Tuesday's Federal Budget foreshadowed significant changes for employees with non-compete clauses in their employment contracts.
The Albanese government has pledged to prohibit non-compete clauses for employees who earn less than the high-income threshold (currently $175,000) by 2027.
This change will affect over three million Australian employees.
The aim of this initiative is to support employees by eliminating obstacles that hinder them from launching their own businesses or pursuing better-paying opportunities. The Treasurer, Jim Chalmers, revealed the changes will increase annual wages by up to $2,500 for employees on median to low wages and will boost GDP by as much as $5 billion. The changes could also improve productivity and reduce inflation.
The government also foreshadowed its intention to "close loopholes" in competition law that currently allow businesses to:
- establish agreements that restrict wages and limit employees' pay and conditions in an anti-competitive manner, without informing or obtaining the consent of the affected employees; and
- implement "no-poach" agreements to prevent employees being recruited by competing companies.
What are non-compete clauses?
Non-compete clauses are post-employment restraints that seek to restrain employees from working for a competing business within a defined geographical area for a defined period of time. If an ex-employee breaches the terms of a non-compete clause, the ex-employer can claim damages against the ex-employee for breach of contract.
Post-employment restraints are generally considered unenforceable unless the employer can demonstrate that the restriction is no broader than what is reasonably required to preserve its legitimate business interests. What is "reasonably required" will vary depending on the nature of the role and industry; for example, a three-month post-employment restraint may be reasonable for a Senior Executive, however it is likely unreasonable for an entry-level employee.
What will this mean for employers?
This announcement will only become law if the Labor Government is re-elected at the upcoming Federal Election.
However, a ban on non-compete clauses will expose employers to heightened competition, as employees are more likely to join rival employers or start competing businesses. Employers could face increased challenges retaining talent and protecting client relationships.
If enacted, adapting to the ban will require employers to develop alternative strategies, like enhanced confidentiality and intellectual property agreements and improved employee retention initiatives such as incentive programs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
