have set out in our responses above, restraints such as nonsolicitation clauses are often drafted broadly with ‘laddered’ or ‘cascading’ clauses that render them likely to be unreasonable and unenforceable.
It is our experience that such clauses are commonly used in employment contracts of ordinary and low-income workers and can have a disproportionate impact on certain types of workers.
Case Study – Casual cleaner receives cease and desist
Our client worked as a casual cleaner and contacted a client who no longer wanted to use her former employer’s services. Our client was served a cease-and-desist letter threatening legal action if the breach continued.
Accordingly, Legal Aid NSW considers that the use of non-solicitation clauses in the employment contracts of low-income workers, and insecure workers such as casual employees, workers under 18 years of age, and gig workers is inappropriate.
Consultation Paper: Worker non-competes and other restraints 26
Recommendation 5: Ban the use of client non-solicitation clauses for low-
income workers and insecure workers.
4.2 Is the impact on clients appropriately considered? Is this more acute in certain sectors, for example the care sector? Please provide reasons.
Legal Aid NSW considers that more consideration should be given to the impact of non-solicitation clauses on clients, particularly in the care sector. It is our experience that restraints such as client non-solicitation clauses and non-competes are commonly used in the care sector for health workers, and aged care and disability support workers.
It is our experience that care workers commonly seek legal advice after they have ended their employment with a NDIS-registered care provider and they either join another provider or commence working as an independent contractor. Their former employer may threaten legal proceedings on the basis that clients have left and the business considers the employee to have solicited or enticed the clients to do so.
Case study – NDIS worker dismissed after clients approached for care
Our client was dismissed from her employment as a physiologist for ‘breaching’ the non-solicitation clause in her contract. Some clients had contacted her through her private practice when the waitlist was too long at her employer’s practice. In effect, the employer’s use of the non-solicitation clause prevented clients from receiving timely quality care.
Choice of care is vital for NDIS participants to ensure they receive the highest quality of care. The NDIS is designed to give people with a disability the right to choose who delivers their support and how their support services are delivered and obliges providers to act with respect for this right.[41] The public interest in upholding this right for people with a disability to choose their carers should not be outweighed by commercial interests of employers. Continuity of care may be desirable for a person with a disability because:
⎯ A carer has rapport with the person and insight into their condition.
41 NDIS Commission, NDIS Code of Conduct – Guidance for NDIS Providers (September 2023).
Consultation Paper: Worker non-competes and other restraints 27
⎯ The person may want to avoid the disruption of a new carer who is unfamiliar
with their needs or condition.
⎯ The person’s family is familiar with and trusts a particular carer with the care of
their family member. This may be particularly important where the carer assists the person at the person’s home.
⎯ Where a person is in a rehabilitative process, recovery and routines may be
disrupted with the introduction of a new and unfamiliar carer.
⎯ Continuity of care may ensure that a trauma-informed approach is taken
towards the person’s care.
Case Study – Legal threats by employer against casual NDIS worker
In March 2024, our client resigned from her employment as a casual psychosocial recovery coach with an NDIS provider (‘former employer’).
Our client’s contract of employment had a cascading non-solicitation clause which had a maximum restraint period of 12 months. The clause prevented our client from soliciting current and prospective clients of her former employer directly or through a competing business.
After our client left her employment, some of her former employer’s clients left the service. One person contacted our client after she resigned and sought to continue to receive services from her.
In April 2024, our client received a letter from her former employer alleging a breach of the non-solicitation clause in her employment contract. Our client was given two days to respond to their allegations of her breach of contract. In her response, our client disputed that she had breached the non-solicitation clause:
Four days after sending her reply, our client received a response from the HR department of her former employer which acknowledged the feedback provided by our client and made no mention of the restraint of trade clause.
Recommendation 6: Ensure any policy response has regard to the
prevalence of client non-solicitation clauses in the care sector and the
detrimental effect of such clauses on NDIS participants and their quality of
care.
Consultation Paper: Worker non-competes and other restraints 28
5. Non-solicitation of co-workers
5.1 What considerations lead businesses to include co-worker nonsolicitation in employment contracts? Are there alternative protections available?
It is our experience that non-solicitation clauses have become common in the employment contracts of low-income workers and that they are often broadly drafted to include restraints on both client and co-worker non-solicitation.
Businesses use co-worker non-solicitation clauses in employment contracts to protect their proprietary interests and maintain a stable workforce. Businesses seek to protect their business interests by preventing competitors from soliciting staff that give them a competitive advantage or who have unique skills or expertise. The scenario that employers seek to protect against is an ex-employee with intimate knowledge of the business’ intellectual property or trade secrets going to work for a competitor or starting their own business and soliciting or enticing other staff to go and join them.
While businesses may have a legitimate interest in preventing trade secret disclosure, as Graves observes, there is no inherent link between co-worker solicitation and trade secret disclosure.[42] The risk of trade secret disclosure is not guaranteed to eventuate or increase because a former employee solicits a former colleague. This makes coworker non-solicitation clauses an inappropriate legal mechanism to address this risk.
Moreover, there are already pre-existing, appropriate legal mechanisms available for employers seeking to prevent trade secret disclosure. While Australia does not have a discrete legislative regime for trade secrets protection, the Corporations Act 2001 (Cth) (Corps Act), contractual confidentiality clauses, non-disclosure agreements and copyright law all provide different and effective legal mechanisms to protect employers from the risk of trade secret misappropriation. We discuss these protections further below.
Legal Aid NSW considers co-worker non-solicitation clauses in employment contracts should be banned entirely. Such clauses are inherently unfair as they seek to restrain workers that are not party to the contract (i.e. the employee who is said to have been solicited or enticed away). Other commentators have argued that co-worker non 42 Charles Graves, ‘Questioning the Employee Non-Solicitation Covenant’ (2022) 55(4) 959, 988.
