Restraint of Trade – An Update

9th April, 2025

MPH wrote recently on the common law position applicable in Australia (and briefly the statutory rules in NSW), in relation to the enforceability of restraint clauses. That article can be viewed here.

As part of its budget papers released on 25 March 2025, the Albanese Government has reported on its proposal to legislate a ban on “non-compete” clauses.  The Government’s press release can be viewed at this link.

If re-elected, the Government has committed to those changes amongst other industrial relations and productivity reforms the subject of recommendations contained in an Issues Paper prepared by the Competition Review Taskforce of the Commonwealth Treasury (Taskforce).  Key aspects  include:

  • the ban will apply to employees earning less than the high-income threshold of $175,000.00 contained in the Fair Work Act 2009 (Cth);[1] and
  • to permit adjustments in the labour market, the proposal is for the ban to take effect sometime in 2027.

Rationale

The rationale behind the proposal can be summarised as follows:

  • to improve mobility in the labour market and reduce barriers preventing Australian workers from switching to better, high-paying jobs;
  • to encourage competition and aspiration, by making it easier for more workers to transition to better paying jobs, making Australia’s economy more dynamic and competitive;
  • to prevent employers from abusing actual or perceived power imbalances, especially in the case of lower income-earning employment, and unnecessarily threatening legal action against those employees; and
  • to improve wage and productivity growth generally.

Other Jurisdictions

The Competition & Markets Authority (CMA) in the UK published a report on competition and market power in the UK labour market on 25 January 2024. Amongst the CMA”s findings in its report include:

  • approximately 30% of employees in the UK are impacted by non-compete clauses generally, with the percentage at around 40% in relation to professional services, scientific and tech related jobs; and
  • even in sectors where the protection of intellectual property is unlikely to be a major concern such as in retail, education and hospitality, around 20% of workers had non-compete clauses in their contracts.

Given the common law position of the UK, and the fact legislation may come sooner in that jurisdiction, activity on this front in the UK will be of interest and clearly relevant to any Australian statutory changes.

The Devil is in the Detail

Amongst the findings of the Issues Paper is an acknowledgement of overseas research in relation to the psychological impacts of restraint provisions in employment agreements, which have resultant impacts on labour mobility, wage growth and employee bargaining power.  That is, that research argues that adverse macroeconomic consequences have less to do with the enforceability of a particular restraint, with those issues being primarily a function of what the literature describes as the “chilling” effect of those restraints. The Taskforce explain that, separately to issues of enforcement, those psychological impacts arise from:[2]

  • the complexity of restraint clauses;
  • the uncertainty as to enforceability;
  • the substantial costs associated with challenging or enforcing a restraint.

Conclusion and Consultation

Ultimately, the efficacy of any legislated ban in addressing labour market conditions, and the legal implications arising from those proposed amendments, will be determined by the specific mechanisms in any legislation passed by a second term Albanese Government.

There are examples of similar legislation being implemented in other jurisdictions, which are discussed in the Issues Paper. Among those examples include Austria legislating a ban on non-compete clauses for workers earning below the median gross-monthly income in that jurisdiction. Research, cited in the Issues Paper, in relation to the impact of those reforms reveal that job mobility did increase, and wages improved comparatively for workers previously subject to non-competes. The research did, however, reveal that a significant impact on mobility and earnings trends was not observed generally across the job economy.

In our view, appropriate topics for further consultation will include:

  1. how any legislation can be targeted to address the issues in the labour market identified by Government as the rationale for the proposed reforms, being increased labour mobility and accelerated wage growth, especially for lower-income earners;
  2. what application, if any, the proposed ban will have on business purchasers seeking to protect goodwill in their investments, noting a typical feature of a sale agreement includes prohibitions on competition post-settlement. Especially curious is a situation in which the controlling mind of a vendor in relation to a share-sale of a business, was also an employee of the vendor entity prior to sale, and perhaps fell below the high-income threshold, making any non-compete potentially prohibited and incapable of enforcement by the business entity after settlement;
  3. the impact on restraints dealing with both the protection of an employer’s confidential information and non-solicitation clauses;
  4. the nature of the civil penalties and/or prosecutorial regime that will apply if an employer were to contravene the new laws; and
  5. the regulatory and enforcement environment generally, including which regulator will implement and have oversight in relation to the new laws, noting that is likely to be a function of what the format of the amended laws will be, and what consequential amendments may flow from any medium deployed by a second term Albanese Government in implementing the proposals.

MPH will keep abreast of any further consultation and will keep our clients informed as to any developments and pre-emptive tips for business, once we know the political climate Australia finds itself in following the 3 May election.

[1] Regulation 2.13 of the Fair Work Regulations 2009 (Cth).

[2] Page 22 of the Issues Paper, citing M Lipsitz and E Starr, ‘Low-wage workers and the enforceability of noncompete agreements’, Management Science, 68(1):143-170; N Balasubramanian et al., ‘Locked in? The enforceability of covenants not to compete and the careers of high-tech workers’, Journal of Human Resources, 2020 58(6); See also Young, ‘Noncompete Clauses, Job Mobility, and Job Quality: Evidence from a Low-Earning Noncompete Ban in Austria’, which finds that non-compete clauses reduced mobility to better paying jobs but did not increase workers overall wage growth.

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