Government to restrain certain employers from using non-compete restraints

The Albanese Government has pledged in its 2025 budget that, if re-elected, it will limit an employer’s use of non-compete clauses to employees who earn more than the high-income threshold under the Fair Work Act 2009 (Cth) (currently $175,000). The change is aimed to prevent employers from 'holding too many Australians back from switching to better, higher paying jobs', by allowing them to move between jobs without needing to hire lawyers. The proposal is consistent with the stated purpose behind the significant workplace reforms introduced by the current Government, including the 'Closing Loopholes' regime. 

In our experience, many workers who earn close to the high-income threshold have access to an employer’s confidential and business sensitive information and could risk causing damage to the employer’s business if they move freely to a competitor in the absence of tailored restraints. This is particularly so in small businesses and start up companies. This change could therefore have a significant impact on an employer’s ability to protect their legitimate business interests. 

Further details on the current enforceability of restraints in Australia and the proposed changes are included below. 

The Albanese Government has promised the following key changes will come into effect as early as 2027, if the Government is re-elected: 

1. Employers will not be able to impose non-compete restraints against employees who earn less than the high income threshold (currently $175,000). 
2. Employers will not be able to fix wages by entering anti-competitive wage arrangements that are designed to cap workers’ pay and conditions, without the knowledge and agreement of impacted workers. 
3. Employers will not be permitted to use ‘no-poach’ agreements to prevent staff from being hired by competitors. 

Given the very early stages of this proposal, it is unclear how the above changes will be implemented in practice. It is not clear, for example, how this will impact non-competes in commercial arrangements, where, for example, founders of companies that exit on sale may be subject to rigorous non-compete restraints as part of any sale agreement, but will not be earning any salary so will not be above the high-income threshold. 

The Government will consult on policy arrangements such as the introduction of penalties, exemptions and transitional arrangements that will allow employers and employees to navigate these changes without being in breach of the law. It will also consider the appropriateness of non-compete restraints for high-income workers and whether the use of non-solicitation restraints should also be restricted. 

In Australia, post-employment restraint clauses are often contained in contracts of employment, irrespective of whether the contracts relate to senior staff members. The Australian Bureau of Statistics reported in February 2024 that approximately 46.9% of businesses are using some form of restraint.¹ This is a clear departure from the primary use of restraints, which was intended to be reserved for highly specialised skill sets, integral client relationships or executive level positions.

There are two main types of restraint clauses: 

• Non-solicitation restraints: These are designed to prevent an employee from soliciting or ‘poaching’ clients or workers from an employer upon the cessation of their employment, as well as to prevent them from interfering with any such relationship. 

• Non-compete restraints: These are designed to prevent an employee from working for a competitor of the employer in the same or a substantially similar position following the cessation of their employment. These are generally limited to a maximum of 6 to 12 months from the date of termination (potentially reduced by any period spent on garden leave) and within a specific geographic location (i.e., Australia or the relevant State or Territory). 

Their purpose is to protect the employer’s legitimate business interests, goodwill, trade secrets and confidential information from being exploited. However, it can be difficult to enforce such restraints.

The default position in Australia is that a post-employment restraint is void and unenforceable unless the restraints go no further than reasonably necessary to protect the legitimate business interests of the employer, such as confidential information and client and employee relationships. Enforceability is determined by courts on a case-by-case basis having regard to the: 

• nature and extent of the legitimate business interest being protected 

• geographic scope of the restraint 

• duration of the restraint, and  

• personal circumstances of the employee.  

A Court will weigh the potential harm done to the employer if an injunction to uphold the restraint were not granted, against the harm done to the individual if it were granted. If a Court determines that, on the balance of convenience, the restraints should not be upheld, they will be voided in their entirety.  In most states and territories, the only exception to this would be where the Court can apply the 'blue pencil' test striking out any part of an unreasonable restraint such that the remaining terms make sense and are reasonable. In NSW, the situation is somewhat different. This is because the Restraints of Trade Act 1976 applies in NSW which permits a Court to 'read down' the restraint to a level that it considers to be reasonable, rather than applying the more limited blue pencil test.  

The Federal Treasury‘s Issues Paper was published in April 2024² (Report),  and expressed concerns about the impact of non-compete and other restraint clauses on workers, in particular, lower-paid workers and how it may harm job mobility and more broadly, overall economic growth, competition and productivity.  Over 45 submissions were made to the Federal Treasury in response to the Report and the potential need for a reform. The submissions expressed opinions ranging from a complete ban of restraints altogether, to stricter guidelines for enforceability and to maintaining the status quo. 

The Issues Paper and submissions in response raised matters, including the below, which are likely to be the key drivers for the Government’s proposal: 

1. increased use of restraints in employment contracts across all skill levels 
2. the power imbalance between low to middle income earners and large corporate employers seeking to enforce lengthy restraints 
3. the financial burden placed on some of Australia’s most vulnerable (i.e., those earning $45,000 or less) and modest workers in defending or disputing the enforceability of a restraint 
4. the misuse of restraints within certain professions, such as the hair dressing, beauty and cleaning industry
5. the limitations restraints place on an employee’s ability to seek new opportunities (and often at a higher pay), and
6. the introduction of stricter, shorter or total bans on restraints in overseas jurisdictions, which suggest that a more regulated approach to restraint clauses is necessary.

The submissions to the Report suggest that there is a consensus for reform to limit the negative impact that restraints have on vulnerable workers and restore their primary purpose – to safeguard an employer’s legitimate business interests from being exploited by high-income managerial employees or executives’ post-termination. 

Whilst the proposed changes are subject to the current Government being re-elected, the position on the enforceability of non-compete restraints is changing, both domestically and globally. Employers should expect there to be some change within this space irrespective of who is in Government. 

Employers should continue to use post-employment restraints for the purpose of protecting their legitimate business interests. However, the use of non-competes should be limited to what they were traditionally designed to do – to safeguard an employer’s legitimate business interests from being exploited by high-income managerial employees or executives’ post-termination.

Employers should exercise caution when including post-employment restraints in the contracts of employees who do not fit squarely within this traditional approach. A review of current employment agreements may also be necessary to determine the overall approach to post-employment restraints within your business. 

It is essential to implement and document specific safeguards, including clauses that protect the use and disclosure of confidential information and the ownership of intellectual property. Additionally, employers should ensure they have the right to place employees on garden leave during their notice periods. Notice periods should be sufficiently long to provide the employer with the opportunity to rebuild and strengthen client relationships when an employee departs. If you would like further information, please reach out to us.