[co-author: Ian Neil SC]

It seems like death by a thousand cuts. In August last year, Federal Treasurer Jim Chalmers announced a Competition Review to examine competition laws, policies and institutions to focus on reforms that would increase productivity, reduce the cost of living and/or lift wages. Non-compete clauses would be part of this two-year process.

Since then, we’ve had a Government Employment White Paper Roadmap reiterate its intention to investigate non-compete clauses (September 2023) and a Competition Review to discuss non-compete and related clauses (October 2023).

The push for change has gathered momentum this year. The ABS released an employer survey that found 22% of workers were subject to a non-compete clause. Then, in March, Dr. Iain Ross (former Fair Work Commission President) authored an ANU Crawford School of Government paper that concluded that the existing law and practice regarding non-competes was “manifestly unfair and contrary to the public interest”, to be closely followed by a government issues paper, titled Non-competes and other restraints: understanding the impacts on jobs, business and productivity, in April 2024.

These papers and reviews have gone hand in glove with ministerial and union rhetoric that would strongly suggest that the die has been cast – non-competes will be overhauled or even abolished. Certainly, there has been little if any argument to the contrary.

For example, the Assistant Minister for Competition, Andrew Leigh, told the McKell Institute that non-compete clauses were affecting a diverse range of employees – from break-dancing instructors to disability support workers and boilermakers. He added that international evidence suggested they harmed job mobility, innovation and wages growth.

For their part, unions want a total ban on non-competes, with ACTU assistant secretary Joseph Mitchell saying recently that the spread of non-competes had gone “completely haywire” and the Government should take “bold action” on the issue.

In essence, they advance four arguments for change, none of which we believe provide compelling evidence for root-and-branch change. They also cite what’s happening with non-competes in the U.S. (of which more later).

The first argument is that the courts generally treat a former employee’s interests as irrelevant when determining the validity and enforcement of a non-compete clause, with the consequence being most are upheld. The second, and related, assertion is that employers have ready access to Court injunctions because they only need to show a prima facie argument that the non-compete is valid, with a review of the relevant cases suggesting that the “balance of convenience” test is always weighed in the employers’ favour.

The third argument asserts that non-compete provisions have become more widespread, covering many low-income employees who will observe the restraint whether it is valid or not because they lack access to legal advice or the outcome is uncertain.

Finally, there’s the economic argument that non-competes prevent employees moving jobs for wage rises, and stifle innovation and competition by preventing the flow of ideas between firms. In essence, it portrays a system heavily stacked against individual workers and labour mobility.

Those on the reform bandwagon also cite what’s happened in the U.S. where the Federal Trade Commission (similar to the Australian ACCC) has voted to ban new non-competes and limit the enforceability of existing non-competes. What’s only mentioned in the fine print is that the decision was a controversial 3-2 and is being legally challenged.

When dissected, just how compelling are these arguments? In our view, not very. In our White Paper (available here upon request), we contend that the picture presented is either inaccurate or an oversimplification while disregarding the benefits of restraint provisions and failing to appreciate how this area of law operates in practice.

First, it is not accurate to assert that, when determining the validity of or enforcing a non-compete clause, the employee’s interests are irrelevant and only the employer’s position counts. In fact, the well-established legal test is whether the non-compete is reasonable having regard to the interests of both employer and employee, and it’s not difficult to find judicial decisions, recent and historical, that contradict these assertions.

Second, most non-competes are not upheld in Court. Our evidence? The one Australian study to examine the enforceability of restraints found that 54% are not enforced, and outside of NSW (where there is specific legislation making restraints easier to enforce) restraints (including non-competes and other restraints such as non-solicitation clauses) are only enforced 33% of the time – hardly conclusive evidence.

Third, the reasonableness test is criticised for causing uncertainty and confusion, particularly in circumstances where a cascade clause is used. Although this assertion has some validity, it’s overstated. We see the real problem as imprecise drafting and the use of restraints to cover employees who should not be subject to them and who may feel obliged to observe them regardless. Provided there is a sensible and genuine attempt to fashion a cascading clause within a set of narrow circumstances, and to use these instruments appropriately, we think there is a place for them.

Fourth, it is accurate to say that the interests protected by restraints have expanded, but only in one category – an employer’s legitimate interest to maintain a stable, trained workforce. Here the solution could be support for a non-solicitation restraint for a reasonable period within a defined scope and geography. Such provisions have existed since at least the early 1990s and recognise the significant investment that can go into achieving a stable, trained workforce, as well as the confidential information and customer connections an employee may hold.

Finally, the net economic effect of non-competes is debatable and arguably positive rather than negative. One recent U.S. academic paper noted that “contrary to the direction of recent scholarship, popular commentary, and policy activity (sound familiar?), there is little certainty concerning the net efficiency effects of non-competes in general and reasonable grounds to believe they have a net positive effect in certain innovation environments.”

This issue is the zeitgeist of the moment. Suddenly, non-competes are hindering job mobility and wage rises and are a handbrake on productivity, while the tangible benefits of non-compete provisions and other restraints (we will address these in our second article) are ignored.

How else do we explain why the common law relating to non-competes has not been altered by statute except on one occasion where NSW legislation made restraints easier to enforce.

We suggest a carefully balanced policy approach will consider all the research concerning the issues identified. It will recognise that there are benefits to non-competes and other restraints; to business, employees and the economy, together with some disadvantages that must be properly assessed to identify what intervention, if any, is necessary. On this issue – and certainly on the available evidence – the Government should hasten slowly.