Consultation Paper: Worker non-competes and other restraints 29
solicitation clauses treat staff as objects and not subjects, and that such clauses should be rendered ‘entirely unenforceable.’[43]
If co-worker non-solicitation clauses are not banned, their use should be substantially restricted to ensure they do not apply to low-income workers, or insecure workers such as casual employees, workers under 18 years of age, and gig workers.
Recommendation 7: Introduce a national uniform law banning the use of co-
worker non-solicitation clauses. In the alternative, prohibit their use for low income and insecure workers.
43 Ross (n 4) 30.
Consultation Paper: Worker non-competes and other restraints 30
6. Non-disclosure clauses
6.1 What considerations drive businesses to include non-disclosure clauses in employment contracts? Are there alternative protections, such as s183 of the Corporations Act 2001 that are available?
6.1.1 The prevalence and impact of non-disclosure clauses
Businesses use non-disclosure clauses to restrict employees from disclosing confidential information during, and after the conclusion of, the employment relationship. This is intended to protect business’ unique processes, technologies, or strategies by restricting disclosure of information such as intellectual property, business plans, trade secrets, client lists, research, and commercially sensitive information.
ABS research indicates that non-disclosure clauses are commonly used in Australia with 45.3% of businesses using a non-disclosure clause, and 81.3% of businesses using non-disclosure clauses for over three quarters of their workers.[44] It is our experience that most employment contracts contain confidentiality or non-disclosure clauses, and that such clauses can be found in the contracts of low-income and insecure workers, such as casuals and gig workers.
6.1.2 Alternative protections available to businesses
Should a policy response restrict the use of non-disclosure clauses in employment contracts, alternative protections for businesses will remain available. In addition to contract law principles, equitable obligations of confidentiality are applicable as well as statutory protections under the Corps Act. For example, sections 182 and 183 of the Corps Act prohibit officers or employees of a business from improperly using their position, or information they obtain while working, to gain an advantage for themselves or someone else, or which causes a detriment to the business.
The protection under s 183 of the Corps Act has been held to reflect a fiduciary obligation under the general law.[45] The duty that it imposes also has a substantial overlap with the equitable duty of confidence.[46] The advantage of s 183 for businesses
44 Australian Bureau of Statistics, Employee Earnings and Hours, Australia (Catalogue No 6306.0, 1 January 2024).
45 SBA Music Pty Ltd v Hall (No 3) [2015] FCA 1079 [28]; as cited in Smart EV Solutions Pty Ltd v Guy [2023] FCA 1580 at
[69].
46 Plus One International Pty Ltd v Ching (No 3) [2020] NSWSC 1598 [547].
Consultation Paper: Worker non-competes and other restraints 31
is that it does not require proof that the information is confidential, rather the focus is on how the information was acquired.[47] The issue is to be judged objectively.[48]
Further, s 183 extends to situations in which a director, officer or employee makes use of confidential information after they have resigned or been terminated, and also applies to workers who may not be covered by a contract of employment.[49] This is because s 183 applies to ‘officers’, which includes anybody 'who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation’.[50] As a result, businesses avoid the need for complex arguments about whether a worker is an employee or a contractor.
The advantage of the protections under s 183 of the Corps Act for employees is that businesses can enforce them only where it can be established that the employee made improper use of the information in order to directly or indirectly gain an advantage for themselves or someone else, or to cause detriment to the business. In contrast, nondisclosure clauses are often broadly drafted, and employees remain uncertain about their enforceability, which results in a chilling effect.
Although we do not advise clients on disputes arising from the Corps Act, it is clear that the protections under sections 182 and 183 are regularly relied upon by businesses in litigation. In addition, where the information is subject to copyright, employers can also utilise s 115 of the Copyright Act 1968 (Cth) (Copyright Act) as an additional avenue for obtaining damages against ex-employees who use confidential company information. In applying this provision, courts must have regard to, among other things, the flagrancy of the copyright infringement, the conduct of the employee, and any benefit shown to have accrued to the employee by reason of the infringement. This provision has been successfully litigated in combination with s 183 of the Corps Act with damages award against the former employee.[51]
Accordingly, businesses have effective alternative protections available should a policy response restrict the use of non-disclosure clauses. These protections are already frequently used by businesses in litigation and remove the uncertainty and chilling effect of broadly drafted non-disclosure clauses in employment contracts.
47 Ibid.
48 Marble Group Services Pty Ltd v Blenkinsop [2023] WASC 464 at [53].
49 TICA Default Tenancy Control Pty Ltd v Datakatch Pty Ltd [2016] FCA 815 (‘TICA’).
50 Corporations Act 2001 (Cth) s 9.
51 SAI Global Property Division Pty Limited v Johnstone [2016] FCA 1333. See also TICA (n 51).
Consultation Paper: Worker non-competes and other restraints 32
7. Restraints on workers during employment
7.1 When is it appropriate for workers to be restrained during employment?
Restraints placed on workers during their employment generally relate to:
⎯ non-disclosure of confidential information such as intellectual property, business
plans, trade secrets, client lists, research, and commercially sensitive information to protect the business’ unique processes, technologies, or strategies; and
⎯ not competing with the employer business either by going into business on their
own or working for a competitor.
Senior or executive-level employees, as compared with low-income or insecure employees, may have the opportunity to use their position for personal gain, or someone else’s gain, or cause detriment to the employer such that restraint during employment for these employees may be appropriate.
It is generally accepted that implied duties of confidence, good faith and fidelity at common law and in equity, apply to workers as long as an employment contract subsists. However, acts of competition against an employer by low-income workers may be necessary for workers to earn a living wage.
Consideration should be given to whether there should be statutory protection for lowincome and insecure workers to allow them in limited circumstances to compete with their employer during employment.
