Banning non-competes – what might it mean for your business?

As part of its Budget, the Federal Government announced it intends to ban non-compete clauses that apply to workers earning less than the high-income threshold in the Fair Work Act 2009 (Cth) – which is currently $175,000 per annum.

When is the proposed ban intended to take effect, and who will it cover?

The Government's intention is to pass this ban into law in 2027, following the publication of the draft bill and a period of consultation. However, it has also foreshadowed that there will be a transitional period for businesses and workers, such that the ban will not take effect for a further period following its passage into law. Accordingly, if this ban is enacted, we expect that the relevant high-income threshold will be closer to $200,000 at the time it takes effect (although the exact amount cannot be determined at this stage, as it is calculated by looking at the average weekly earnings in Australia at the relevant time).

The Government has, in the messaging around this proposed ban, focused particularly on childcare workers, construction workers, and hairdressers – although the ban is not industry-based, and its intended operation is far broader than that. If any of the workers in your business earn less than the relevant high-income threshold, the non-compete ban will apply to those workers.

It is unclear at this stage whether the ban is intended to cover independent contractors, in addition to employees. The draft bill will reveal this, as well as other pertinent details including the proposed penalties for contravening the ban, and any exemptions from the ban.

The implications of the non-compete ban

Practically speaking, if the ban passes into law, there will be fewer disputes in which an employer seeks to enforce a non-compete against an employee who has left the business, as a large portion of employees will no longer be subject to any such restraint. Without the prospect of a non-competition restraint which prevents an employee from competing for a period following termination (and thus earning a wage), these employees will be free to move more readily from business to business. We expect that this will, in turn, give workers greater bargaining power to negotiate higher wages and more favourable conditions of employment generally.

However, from a practical perspective, non-competition restraints for some of these workers may already be unenforceable (although that does not currently prevent these from being included in their employment contract).

Non-competes will only be enforceable when they are reasonably necessary to protect the legitimate interests of the business (like the business' confidential information, intellectual property and goodwill, including customer connection). So while, pre-ban, an employer may be able to enforce a non-compete against a hairdresser who has the ability to build strong relationships with customers, a non-compete for a retail worker of a big business which is not as reliant on repeat customers, is unlikely to be enforceable.

We also expect (and indeed would encourage) employers to ensure that their employment agreements include adequate protections in relation to the company's confidential information and intellectual property, as these business interests will no longer be capable of being protected by a non-compete restraint if this ban passes. Similarly, employers will need to rely more readily on non-solicitation and non-dealing restraints.

We would also recommend that employers require longer notice periods from employees, with the employer then putting those employees on garden leave (effectively taking them out of the market, and stopping them from interacting with clients and colleagues) for the duration of their notice period.

What about other bans on post-employment restraints?

The Government has also foreshadowed that it will consider and consult on:

• non-competes for workers who earn above the high-income threshold; and

• clauses that restrain the solicitation of clients and co-workers.

If the Government ultimately proposes a ban on non-competes for high-income employees, we would expect this to be fiercely opposed by businesses, as employees who are remunerated more generously are often privy to company confidential information and intellectual property, and have significant client relationships – with the effect being that non-compete restraints are more likely to be enforceable against these individuals.

Any ban on non-solicits is also likely to be the subject of fierce opposition, as this would mean that individual employees would be able to solicit clients, and their colleagues, to take their business / move across from one company to a competitor. This would have significant financial implications for the former employer, who relies on the revenue these clients generate, and would also then need to incur the time and expense associated with hiring new staff.

We would again expect employers to tighten the drafting around other protections in their employment agreements, as well as requiring longer notice periods from employees so the employer can put them in the garden, taking them out of the market, for the duration of the notice period.

When will we know more?

Clayton Utz will comment on the draft bill, once published, as well as all other developments in this space (including if a more extensive ban on non-competes, or a ban on non-solicits, is introduced).

Otherwise, feel free to get in touch with our team if you would like to discuss what the proposed ban on non-competes for workers earning less than the high-income threshold may mean for your business.