Non-compete clauses are commonly used in Australian employment contracts, particularly for senior employees. However, in recent years, these clauses have been the subject of increasing international scrutiny, with many countries imposing substantial restrictions or banning them entirely. In Australia, non-compete clauses are becoming subject to similar scrutiny, with potential reform in this area on the horizon. 

Rationale for Non-Compete Clauses in Employment Contracts

Employers often contend that the use of non-compete clauses in employment contracts are reasonable and required to protect their legitimate business for a number of reasons, including:

1. To protect trade secrets and confidential information;
2. To preserve client and customer relationships;
3. To safeguard investments in employee training;
4. To preserve goodwill and reputation; and
5. To encourage long-term commitment from employees.

The courts have held that these clauses are legally enforceable only to the extent where the restraint is reasonably necessary to protect the employer’s business interests.

Rationale for Restricting Non-Compete Clauses in Employment Contracts

Critics have highlighted several complications brought about by non-compete clauses in employment contracts. In this regard, these clauses have been suggested to:

1. lock out new competitors;
2. increase barriers to entry;
3. stifle innovation;
4. inhibit wage growth; and
5. decrease negotiating power.

The United States’ Approach

On the 5^th of January 2024, the United States Federal Trade Commission announced that it was considering making an amendment to the Federal Trade Commission Act (FTC Act) that would make it illegal for an employer to insert a non-compete clause into an employment contract. Specifically, the provision would make it a breach of the FTC Act to:

1. enter into or attempt to enter into a non-compete with a worker;
2. maintain a non-compete with a worker; or
3. represent to a worker, under certain circumstances, that the worker is subject to a non-comete.

The provision would have two notable exceptions:

1. M&As: the seller of a business or asset that are substantial owners, members or partners in the business may still be subject to non-competes; and
2. franchisee agreements: franchisees in a franchisee-franchisor relationship may still be subject to non-competes.

The United Kingdom’s Approach

In May 2023, the United Kingdom Department for Business and Trade published a paper on non-compete clauses, outlining their intention to enforce a three-month statutory restriction on the use of non-competes. This limit is reportedly unlikely to apply to all workplace contracts, with likely exceptions for partnership and shareholder agreements. 

The Australian Approach

On the 21^st of February 2024, the Australian Bureau of Statistics released new data on the use of restraint clauses by employers. These statistics suggest that at least one in five Australian employees are subject to non-compete clauses. In addition, the 2023 Employment White Paper identified that non-compete clauses may be causing a number of issues, including limiting job mobility, industry innovation and wage increases.

In response to these issues, the Australian government announced plans to release an issues paper on non-compete clauses in employment contracts that would identify potential options for reform. The Treasury has also communicated its intention to release a consultation paper seeking submissions on non-compete clauses in the coming months. 

Conclusion

It appears that employers will soon need to face the risk that they have been attempting to protect against through the use of competition restraints. If restrictions are placed on the use of these clauses, employers will need to consider the alternatives that are available to them to protect their legitimate business interests. These alternatives will include (among other things) requiring longer notice periods for resignation, inclusion of gardening leave rights and ensuring that robust solicitation restraints and confidentiality obligations are in place.