7.2 Is it appropriate for part-time, casual and gig workers to be bound by a restraint of trade clause?
Workers engaged in part time, casual and gig work are often the most vulnerable workers advised by Legal Aid NSW. Gig workers and other workers engaged in employee-like work are particularly vulnerable to exploitation.
A recent survey of independent contractors (including gig workers found:
⎯ most respondents worked significant hours, with 41 per cent working over 40
hours per week;
⎯ of those working over 40 hours, at least 66 per cent earned less than the
minimum wage; and
Consultation Paper: Worker non-competes and other restraints 33
⎯ workers with greater dependence on 'gig work' have lower take-home pay[52]
Workers engaged in these arrangements are often women, workers from non-English speaking backgrounds, younger and older workers and workers with a disability.
Part-time, casual, gig workers, and other employee-like workers are vulnerable as these roles often do not provide the worker a living wage and so workers need to supplement their income through additional jobs and income streams. Non-compete clauses serve to prevent these workers from being able to earn a living wage as well as limiting the opportunities for the development of workers’ skills, thereby limiting the opportunities for them to enter more secure employment.
Legal Aid NSW recommends that there be a complete ban on the use of restraint of trade clauses. In the event that the government does not implement a full ban, Legal Aid NSW recommends that any legislative amendment should make unlawful restraints of trade in relation to part time, casual and gig workers.
Recommendation 8: Implement a complete ban on the use of restraint of
trade clauses for insecure workers including casual workers, gig workers, and
other workers engaged in employee-like work.
52 Australian Bureau of Statistics, Working Arrangements (Catalogue No 6336.0, 13 December 2023). The ABS reports that the majority of gig workers appear within existing data as independent contractors using an Australian Business Number but are difficult to distinguish from other self-employed people without employees.
Consultation Paper: Worker non-competes and other restraints 34
8. No-poach and wage-fixing agreements
Workers are typically unaware they are subject to no-poach or wage-fixing agreements as these agreements occur between businesses and often remain confidential. Even if workers were aware of a wage fixing or no poach agreement, they have limited standing to challenge the agreement given that the validity of such agreements is dealt with under the common law restraint of trade doctrine and the common law provides that third parties injured by a restraint have no remedy.[53]
We see this most commonly when we advise clients employed by franchises such as Bakers Delight, KFC, McDonald’s, and Domino’s which reportedly all use no-poach clauses as a standard term in their franchise agreements. These clauses prevent franchisees from hiring workers from other stores within the chain.[54] As noted in the Issues Paper, the Franchise Disclosure Register indicates that 89.9% of all franchisors in Australia impose some kind of restraint of trade on franchisees.[55]
The fast-food franchise sector in Australia includes low-wage and high-turnover businesses with a high proportion of young and casual workers. Workers seek advice from us after being barred from taking a second job at a different franchise or with a competitor because of a no-poach clause in the franchise agreement. These workers are often paid the minimum junior rates under the Fast Food Industry Award and are seeking to supplement their income with a second casual job. No-poach agreements limit their ability to do this, which can be further exacerbated by other factors such as if the worker lives in a regional area, or an area with limited employment opportunities.
No-poach agreements are also prevalent in the United States’ fast-food franchise sector with efforts by regulators there to curb their use. Studies in the US have shown the removal of no-poach agreements increased average wages of job postings for roles in the affected businesses by around 5-6% and increased the overall earnings of workers in those businesses by around 4%.[56]
Overall, no-poach agreements limit a worker’s ability to move to, or take up, a role with a different employer that may be a more suitable match for them. Wage-fixing agreements work similarly as they reduce the incentive for workers to search for more
53 John Heydon, The Restraint of Trade Doctrine (4th ed, 2018) 301.
54 Andrew Leigh, How uncompetitive markets hurt workers (2023) 26(1) Australian Journal of Labour Economics 16.
55 Issues Paper, p. 34.
56 See Francine Lafontaine, Saattvic Saatvic and Margaret Slade, ‘No-Poaching Clauses in Franchise Contracts:
Anticompetitive or Efficiency Enhancing?’ (Research Paper, Vancouver School of Economics, 2023); B. Callaci et al., ‘The Effect of Franchise No-Poaching Restrictions on Worker Earnings’ (Discussion Paper, IZA Institute of Labor Economics, 2023) Abstract.
Consultation Paper: Worker non-competes and other restraints 35
productive roles. In turn, they artificially reduce workers’ wages and reduce workers’ bargaining position to demand better wages.
Other jurisdictions have acknowledged the anti-competitive nature of no-poach and wage-fixing agreements and have implemented policy responses to limit their use. For example, Canada recently prohibited certain no-poach and wage-fixing agreements under existing criminal and civil competition law prohibitions, given the potential for these agreements to undermine competition like any other price-fixing agreement between competitors.[57]
Legal Aid NSW considers that Australia should follow the example of other jurisdictions such as Canada, and prohibit certain no-poach and wage-fixing agreements. Any policy response in Australia should have regard to the following considerations:
⎯ The prevalence of no-poach clauses in the Australian fast-food franchise sector
which includes low-wage and high-turnover businesses with a high proportion of young and casual workers;
⎯ The particular impact of these agreement on low-income workers in regional
areas where there is a limited pool of available work;
⎯ The limited remedies available for employees to challenge these agreements
under the common law restraint of trade doctrine, or the RTA in NSW;
⎯ The jurisdictional limits of the Australian Competition and Consumer
Commission (ACCC) under the Competition and Consumer Act 2010 (Cth) (CCA) and the Competition Codes of the states to deal with agreements that relate to working conditions for employees and independent contractors; and
⎯ The finding of a number of reviews into Australian competition policy and
workplace relations that the negotiation and determination of employment terms and conditions are best dealt with under the FW Act.[58]
© Legal Aid Commission of NSW 2024.
