The proposed ban on non-competes – time to have your say

Consultation is now underway on a range of details as to how the government implements the proposed ban on non-compete clauses for lower earning employees.

How to define a non-compete clause?

The first issue to be determined is how to define a “non-compete” clause in the Fair Work Act.  The Federal government’s view is that the definition used by the US Federal Trade Commission could be adopted or adapted for an Australian context.  This is on the basis that it appropriately covers the range of formats in which a non-compete may arise without going so far as to cover all restraints of trade in employment. 

The US Federal Trade Commission defines a non-compete as being:

“A term or condition of employment that either prohibits a worker from, penalises a worker for, or functions to prevent a worker from:

a) Seeking or accepting work with a different person where such work would begin after the conclusion of the employment that includes the term or condition.

b) Operating a business after the conclusion of the employment that includes the term or condition.

[The] term or condition of employment includes, but is not limited to, a contractual term or workplace policy, whether written or oral.”

On its face that definition relates only to a clause that is said to be a “term or condition of employment”.  However, it remains to be seen what arrangements may be considered to come within that phrase, including whether incentive arrangements offered to an individual perhaps by a holding or parent company, and not their employing entity, will be included.

That definition is in some ways quite broad and recognises that restrictions on a worker’s ability to change employment can occur in three key ways:

• first limb - typically clauses are expressed as prohibiting an employee from working for a competitor or starting a competing business, and apply for specific durations and/or to specific geographic areas;
• second limb - they may also take the form of a “penalty” being imposed on an employee for breach – traditionally the general law has viewed penalties as being unenforceable contractual provisions. The use of the term here is not intended to be that narrow and is stated to include a range of arrangements, from broad liquidated damages clauses through to other adverse financial consequences such as forfeiting a bonus or other employment benefit, or by an employer seeking to recover training costs; and
• third limb - clauses that are said to function to prevent workers from seeking or accepting new work, or operating a competing business – this is said to cover clauses drafted in such a way that would otherwise avoid any non-compete ban, but may achieve the same objective of restricting the employee’s mobility.

The second limb covers what represents a common feature in incentive arrangements, that an employee ceasing employment in defined circumstances will either forfeit a benefit (through malus provisions), and in some cases, may be required to pay back a benefit already paid (through clawback provisions).  These types of provisions have not historically been considered to be post-employment restraints or subject to the common law test of reasonableness, though the potential for such doctrines to apply to those types of provisions has long been recognised.

The third limb may be the most contentious though, in that while it is said in the Consultation Paper that it would not cover existing employee duties under common law, equity or statute that may extend beyond employment or targeted and well-drafted non-disclosure and non-solicitation clauses, what clauses would be captured by that limb is less clear.

How non-compete clauses are defined under the Fair Work Act, and the extent to which any ban may capture other post-employment restrictions, is likely to be an area of controversary and, potentially, significant future litigation.

Who should be covered by the ban and what should be taken into account in determining an employee’s earnings?

The ban on non-compete clauses for employees earning below the high-income threshold will be implemented through amendments to the Fair Work Act.  The coverage of the Fair Work Act is complex however and does not include all employees in Australia (with approximately 15% of employees in Australia covered by State industrial relations systems).  It is less clear whether the government intends for its ban to only cover national systems employers or whether it will attempt to achieve universal coverage (as it does in some areas such as the stop sexual harassment provisions in the Fair Work Act).  It would seem that less than universal coverage is the most likely result.

Consideration may also need to be given as to what pay elements should be included in that high-income threshold calculation.  Where the high-income threshold is used, for example, to determine whether an employee may be able to commence an unfair dismissal claim, then payments where the amount cannot be determined in advance - such as commissions, incentive-based payments and bonuses - are not included in the calculation.

In the context of this current debate, the exclusion of those types of payments made have unintended consequences.  For example, an individual may receive a relatively low salary (which is well below the high-income threshold) but be eligible to receive (and have historically received) very large cash-based bonuses or equity grants which would result in the employee’s total remuneration being in excess of the high-income threshold.  Such arrangements are not uncommon in the start-up and technology spaces.  That employee may have access to highly confidential and valuable proprietary information of their employer and in any other circumstances be appropriately covered by a post-employment non-compete restriction (and other restrictions).  In those circumstances, it may be more appropriate to use the value of past payments (necessarily calculated at the time of potential enforcement) to determine what restrictions should apply to an employee rather than the usual earnings test against the high-income threshold.

