Australian employers routinely use non-compete clauses in employment contracts. These provisions restrict a departing employee from working for a competitor, soliciting clients, or poaching colleagues for a defined period after they leave. Under the current law, such clauses are enforceable only to the extent that they are reasonable in scope, duration, and geographic reach – a test applied by the courts on a case-by-case basis.
Significant changes are on the way
The Australian Government has proposed significant regulatory intervention that would, for the first time, subject non-compete clauses in employment contracts to a clear legislative framework. Due to commence in 2027, the most direct stated purpose of the legislation is to remove a structural suppressor of wages growth. Around one in five Australian workers are subject to a non-compete clause. This reduces their job mobility and acts as a downward drag on wages across entire industries due to the reduced bargaining power of employees on pay. The changes are also framed as productivity measures, the reasoning being that when skilled workers are locked in place, their skills cannot flow to where they are most productively deployed.
What is being proposed?
The legislation is still at draft stage, however it is likely that regime will include:
- An outright ban (or near-ban) on non-compete clauses for lower- and middle-income earners.
- A regulated (rather than banned) regime for higher earners, which includes a proposed ban on waterfall, or cascading clauses;
- A ban on no-poach and wage-fixing agreements between businesses.
Opportunities and Risks
The impact of the proposed reforms on Australian business will be genuinely two-sided. Small and medium businesses may find it easier to access talent and recruit skilled workers; the playing field in competitive tenders will be more level in terms of competing for staff in tight markets and large businesses will no longer be able to lock workers in with non-compete clauses and deep pockets to enforce them with.
Disruption is also on the horizon:
- Non competes have typically functioned as cheap (and blunt) instruments to protect value IP and trade secrets by preventing a key employee from walking out the door and immediately setting up in competition or joining a rival. Businesses will now need alternative strategies and tools to protect their valuable information and client relationships, beyond the standard employment contract.
- If the reforms require that any restraint on a higher-earning employee be supported by compensation business face a stark choice – pay to enforce the restraint, or abandon it altogether. For a business with five senior employees, this could represent a significant additional annual cost.
- Franchise and distribution networks face particular exposure. A significant number of small and medium Australian businesses operate as franchisees or within industry groups that rely on network-wide no-poach understandings. The proposed prohibition on no-poach agreements between businesses — backed by the civil penalties framework in Part IV of the Competition and Consumer Act 2010 – means those arrangements may become a source of regulatory liability.
- Existing contracts will need to be audited. Any business with current employment contracts containing non-compete, non-solicit, or no-poach provisions will need a systematic review of those clauses once the legislation passes.
What Should Businesses Do Now?
Don’t wait until you’re facing a civil penalty – start preparing now:
- Audit your current employment contracts. Identify every employee bound by a non-compete, non-solicitation, or no-poach clause, and record the commercial rationale for each one. The legislation will only apply to contracts entered into after it becomes law, but the courts will take a very strict view on pre-existing non-compete clauses. Make sure they are absolutely necessary and genuine before you seek to rely on them.
- Identify your genuinely protectable interests. The courts have long recognised that a restraint is only enforceable to protect a legitimate interest – for example confidential information, trade connections, or a stable workforce. Catalogue what you actually need to protect; this will guide the alternative structures you need to put in place.
- Invest in trade secrets and confidentiality infrastructure. Enforceable confidentiality obligations remain lawful under the proposed reforms. Tighten your NDA provisions, implement clear policies on handling confidential information, and consider whether any key methodologies or processes can be formally protected.
- Review your staff incentive structures. If you cannot prevent an employee from leaving and competing, the best retention tool is making it unattractive to leave in the first place. Equity arrangements, deferred incentives, and garden leave provisions (properly compensated) are worth considering.
- If you are a franchisor or operate within an industry body, seek legal advice on any network-wide arrangements. The proposed no-poach prohibitions may expose network agreements that have never been scrutinised for competition law compliance.
As always, we’re here to help you prepare. Just reach out and we can assist you in getting you ahead of the curve.