You may copy, print, distribute, download and otherwise freely deal with this work for a non-profit purpose provided that you attribute Legal Aid NSW as the owners. To reproduce or modify the work for any other purpose you need to ask for and be given permission by Legal Aid NSW.
57 Issues Paper, 38.
58 Issues Paper, 35 nn 128.
Consultation Paper: Worker non-competes and other restraints 36
END DOCUMENT 11
BEGIN DOCUMENT 12 Please treat this as a submission to the treasury worker survey: non-compete clauses and similar restraints are a real problem for the working class - switching jobs should be a right, but non-competes might be costing workers and not just financially. Thankyou, Keri James.
END DOCUMENT 12
BEGIN DOCUMENT 13
Non-competes and other restraints: understanding the impacts on jobs, business and productivity. Issues Paper 2024.
Submission to Competition Taskforce, [email protected]
Professor Joellen Riley Munton
Professor of Law at the University of Technology Sydney, and Professor Emerita, The University of Sydney.
Contact details:
Email: [email protected] or [email protected]
Preliminary comments
I welcome the opportunity to make a submission to this important Review of Australia’s laws affecting the opportunities of working people to pursue their careers in a vibrant and competitive labour market. I have maintained an interest in this area since undertaking research into the legal techniques used by employers to capture and constrain the value of human capital, as part of my doctoral research. My thesis, completed in 2005 at the University of Sydney entitled Beyond Deregulation: Imagining an Equitable Private Law of Work included a chapter dealing with this topic. A condensed version of the thesis was subsequently published as Employee Protection at Common Law (Federation Press, 2005), and the chapter dealing with the issues the subject of this Review was Chapter 6, ‘Fairly Sharing the Fruits of Work’.
Some of my subsequent academic writing has been cited in the Issues Paper, so I shall not list it here.
In addition to my academic work (which involved reading many cases on these issues), I have some experience as a part-time consultant to specialist employment law firms, where I have witnessed the use of restrictive covenants in employment contracts, and seen their impact on employees. As an academic with a reputation in this field, I am also regularly contacted by persons seeking to understand the restrictions in their existing employment contracts when they are seeking new employment, so I have an insight into how commonly these restraints are used in employment contracts, even for employees who are by no means senior executive personnel.
In order to provide as helpful a submission as possible, I have arranged my comments as responses to the 19 discussion questions in the Issues Paper. I would however like to preface those responses by a statement relevant to my answers to all the questions: I come to this problem from the perspective of determining the proper role for the coercive powers of the State in restricting the lives of citizens. It is common for judges determining disputes over the enforcement of restrictive covenants to allude to ‘freedom of contract’, and the principle that
persons must be held to the terms of their own agreements (‘pacta sunt servanda’ is the arcane Latin phrase sometimes cited by the classically-educated members of the judiciary[1]). This assertion ignores the fact that it is the machinery of the state – in the form of the enforcement of contracts in courts – that is called in aid of these supposedly freely-made bargains. While the state may have an interest in maintaining the certainty of commercial bargains between corporations, there is no reason, in logic or policy, why our legal system should support the enforcement of all contract clauses made in the context of employment relationships with individuals. Even the argument that these clauses are seriously made is flawed. In my experience in legal practice I have learned that these clauses have become boilerplate in standard form employment contracts. They are rarely if ever seriously negotiated at the time of recruitment. Often the contract documentation is presented after the interview and verbal acceptance of the job, and is signed without reflection.[2]
I am convinced that many employers who simply use the contract templates provided by their lawyers do not even consider these clauses themselves, and only become aware of them when they are seeking advice on how to manage the departure of members of staff. The clauses are, in my view, largely used blindly, as risk mitigation tools to favour the interests of the employer should they decide to make a former employee’s departure difficult. Sometimes, employers even seek to enforce these restraints when they have dismissed employees or made their positions redundant.[3] At worst, the clauses appear to be used vindictively, as the final punishment visited upon a departing employee who has fallen out of favour with more senior colleagues in an organization. It often appears that the employer does not wish to keep the services of the departing employee. They just want to make sure that the departing employee suffers, or they want to land a blow in an ongoing rivalry with a competing enterprise. It seems very clear that in Network Ten v Seven Network Operations[4], for example, Mr Stephens (a talented programmer) was really just a pawn and ultimately a casualty in the hairy-chested contest between rival television networks and their egoistic executives. He wasn’t the first such casualty. Seven Network (Operations) Ltd v Warburton (No 2)[5] arose because Seven (who had decided not to promote Mr Warburton to their own
1 See Seven Network (Operations) Limited & Ors v James Warburton (No 2) [2011] NSWSC 386, [3], where Pembroke J explains this term. The case concerned restraints in an equity participation deed between a major broadcaster and a senior executive who, frustrated by his inability to secure the top job at Seven, was seeking to take up the chief executive’s role at Ten. 2 There is some evidence in the case that even Mr James Warburton signed the deed in question without reflection on the significance of the restraints for his career prospects: see Seven Network (Operations) Limited & Ors v James Warburton (No 2) [2011] NSWSC 386, [3], where Pembroke J found that Warburton had forgotten or for some other reason was unaware of the contract term. Pembroke J cites a principle from commercial contract law: ‘The enforcement of a commercial contract does not depend on a party's knowledge of its terms: Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] 219 CLR 165 at [43] - [44].’ 3 See for example IceTV v Duncan Ross [2007] NSWSC 635; Ross v IceTV [2010] NSWCA 272. For background to the circumstances giving rise to this litigation see Joellen Riley, ‘Innovation Put on Ice? How Overly Jealous Intellectual Property Protection Discourages Creativity and Productivity’ (2008) 20(7) Australian Intellectual Property Law Bulletin 102. 4 [2014] NSWSC 692. Note that this case turned on the application of notice periods in contracts, rather than restrictive covenants. It nevertheless illustrates the kind of personality-driven disputes between rival enterprises that can catch ordinary employees. 5 [2011] NSWSC 386; (2011) 206 IR 450.
top job) resented his recruitment to lead Channel Ten. It is not uncommon for these disputes to arise because one nasty employer does not like to lose an argument.