The Consultation Paper also raises the issue of whether the ban should extend to cover independent contractors who may also be subject to non-compete clauses.  This issue has been raised on the basis that many contractors perform work that resembles employment and the same common law principles apply to any such restrictions imposed.  However, if a contractor is indeed a genuine independent contractor, the contrary position has merit.  That is genuine independent contractors should be operating their own business, have greater bargaining power and therefore a better ability to negotiate the terms of any restrictions that may apply to them.  A related question is whether the reforms will be capable of covering contractors engaged via a personal services company.

When should the high-income threshold be applied?

The question arises as to when the high-income should be applied to a worker’s earnings to determine whether a non-compete clause is banned.  That threshold could be applied at differing times with very differing results and it may be appropriate for it to be re-applied at a later point in time.

For example, while an employee may have earnings less than the threshold at the time that their employment contract is entered into, their remuneration may change and subsequently exceed the threshold.  They may move from part-time to fulltime employment or vice versa which impacts whether they move above or below the threshold, or their remuneration may simply not keep pace with the index of the threshold so that while they were initially earning above the threshold, they are not at the time of potential enforcement. 

To the extent the “true” earnings level of an employee is to be taken into account, so as to include bonuses and incentive payments, then arguably the high-income threshold should be applied at the time of potential enforcement.

Depending on where the government lands on these issues, it may be that employment contracts will be drafted in the future, for example, to include a non-compete which is only triggered and operable if and when an employee’s remuneration later exceeds the high-income threshold.

How should the ban be enforced?

In addition to making any non-compete clauses included in an employment contract in breach of the ban void or unenforceable, the government is considering whether there should also be civil and/or criminal penalties which apply, and if so, at what level.

If penalties are to apply, then there will also be some consideration as to whether there should also be defences against the application of penalties.  For example, where the employer can show that they “reasonably believed” they were correct in considering an employee as earning above the threshold and not being subject to any ban.

The government is also considering bestowing a range of parties with standing to commence enforcement proceedings.  This could include affected employees, an interested union, an employer organisation and a Fair Work Inspector, as well as potentially providing standing for other businesses that intend to hire an employee bound by a non-compete clause. 

Given the ban will be legislated in the Fair Work Act, the Fair Work Ombudsman would also typically have a role in enforcing compliance with those provisions designated as civil remedy provisions.

Caution may need to be exercised on this issue, so as to avoid providing standing to competitors to challenge clauses for an improper purpose and/or whether proceedings could operate in any circumstances as being representative and binding on the same employer in relation to other non-party employees.

Depending on the final policy parameters for the ban, the Fair Work Commission could also have some role in resolving disputes arising between parties in relation to non-compete clauses, including disputes about whether a contractual clause constitutes a non-compete, the application of the high-income threshold, and whether any potential exemption applies to a specific circumstance.  This could create some interesting issues, with the Commission being able to exercise conciliation and arbitration powers, but being barred from operating as a court and making judicial decisions.

Are limited statutory exemptions are required?

Stakeholder feedback received on the Issues Paper indicates that there may be legitimate, exceptional circumstances where there is an overriding public interest in retaining the use of non-compete clauses.  With this backdrop, the government is consulting on whether there should be some limited statutory exemptions to the ban to avoid unintended consequences.

It is clear that the government has in mind that any such statutory exemptions should be very limited in scope, such as in relation to matters of national security or the integrity of core public functions. It is difficult to see how any such exemptions could have wide, practical application to public or private organisations.

What transitional arrangements should apply?

The ban of non-compete clauses is expected to apply prospectively from 2027 to employment contracts made or varied after the start date. 

Having said that, the government is also considering how the ban should apply to non-compete clauses in existing employment contracts, and what arrangements could apply to support a transition to the ban (such as the imposition of a grace period).

Non-employment related restraints and confidentiality obligations

The government has clearly stated it is not proposing changes to restraints of trade outside of employment including those which commonly apply in a sale of business context to protect goodwill, or to the use of confidentiality clauses in employment.  Businesses and their advisors will at least be able to breathe a little easier because of that position.

