Saying goodbye to restraints of trade – watch this space

In a landmark shift, the Australian Government is taking bold steps to overhaul the use of restraint of trade and non-compete clauses in employment contracts. These clauses, which prevent workers from joining competitors or starting similar businesses after leaving a job, have long been used by employers to protect confidential information and client relationships. However, in practice, many of these clauses have been criticised as overly restrictive, unreasonable, and often unenforceable. The growing recognition of the negative impact these clauses have on worker mobility, wages, and overall economic productivity has led to proposed reforms aimed at reducing their use and increasing fairness in the labour market.

Current Law

Under the current legal framework in Australia, restraint of trade clauses—including non-compete, non-solicitation, and no-poach agreements—are presumed unenforceable unless employers can demonstrate that they are necessary to protect a legitimate business interest, such as trade secrets, client relationships, or intellectual property. Courts assess these clauses based on several factors, including:

• Geographic scope – How wide is the area covered by the restraint?
• Duration – How long does the restraint last?
• Nature of the restriction – Is the clause too broad in terms of job roles or industries?
• Bargaining power – Did the employee have a fair opportunity to negotiate the clause?
• Do they protect the legitimate business interests of the employer?

Despite these protections, the system remains inconsistent, and many workers – especially those in lower-paying or junior roles – lack the resources to challenge the clauses in court. As a result, these clauses can still limit job mobility, even when they may be legally unenforceable. A 2024 ABS report revealed that 46.9% of businesses use some form of restraint, with troubling cases where even minimum wage workers have faced legal action for breaching non-compete agreements.

Proposed Reforms

In April 2024, the Australian Treasury released a consultation paper outlining proposed reforms to address these issues and promote a more competitive, mobile, and fair labour market.

Key proposals include:

Ban on Restraint Clauses for Low-Paid Workers: Non-compete clauses would be prohibited for employees earning below a specified income threshold (potentially linked to the national average wage or the Fair Work Act threshold of $175,000). This measure aims to protect lower-income workers from being unfairly restricted in their career opportunities.

Presumption Against Enforceability: A legislative presumption would be introduced that all restraint clauses are void unless employers can meet specific statutory criteria. This shifts the burden of proof, making it harder for employers to enforce overly broad restrictions.

Time and Geographic Limits: New limits would be placed on the duration and geographic scope of restraint clauses to prevent employers from using vague or overly expansive restrictions.

Mandatory Compensation for Non-Compete Periods: In cases where a restraint is deemed enforceable, employers may be required to provide compensation to the employee during the restraint period, similar to practices in some European countries.

Increased Scrutiny by Regulators: The Australian Competition and Consumer Commission (ACCC) could be granted additional powers to investigate and report on the anti-competitive use of restraint clauses, particularly in industries where such clauses are widely used.

No-Poach and Wage-Fixing Bans: The Government has also proposed outlawing ‘no-poach’ agreements that prevent workers from being hired by competitors and wage-fixing arrangements that cap pay or conditions without employee consent.

Expected Impacts

These reforms are expected to have widespread and significant effects on Australia’s labour market and economy.

Workers are expected to have increased job mobility, especially for those in lower-paid or mid-level roles. This could lead to higher wages, better career opportunities, and greater job satisfaction, as employees are no longer locked into restrictive contracts.

While businesses may need to adjust their employment contracts and explore alternative ways to protect sensitive business information, such as through confidentiality agreements or strong company culture, the reforms will also reduce the need for litigation over vague or unenforceable restraint clauses. Employers will likely need to shift focus from legal threats to more proactive strategies for retaining talent.

The reforms could also result in fewer court cases involving restraint clauses, providing clearer rules and greater certainty for both employers and employees. This could alleviate the financial burden of legal disputes and streamline dispute resolution.

Conclusion

Australia’s proposed crackdown on unfair non-compete and restraint of trade clauses marks a significant step towards creating a dynamic and competitive labour market. By limiting the use of overly restrictive contracts, the Government aims to foster greater worker mobility, increase wages, and promote economic growth. Employers will need to adapt to this new legal landscape, but the anticipated long-term benefits (improved productivity, innovation, and job satisfaction) remain to be seen. As the reforms move forward, both businesses and employees should prepare for a future where opportunities are defined by competition, mobility and freedom.

Should the Labour Government be reelected in 2025, it has indicated that reforms are expected to take effect from 2027.

If you have any questions or concerns in respect of restraints of trade and how they might apply to your employment or business, please do not hesitate to contact our team.