Even where contracts are made by employees with some awareness of their terms, there are arguments for refusing to enforce those terms. Some contractual bargains do not serve the public interest, and prove to be entirely oppressive to the parties concerned. In those circumstances our legal system has (in the past) refused to enforce some contractual agreements. Indeed, the doctrine making illegal (and hence unenforceable) any contract in restraint of trade is an ancient one,[6] only relatively recently modified to permit the enforcement of those restraints that go no further than necessary to provide reasonable protection for a ‘legitimate interest’ of the person claiming the benefit of the restraint.[7]
The progressive erosion of the more ancient principle in recent times, particularly in New South Wales under the influence of the Restraint of Trade Act 1974 (NSW), has been to the detriment of freely competitive labour markets, and hence to the detriment of the liberties of ordinary working people who should not be shackled in their pursuit of productive careers, even when it is their own signature on an employment contract which purports to bind them.
Several features of the development in the law in New South Wales in particular have led to a situation in which the ancient doctrine making restraints illegal is barely recognized. Those features are:
- Employers’ claims to ‘legitimate interests’ have been expanded well beyond the
kinds of proprietary interests that justified restraints in the past. Now it is not only trade secrets and highly confidential information that employers are permitted to protect, but the good relationships that staff have built up with customers, and an alleged interest in a ‘stable workforce’.
- The length of time that restraints are considered to be reasonable has been
expanding, so that my advice to students early in my career that a matter of weeks would be a reasonable restraint protecting client connections, must now be adjusted to many months, or even a year or two.
- The willingness of courts to enforce restraints by injunctions preventing the
employee from taking up new employment (rather than injunctions forbidding them from contacting certain former clients) has increased, so that restraints are being used to keep talent out of the labour market for significant periods of time. And of course, talented employees who cannot afford to take a significant break from the labour market while waiting out the term of a threatened restraint may be discouraged from considering a change of employment at all.
6 See Harlan M Blake ‘Employee Agreements Not to Compete’ (1060) 73 Harvard Law Review 625. 7 The decision in Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co [1984] AC 535 is generally attributed as the decision permitting the enforcement of otherwise illegal restraints on trade if they go no further than reasonably necessary to protect a legitimate interest of the covenantee. The case concerned a sale of a business, where the covenantor had accepted a substantial price for the restraint. Unfortunately, sale of business cases (where the covenantor has received substantial consideration for their promise) have infected the findings in employment cases, where no special consideration justifies the restriction on an employee.
- Interlocutory injunctions are extremely easy to obtain. It is rare for courts to refuse
an injunction when all they need to determine is whether there is a ‘serious question to be tried’, and they are predisposed to favour the former employer’s interest when assessing where the balance of convenience lies. The notion that the matter will all be resolved equitably upon final hearing, and the injuncted employee will be able to recover damages then if it is established that the injunction ought not to have been granted, ignores the reality of court costs and delays. By the time a matter has come on for final hearing, the interim injunction will have expired, and the employee who has been kept out of work for many months will be very unlikely to have the resources or the appetite to fight on for compensation. The employer effectively wins, without any rigorous assessment of the validity of the restraint. The real winners are the solicitors and barristers who run these matters for fees.
It is time for this Review to take a stringent view of these practices, and return to the wisdom of the past, and the fundamental value in allowing productive human beings to exploit their own personal talents in their own chosen futures. Those lobbying in the interests of employer groups who benefit from these restraints must be put to the task of justifying why an employer should be able to restrict the movement of talented staff, just because those employees were persuaded to sign a standard form contract containing a restraint, at a time when they were optimistically assuming their best interests were served by taking that particular job.
The fact that employers are better off if they can enforce these restraints is not a sufficient justification. The employer must be able to show that something genuinely belonging to the employer is at risk of loss by allowing the employee freedom to move. Employers do not own their customers. Customers are at liberty to do business with whomever they please, so the mere risk that a customer may decide to follow a departing employee is insufficient justification for a restraint. Employers do not own their workforce, so the fact that other employees may wish to resign their employment in order to continue working with a favoured former colleague is also not sufficient justification to enforce a restraint. Just because the enforcement of a restraint would be valuable or convenient to the employer, does not mean that the employer should be granted a legal right to enforce the restraint. To hold such is to favour the interests of existing business owners, over the liberties of workers, and over the interests of potential new businesses which may be prepared to offer more attractive employment opportunities to staff.
With this perspective in mind I make the following observations on the Discussion Questions in the Issues Paper.
Non-compete clauses
1. Does the common law restraint of trade doctrine strike an appropriate balance
between the interests of businesses, workers and the wider community? If no, what alternative options are there?
The original doctrine, making illegal all restraints that are contrary to the public interest in freely competitive labour markets strikes the appropriate balance. The current iteration of the doctrine, which has been weakened in favour of protecting dubious claimed interests of employers for long periods of time, and by preventing former employees from taking up new positions, does not strike an appropriate balance.
The current approach needs to be modified to limit the types of claims that employers can make to ‘legitimate interests’, to restrict the length of time that customer relationships claims can be enforced, and to forbid the enforcement of any restraint by an injunction that stops a person from actually taking up employment.