The Consultation Paper provides that while the government has not yet determined whether there needs to be reforms for non-compete clauses for employees earning above the high-income threshold, it has nonetheless committed to consult on whether there is a need for any changes.

The feedback received from stakeholders to date has ranged from some supporting a full ban of non-compete clauses, through to other stakeholders suggesting the need for a more flexible approach for high-income employees, as they are better equipped to negotiate their own employment contracts and navigate any potential litigation.

The government has identified two potential options for high-income workers if reform is required, namely:

• to extend the ban on non-compete clauses to these employees; or
• to introduce statutory limitations to non-compete clauses, which could include mandatory compensation, duration limits, or both.

Full ban?

Trade unions and community legal centres have expressed support for a full ban.  While a full ban would provide legal certainty to employees and businesses that employees cannot be restricted from moving to another job or setting up a rival company, employer groups argue that in some cases a non-compete may be the only practical and efficient way to protect their legitimate interests.  Although full bans exist in some overseas jurisdictions, implementing a full ban for all Australian based employees would seem to be a step too far.

Some stakeholders have also commented that a full ban could lead to unintended consequences, such as an increase in more costly complex intellectual property litigation or through claims under the Corporations Act 2001 (Cth) (Corporations Act).

Statutory limitations?

Some stakeholders have expressed support for the imposition of mandatory minimum compensation to be paid for the duration of any non-compete.  There are certainly some possible benefits in that approach.  Imposing mandatory compensation may discourage businesses from using non-compete clauses as a standard employment contract term and instead reserve their use for situations where they truly protect a legitimate and valuable interest.  However, a potential downside to this limitation could be that it unfairly disadvantages smaller businesses who may then be less likely to be able to use non-compete clauses.

If this limitation was adopted, then there would need to be further consideration of what the compensation level would be (most likely as a percentage of an employee’s past salary), whether any compensation would be payable as a lump sum or as regular instalments, and whether businesses should be able to remove a non-compete clause if it was no longer necessary and how this would affect their liability to pay compensation.  The payment of compensation in that way is a feature utilised in other jurisdictions and may ultimately provide some balance if reforms are implemented.

In addition, or as an alternative, the government is consulting on whether non-compete clauses should be subject to a maximum duration to prevent businesses from using non-competes that purport to last for excessive periods and provide some certainty as to when they are unenforceable.  Under this option, the intention would be that non-compete clauses could still only be unenforceable to the extent reasonably necessary, and so that durations less than any maximum duration could still be deemed unreasonable for certain employees and in certain circumstances.

If that limitation was adopted, there would still need to be consideration of any maximum duration and whether such a period operated from when notice of termination is given or when it ends.  If the latter approach was adopted, then any period of garden leave placed on an employee during their notice period, would, in effect, reduce the post-employment duration that was enforceable.

Non-solicitation clauses aim to prevent workers from approaching or providing a service to former clients and suppliers once they leave a business (client non-solicitation clauses) or hiring former co-workers (co-worker non-solicitation).

Client non-solicitation clauses

Business stakeholders generally support client non-solicitation clauses as they protect valuable client connections, and may operate to increase investment in client relationships.

Some stakeholders highlighted concerns about the use of these clauses for employees, particularly in the healthcare and broader care and support sector, where client relationships may be especially important for the client to receive an appropriate level of care.

A potential reform option put forward is to impose a duration limit on the operation of non-solicitation clauses, providing an employer some time to secure relationships with their clients before the recently departed employee could actively entice the client to move to a competing business. 

Thought will also need to be given as to what activities amount to solicitation.  For example, would only active steps taken by the former employee to interact with a client in an effort to entice them away be included, while passive interactions merely dealing with former clients be excluded?

Co-worker non-solicitation

Clauses of this type are said to limit job mobility but not as severely a non-compete clause.  Nonetheless a continuing concern with these clauses is that they impair the freedom of other workers who are not a party to the clause and who are therefore not compensated for the restriction, to move to their preferred and most productive job, reducing their bargaining power and potential wages.  See our earlier article on the enforceability of these types of restrictions here.

In circumstances where the government appears to characterise these clauses as being broadly anti-competitive, a potential reform option being considered is to implement a full ban, with some statutory exemptions applying.

