The Federal Government has recently passed some of the most extensive industrial relation reforms seen in Australia with the view to providing stronger protections for workers, improving job security and gender equity.
Employers could soon be facing further changes, with the Assistant Minister for Competition, Charities and Treasury, Andrew Leigh MP (Leigh), suggesting the use of ‘non-compete’ and ‘no-poach’ restraints in employment contracts is hampering job mobility and wage growth by preventing employees from taking up employment with higher paying competitors.
On 2 March 2023, Leigh formally requested advice from the Australian Competition and Consumer Commission (ACCC) on the competitive impacts of non-compete restraints and what (if any) action the Australian Government should take in response.
Non-compete and no-poach (also referred to as non-solicit) restraints are often used to protect a company’s confidential and proprietary information by preventing former employees from working with a competing company or poaching clients, customers, and other employees, for a specified length of time post-employment.
On the one hand, non-compete and non-solicit restraints are necessary to protect businesses from unfair competition and prevent employees from using their insider knowledge to benefit a competitor. Non-compete restraints can also incentivise companies to invest in their employee training and development, with the knowledge that their investment will be protected. On the other hand, some may argue that non-compete restraints can lead to lower wage growth, as employees are unable to negotiate higher salaries or better working conditions due to fewer job opportunities.
In a speech delivered on 2 March 2023, Leigh suggests that across an employee’s career, “the biggest average wage gains come when people switch employers” and that the use of non-compete and no-poach restraints could be a contributing factor in why “after inflation, Australian workers only earned an extra $18 per week more in November 2022, than they did in November 2012.”
Several jurisdictions overseas have already taken steps to limit the use of non-compete restraints in employment contracts. In the United States, for example, some states, such as California, North Dakota, Oklahoma and Washington, D.C, have already banned non-compete restraints altogether.
The U.S. Federal Trade Commission (FTC) has also proposed a new rule to ban employers across the U.S. from imposing non-compete restraints on their workers. The FTC has suggested prohibiting the use of non-compete restraints could increase wages by nearly $300 USD billion per year, and close racial and gender pay gaps up to 9%.
The use of non-compete and non-solicit restraints in Australia
While non-compete and non-solicit restraints are a ubiquitous feature of many Australian employment contracts, the presumption at law across most Australian States and Territories is that post-employment restraints, including non-compete and non-solicit restraints are unenforceable for public policy reasons, unless the restraint is reasonably necessary to protect the employer’s ‘legitimate business interests’.
In fact, between 2010 and 2022, just under half of all litigated non-compete and non-solicit restraints have been ruled as either unenforceable or void for public policy reasons. Of the restraints held to be enforceable, approximately a quarter were found to be enforceable for a period of 12 months or more.
Figure 1 – enforceability of non-compete and non-solicit restraints between January 2010 to September 2022 based on publicly available reported decisions.
Case law has shown that restraints are notoriously difficult to enforce, and given the relatively high bar Courts have applied for demonstrating a ‘legitimate business interests’, non-compete and non-solicit restraints are typically only found in employment contracts of highly-paid senior managers or those with access to confidential information and/or significant client connections.
If the aim is to drive up wages, one could question the utility of banning the use of non-compete and non-solicit restraints, which are more common and more likely to be enforceable in employment contracts for relatively highly paid individuals.
Given the reluctance of courts to enforce non-compete and non-solicit restraints in the first place, there is an argument that non-compete and non-solicit restraints have little deterrent effect or impact on worker mobility. Leigh, however, suggests that “workers not being perfectly aware of all their legal rights” and faced with the prospect of “facing off against their former employer in court” could be enough of a reason to consider the ban of the restraints altogether.
What do employers need to know?
Given the lack of data on how widespread the use of non-compete and non-solicit restraints are in Australia, the ACCC may commence a period of public consultation before making any recommendations.
The Government could then decide to ban the use of non-compete restraints (perhaps in a similar manner to the ban on pay secrecy provisions as part of the Secure Jobs, Better Pay reforms). It is unclear at this stage whether any proposed ban would also extend to the use of non-solicit restraints.
The Government may also consider amending the Competition and Consumer Act 2010 (Cth), which currently carves out matters relating to employee remuneration, conditions of employment, hours of work or working conditions of employees.
If these changes to the law were to occur, we expect employers may need to consider the use of alternative ‘restraint’-type mechanisms such as extending notice periods and/or utilising ‘gardening leave’ provisions on a more regular basis.
We would also expect to see an increase in the number of claims brought by employers under the Corporations Act 2001 (Cth) for breaches of the various ‘officer and employee’ duties. For example, section 183 prohibits employees of a corporation from improperly using a company’s information to gain an advantage for themselves or someone else or to cause detriment to the corporation.
The Government has yet to flag any changes to the use of post-employment restraints as part of their Industrial Relations law reform agenda, and no timeline has been provided for the ACCC review.
At this stage, it is unlikely any changes to the law will occur until at least next year (if at all).
For further information, please contact:
Shivchand Jhinku, Partner, Herbert Smith Freehills