Employers should be able to obtain injunctive relief to prevent their trade secrets and genuinely confidential information from being exploited, and they should be able to claim a short period of grace during which to shore up their relationships with clients following the departure of an employee who has had close relationships with those particular clients (a matter of two or three months should be more than sufficient for a diligent employer to undertake relationship preservation work), but the restraint should be limited to preventing the former employee from contacting particular clients for a limited period. Restraints should no be permitted to prevent or delay them from taking up a new position.
There should be no recognition of any legitimate interest in a ‘stable workforce’. Employers have adequate means to protect their interest in maintain their staff by providing attractive employment conditions to retain staff, and sufficiently long notice periods in employment contracts to allow them sufficient time to recruit replacement staff. It should definitely never be permissible for a restraint in a contract between the employer and employee A to be enforced in such a way as to limit the future employment opportunities of employee B (a former colleague).[8]
2. Do you think the Restraints of Trade Act 1976 (NSW) strikes the right balance
between the interest of businesses, workers and the wider community? Please provide reasons. If not, what alternative options are there?
No. The presumption in this legislation is that courts should assist employers in enforcing restraints that would otherwise be unenforceable because they are excessive. Allowing the scope for a court to read down a restraint merely encourages the drafting of excessive restraints with ‘ladder’ or ‘blue pencil’ clauses. Employees (and the businesses who want to recruit them) faced with such clauses cannot tell what restraint will be applied until a court is asked to rule through any excessive clauses. Needing a court to determine the meaning of
8 See for instance the unjustified decision in Hartleys Ltd v Martin [2002] VSC 301, in which a secretarial assistant was unable to take up employment in a new job after resigning her employment, because the new employer had agreed to a restraint on hiring former colleagues. The secretarial assistant bore the consequences of a contract made between the two employers, even though she herself was not party to the agreement, and without even being heard in the proceedings determining the matter.
clauses is a prohibitively expensive way of promoting the ‘commercial certainty’ claimed by proponents of enforceable restraints. It is a system that benefits only the lawyers who charge fees for these services. The legislation should be repealed.
3. Are current approaches suitable for all workers, or only certain types of workers? For
example, senior management, low-income workers, or care workers, etc?
The current approach which is highly favourable to the interests of the former employer is justifiable only in respect of contracts with persons whose seniority is such that they have enjoyed special benefits from participation in the employing enterprise. Company directors, who owe fiduciary duties not to engage in conflicts of interest, and who typically earn high levels of remuneration including performance-based incentives, might be appropriately restrained from taking any steps that would impair the fortunes of the company to whom they owe these duties, but only for so long as the company would need to replace their services, and shore up client relationships. Even highly paid individuals should be free to change businesses, and set up new ones.
It should certainly not be the case that hairdressers, dance instructors, baristas, and other service industry personnel should be restrained. These people will rarely hold any kind of trade secret or confidential information worth protecting, and their client relationships will be entirely dependent upon their own talents and personal traits. If clients want to follow a hairdresser to a new salon, or a dance instructor to a new studio, they should be entirely at liberty to do so, because the characteristic that is valuable in the relationship between hairdresser and client is the personal skill and charisma of the hairdresser as a human being. People should not be constrained from continuing their relationships with persons who wish to be served by them, simply because their initial introduction occurred while the worker was employed at a particular establishment. The former employer has it within their power to keep good staff by paying well and providing pleasant working conditions. Too often service personnel leave jobs because they are not treated well. A former employer should not be permitted a power to continue to oppress staff, by calling upon a clause in the initial employment contract purporting to prevent staff from leaving to pursue their career elsewhere in more agreeable circumstances.
4. Would the policy approaches of other countries be suitable in the Australian context?
Please provide reasons.
I have not engaged in sufficient comparative legal study to completely answer this question, but I am aware that even before the United States took steps (recently) to outlaw restrictive covenants in employment contracts, it was much more difficult to get an injunction enforcing restraints. This should always have been the case in Australia.
5. Are there other experiences or relevant policy options (legislative or non-legislative)
that the Competition Review should be aware of?
I have been impressed by the level of research already undertaken by the Review team and have no further suggestions to make about lines of enquiry.
Non solicitation clauses
Non-solicitation of clients and other business contacts
6. What considerations lead business to include client non-solicitation in employment
contracts? Are there alternative protections available?
Employers include client non-solicitation clauses in employment contracts on the assumption (accepted in the case law) that the employer has a legitimate interest in preventing former employees from exploiting their personal relationships with the employer’s clients, because the employer initially facilitated the development of those valuable relationships. It is assumed (without testing the proposition) that the employer provided all of the support for that relationship to thrive, and should not be deprived of the ongoing value of the relationship by the risk that clients will follow the former employees to a new enterprise. The accepted assumption nevertheless pays insufficient regard to the aspects of the client relationship that depend upon the personal qualities of the employee. The employee’s own personal talents, charisma, diligence, are features they hold as an individual human being. Their opportunity to continue to exploit those traits ought not to be restrained by a former employer. Likewise, clients themselves have an entitlement to receive services from whomever they wish to engage. It unreasonably restrains the liberties of clients if they cannot continue to deal with the service providers they prefer. For this reason, the law would better serve the interests of freely competitive markets in services if restraints based on client connection were not permitted for anything more than a short period of time, sufficient to allow the employer to contact those clients with whom the departing employee had a relationship, to confirm that the employer is still able to service the client’s account with suitably qualified staff. This should be a matter that can be achieved in a matter of weeks, and within the usual notice period in employment contracts. Senior people, whose notice periods are often three months, might be restrained for three months, but people whose contracts allow for only one month’s notice (or less) should not be able to be restrained for longer than their notice period.
7. Is the impact on clients appropriately considered? Is this more acute in certain
sectors, for example the care sector? Please provide reasons.