Where a post-employment restraint may still be lawfully imposed on an employee as part of an employment relationship, the government is also considering potential reforms including:

• prohibiting “cascading” restraint clauses by requiring businesses to specify a single reasonable duration limit and geographic coverage that is required to protect the business’ legitimate interests. The use of cascading clauses has developed in response to the limited options to courts outside of NSW to sever what would otherwise be an unreasonable restraint and leaving potentially something reasonable to enforce. It may be that some consideration should be given to parties operating in states outside of NSW being able to rely upon equivalent powers to those provided to NSW courts under the Restraints of Trade Act 1976 (NSW) to read down what would otherwise be an unreasonable restraint;
• requiring restraint clauses to specify the legitimate business interest to be protected – this may on its face seem reasonable, but it could simply lead to employers pointing to all potential legitimate interests as providing a basis for a particular restraint; and/or
• correcting other perceived issues with the application of the common law restraint of trade doctrine, including whether:
  • the compensation of employees for a restraint is sufficiently considered;
  • the scope of legitimate interests has inappropriately expanded to include an interest in a stable workforce (permitting co-worker non-solicitation clauses);
  • the threshold for the use of injunctions is appropriate with respect to the public interest against competition and the particular harm to an employee of an extended period without work; and
  • it is clear on how a restraint would be enforced where an employment contract has been breached or where an employee has been made redundant.

Employers often seek to prevent employees during their employment through the use of “exclusive service” clauses, from engaging in certain activities that may compete or interfere with their employment or engagement. It is common for these clauses to be drafted so broadly that they purport to effectively prevent employees from holding any secondary employment, freelance or consulting work, or operating a new business, even if that is unrelated to their primary role.  Part-time and casual employees can be particularly adversely affected by those types of clauses.

Stakeholders broadly agreed that it is fair for an employer to contract the exclusive services of a full-time employee, but had differing views on how, if at all, restraints during employment for part-time and casual employees should be regulated.  Some stakeholders argued that it is not appropriate for a part-time or casual worker to be restrained to one employer, while others argued that banning or reforming restraints for part-time or casual employees should continue to be left to the common law to regulate.

In that context, the government is seeking views on whether it should restrict the use of these “concurrent employment restraints”, while not removing any existing duties under the common law, equity or statute (such as sections 182 and 183 of the Corporations Act). It has raised one option as limiting the use of concurrent employment restrictions to circumstances where the secondary employment would conflict with the proper performance of the employee’s duties in their primary job, or otherwise present a conflict of interest.

No-poach agreements can involve two or more businesses agreeing to refrain from actively recruiting or hiring each other’s workers, while wage-fixing agreements involve two or more businesses agreeing to set a cap on wages and employment conditions for their workers.

In responding to the Issues Paper, unions and community legal centres supported a ban on these agreements, while business stakeholders argued there was no evidence to support a ban, noting limited evidence of their widespread use in Australia.

Part IV of the Competition and Consumer Act covers restrictive trade practices which includes cartel conduct (Division 1) and other anti-competitive provisions (Division 2):

• Division 1 prohibits individuals from making or giving effect to a “contract, arrangement or understanding” that contains a cartel provision in the form of price-fixing, restricting outputs in the production and supply chain, allocating customers, suppliers or territories, or bid-rigging; and
• Division 2 prohibits a broad range of other anti-competitive conduct, including “concerted practices” which “substantially lessen competition”, secondary boycotts, the misuse of market power, and exclusive dealing and resale price maintenance, among other things. Relevantly, however, Part IV has several exemptions, including one for matters related to “remuneration, conditions of employment, hours of work or working conditions of employees.”

The Federal government is proposing to ban no-poach and wage-fixing agreements from 2027 by designating them as their own form of anti-competitive conduct in Part IV, meaning that they would not be subject to the broad exemption for employment conditions.  Any breach of that prohibition could lead to significant civil pecuniary penalties and potentially also attract criminal sanctions.

The government is consulting on whether there should be specific exemptions to those bans, including so as to allow multi-employer bargaining agreements, joint ventures, secondment arrangements, labour hire firms, professional sports organisations and/or where specific ACCC authorisation is sought and obtained.