As noted in the response to question 6 above, client interests are largely ignored in the law as it is presently enforced. This is unreasonable in all sectors, but especially so in any sector where the client is dependent upon a particular relationship of trust in the personal delivery of services. So in all sectors involving personal care services, it should not be possible for a contractual restraint between a former employer and employee to interfere with the client’s free choice in who they decide to continue to engage. I would include all services that require trust and confidence in persons to be included. For example, a householder reposes a great deal of trust in cleaners who are given house keys to come and service homes in the owners’ absence. Householders should not be restricted from continuing to engage their preferred cleaner, simply because the cleaner has a restraint in their employment or services contract.
It is the cleaner’s own talent and trustworthiness that makes their work valuable, not anything ‘invested’ in them by the former employer, so former employers should not be permitted to restrain their choice to continue their careers by continuing to provide services to those clients who have come to value their talents and characteristics.
Non-solicitation of co-workers
8. What considerations lead businesses to include co-worker non-solicitation in
employment contracts? Are there alternative protections available?
Of all the restraints enforced in Australia, these are the most pernicious. They have the effect of limiting the future employment prospects of persons who have not even signed the agreement themselves. Businesses operating in a tight labour market understandably prefer to use restraints to attempt to keep their staff. They could however use incentives, such as improved pay and conditions. There is already a natural tendency for people to prefer the stability of their present employment. There are all sorts of privileges built into our system of labour rights that favour long service (such as long service leave, enhanced notice and redundancy entitlements). Employees are not easily tempted to leave good, well-paid jobs. They are tempted however to leave jobs where they have been treated poorly, and they are tempted to look for better jobs with higher pay, more attractive benefits, and more interesting work and career prospects. Employers who wish to keep staff should resort to providing valued benefits, and a good working environment, rather than be permitted to capture unhappy staff by restraints limiting their departure.
9. Is the impact of co-worker non-solicitation clauses more acute for start-ups/new firm
creation or in areas with skills shortages in Australia?
I have done no empirical research myself to be able to offer insights into this question. It does appear, however, that restrictive covenants have proliferated in the contracts of ‘ordinary workers’ at the same time as employers have complained of labour and skills shortages, suggesting that these clauses may be an improper attempt to avoid the usual outcome of a competitive labour market, i.e. rising prices for valued labour (and hence improved wages in areas of skills shortages).
Non-disclosure clauses
I have done no specific work on non-disclosure clauses so have no responses to questions 10, 11 and 12.
Restraints on workers during employment
13. When is it appropriate for workers to be restrained during employment?
An employer should be entitled to expect a full time employee who is being remunerated appropriately for exclusive service to refrain from engaging in other employment or business activities which would undermine the business interests of the employer. This expectation arises from the implied duty of loyalty and fidelity in employment contracts, and is unexceptional. Note however that this duty does not prevent an employee from maintaining
other outside interests – even profitable ‘side hustles’ – so long as the outside interest does not undermine the business interests of the employer.
14. Is it appropriate for part-time, casual and gig workers to be bound by a restraint of
trade clause?
An employer who does not wish to absorb an employee’s productive time and offers only parttime or casual engagement, should not be permitted to limit the worker’s ability to earn income from their skills and experience by taking up other employment in their free-time, even if the other employment is in the same field as the employer’s business. If we are to address the problems of under-employment in the labour market, we cannot afford to allow employers to purchase the whole of an employee’s labour potential at a discount, by allowing them to restrain the employee while only providing part-time work. The duty of fidelity and loyalty (mentioned in the response to Question 13) is an obligation owed in exchange for full employment. It ought not to be able to be bought cheaply by an employer who is unwilling to provide full employment.
No-poach and wage-fixing agreements
15. Should there be a role for no-poach and wage-fixing agreements in certain
circumstances, for example: a) If the agreement is between unrelated businesses (e.g. competitions)? b) If the agreement is between businesses that are cooperating in some way (e.g.
joint venture partners)?
c) If it is part of a franchise agreement, either horizontally (where franchisees
through a common agreement do not to [sic] poach each other’s staff) or vertically (where franchisors make agreements with each franchisee?
I refer to my response to Question 8. There should never be an ability to enforce a contract clause which has the effect of limiting the employment prospects of a person who did not sign that agreement. Agreements between organisations, whereby they agree not to recruit other enterprises’ current staff, impose unwarranted restrictions on the employment opportunities of the staff themselves, whether or not the enterprises are related parties, members of a common franchise group, or operating at arm's length. The best illustration of this is the outcome in Quantum Service and Logistics Pty Ltd v Schenker Australia Pty Ltd,[9] where a relatively modestly paid technician was prevented from taking up employment that he had applied for on Seek.com, because the new employer was a client of his own employer. Mr Murugiah was employed by Quantum, who seconded him to Schenker to provide IT services. Mr Murugiah was unhappy with his employment at Quantum so began searching for new employment through Seek.com. He applied for and was successful in obtaining a position advertised by Schenker, on a salary $22,000 per annum more than his Quantum salary. Quantum were successful in obtaining an injunction requiring Schenker to withdraw the offer of employment, relying on a clause in their services agreement with Schenker that Schenker
9 [2019] NSWSC 2.
would not seek to hire Quantum staff. Mr Murugiah had signed nothing himself, and yet his employment opportunities were limited by an agreement made between his employer and its clients. The misery caused to Mr Murugiah, not only by being unable to take this job, but by the pursuit of the litigation, was considerable.
It is notable (in respect to Question 2 above) that this restraint was found to be illegal according to the common law doctrine, but was saved by the Restraint of Trade Act 1974 (NSW). Were it not for that legislation, the restraint could not have been enforced. It is also notable that the judge was prepared to ignore Mr Murugiah’s plea of hardship, on the basis that Quantum agreed to continue to employ him at his original salary, paying no regard to the fact that he had applied successfully for a position on a considerably higher salary, nor any regard to the fact that he wanted to leave his employment with Quantum in any event. The callous disregard of the employee’s interests and preferences in this case is quite breathtaking, especially given that he himself had signed no restraints.
16. Are there alternative mechanisms available to businesses to reduce staff turnover
costs without relying on an agreement between competitors?
In Kores Manufacturing Co Ltd v Kolok Manufacturing Co Ltd,[10] Lord Justice Jenkins said, wisely, that the value of a stable workforce is ‘an interest which employers are entitled to protect by legitimate means, as by paying good wages and making employment attractive’.
17. Should any regulation of no-poach and wage-fixing agreements that harm workers
be considered under competition law as an agreement between businesses (for example reconsidering the current exemption), or under an industrial relations framework?
I am not an expert in competition law, but it does appear to me that when matters are considered to be worth prohibiting in competition law, more significant penalties are levied for breach than tend to be levied under industrial legislation, so if this issue is to be treated seriously, it may be best to consider this problem through the lens of the impact of restraints on competition in markets. It would however be wise for the Fair Work Act to make it clear that restrictive covenants are prohibited content in enterprise agreements, and to make noncompete restraints unenforceable in employment contracts, in the same way that salary secrecy clauses are now unenforceable.[11] Attempts to use pay secrecy clauses attract civil penalties. Attempts to use non-compete clauses to bluff employees into obedience to an unlawful contractual clause should also attract civil penalties.
18. Should franchisors be required to disclose the use of no-poach or wage-fixing
agreements with franchisees?
My response to Question 15 above indicates that I do not accept that franchisors should be able to use, let alone fail to disclose, no-poach and wage-fixing clauses in their agreements with franchisees.
10 [1958] 2 All ER 65. 11 Fair Work Act 2009 (Cth) ss 333B-333D.
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19. Are there lessons Australia can learn from the regulatory and enforcement approach
of no-poach and wage-fixing agreements in other countries?
Even before the United States banned the use of these clauses, the approach taken in certain US states was already much more restrictive than in Australia. For example, in NSW, judges have enforced restraints by granting an injunction, even where the employer has not been able to show any risk of damage as a consequence of the employee breaching the restraint. In Otis Elevators Co Pty Ltd v Nolan,[12] Brereton J said:
‘I am of the view that the mere fact that the injury to the plaintiff is slight or nonexistent is insufficient to justify declining an injunction on discretionary grounds; so also is the mere fact that the enforcement of the injunction would occasion considerable hardship to the defendant’.
In New York, such an attitude would not be accepted. In a case decided in the very same year as Otis Elevators, a superior court in New York said:
‘A party seeking the drastic remedy that a preliminary injunction confers must establish a clear legal right to that relief under the law and upon undisputed facts . . . the movant must demonstrate a likelihood of success on the merits, the prospect of irreparable harm or injury if the relief is withheld and the balance of equities favours the movant’s position.’[13]
With respect, this is a much more rational position. It is difficult to understand why a court should impose an injunction preventing an employee from taking up further employment, if their former employer can show no risk of damage as a result, and where the employee will suffer considerable hardship. Such a punitive approach to remedies is entirely inconsistent with the tenor of all Australian commercial law.[14]
It occurs to me that even in the United States, where these clauses have not been enforceable by injunction, it has been recognized that the clauses still do damage to freely competitive labour markets because many people do not know that they are unenforceable, and are easily intimidated into submission by the threat of litigation. A highly publicized ban is an appropriate antidote to such circumstances. In my view Australia should follow suit, because unfortunately, any half-way solution is still likely to leave employees in doubt about what employers can and can’t enforce. The threat of litigation is likely to continue to induce people to fear changing jobs, even in pursuit of more fulfilling and remunerative work.
12 [2007] NSWSC 59. 13 Jacobi Tool & Die Mfg Inc and Jacobi v Mondi & Ors 2007 WL 3325854 (NY Supp).
14 See the majority decision in Harris v Digital Pulse Pty Ltd (2003) 56 NSWLR 298, where it was held that equitable remedies (and an injunction is an equitable remedy) as well as contractual remedies, are not punitive.
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Final remarks
I expect that the Review Committee will receive many submissions from parties with an interest in maintaining the status quo. Many lawyers who act on these kinds of matters, and many barristers who run interlocutory injunction cases, have a vested interest in maintaining uncertain laws. Uncertain laws are productive of considerable legal work – in providing advice, and in launching proceedings in court. Unfortunately, the boon to lawyers is a tax upon the fortunes of working people who rely on their ability to generate income from pursuing their careers. Many of the people who find themselves subject to these kinds of restraints are people who can ill-afford the expense of legal advice, let alone litigation. And they can illafford remaining out of work in their chosen profession for the amount of time necessary to avoid the risk of the threat of legal action. The problem is one that has grown over time, possibly as a consequence of the ease with which people can now use standard form contracts – quite thoughtlessly – to include all sorts of restrictions once deemed appropriate only in cases where a former business owner has sold their business for a price enhanced by the inclusion of the vendor’s promise not to compete with the purchaser for a period of time. The cases dealing with such sales of goodwill have infected common practice in ordinary employment contracts, and it is time to address the harm that this practice is doing to our labour market.
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BEGIN DOCUMENT 14 There is no reason I can see for workers to be forced into non-compete contracts. I can see the occasional need for upper management in a company needing to sign such a contract, but forcing the average worker to do so is an abuse of their rights to work freely and an abuse of the legal system. It obstructs free movement of individuals and creates a caste-type system of work. Businesses will naturally try to gain advantage to maximise profit, but this should not come at the expense of their workers. It should be obtained by maximising innovation and efficiency. Non-compete clauses are the lazy way for businesses to try to gain advantage and it is an abuse of their employees.
END DOCUMENT 14
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