A re-elected Labor government will ban non-compete clauses for those earning less than $175,000.
The Albanese government’s pledge to end non-compete clauses for low- and middle-income workers will place Australia in line with similar moves internationally.
Treasurer Jim Chalmers revealed the news in the 2025 budget on March 25, with changes set to apply to workers earning below the ‘high income’ threshold as defined by Fair Work: currently $175,000 per annum.
Non-compete clauses prevent or restrict an employee from moving to a competitor and can restrict movement for a period of time or for a geographic location.
It’s a reform Dr Chalmers said was necessary after a Treasury Competition Review heard troubling accounts of misuse of the clauses, particularly cases of minimum wage workers being sued by former employers.
“Australians shouldn’t need a lawyer to go to a higher-paying job. Even where non-compete clauses aren’t legally enforceable, they can lower worker mobility,” Dr Chalmers said.
“Research suggests the reforms could lift the wages of affected workers by up to four per cent, or about $2,500 per year for a worker on median wages.
“Productivity Commission modelling suggests the changes could improve productivity and add five billion dollars, or 0.2 per cent, to GDP annually, as well as reduce inflation.”
A 2023 McKinnon poll found one in five of 3,000 survey respondents had a non-complete clause. Many of those surveyed were low-wage workers with little to no bargaining power.
And research by firm e61 Institute found workers at firms that use NCCs extensively were paid 4 per cent less on average than similar workers at similar firms that use non-disclosure agreements but not NCCs.
The Albanese government’s move reflects those made (or proposed) by other governments globally.
In the US, the Federal Trade Commission labelled non-compete clauses exploitative and planned to legislate a comprehensive ban on NCCs for all workers from September 4 last year.
As part of that reform, NCCs entered into before the implementation date would be void, apart from those of senior executives, which would be allowed to run their course before being prohibited in future contracts.
In its research, the FTC estimated a ban on NCCs would lead a 2.7 per cent per annum increase in the formation of new businesses, resulting in 8,500 new businesses being added each year.
It also forecast the ban could foster innovation, leading to an estimated average increase of 17,000 to 29,000 new patents each year.
The FTC said that, during its 90-day public consultation period, 25,000 of the 26,000 submissions received were in support of a ban.
However, on August 20, just weeks from legislation coming into effect, the US District Court of North Texas issued a nationwide injunction against enforcement of the ban.
That ruling hinged largely on what Judge Ada Brown said was a lack of constitutional and statutory authority on the part of the FTC to promulgate the rule.
Judge Brown also criticised the “unreasonably broad” nature of the reform.
Despite falling flat in the US, a ban has been implemented in several other countries, including Colombia, Malaysia, Mexico and India.
In many other countries, non-competes are allowed but rarely enforced.
In Singapore, for instance, courts take a conservative approach toward the validity of an NCC, with the burden on the enforcing party to justify the clause.
And in some countries – like China – NCCs are legal and enforceable, but a business seeking to enforce a non-compete must pay the employee for the duration of the non-compete period.
But how enforceable are NCCs for low-income workers?
Under common law, restraints on trade are considered to be against public policy, and therefore unenforceable, unless they are reasonably necessary to protect the legitimate interests of the employer.
However, there are concerns that despite being unenforceable in many cases, the uncertainty, cost and time, and reliance on litigation to resolve disputes has an effect on employee mobility.
Balfour Meagher executive director and senior commercial lawyer Tom Meagher said he welcomed the move to crack down on non-compete clauses.
“These clauses have started to infest employment contracts. They’re draconian,” Mr Meagher told Business News.
“What was originally meant to be the exception and to protect an employer from serious damage has now almost become a standard feature of an employment contract.
“It’s inherently against public policy to restrain an employee from being able to undertake their livelihood.”
Mr Meagher said while there were provisions to protect employees under common law, it was unrealistic to expect people to fight the clauses.
“Even though they’re not meant to really be accepted under common law, it’s still a contract that the employee has put their signature on, so it is enforceable,” he said.
“The cost, stress and time it takes to defend or break these clauses just isn’t worth it for a lot of people.
“So I think it’s a sensible and overdue decision, because these clauses have gotten out of hand.”
Real estate is one sector expected to receive a shakeup should the reforms be implemented, with data from the Australian Bureau of Statistics showing it had the second-highest take-up of non-compete clauses, at 32.6 per cent.
However, Burgess Rawson WA managing director Chris Wiese told Business News he didn’t see the removal of NCCs as a problem for companies that maintained a good culture.
“We see the move to ban non-compete clauses as a positive step. If you’re a good employer, your team members will stay,” Mr Wiese said.
“At Burgess Rawson, we focus heavily on culture, support, and long-term development.
“We invest in our team and we back ourselves to retain great talent without needing legal restraints.”
Following a period of consultation on policy details, the reforms will take effect from 2027.
The treasurer flagged the ban may also be extended beyond low- and middle-income earners.
“We will also consider and consult further on non-solicitation clauses for clients and co-workers, and non-compete clauses for high-income workers,” Dr Chalmers said.
Mr Meagher was sceptical about extending the ban to high-income workers.
“Let’s separate high-income and high-value employees, because with the $175,000 threshold, high income could mean a traffic controller, and there’s not much point having a non-compete on them,” he said.
“So, let’s say high-value employees like those in C-suite roles; there are valid reasons to have non-compete clauses for employees like that, who can do significant damage to the business.
“I think you’d start to see longer periods of gardening leave and longer notice periods being required before a high-value employee can leave a role.
“I’d also think it could drive wages down at the high-value level. You’ll have some companies taking the cost of training a new employee, the onboarding and the like, into account when negotiating pays.
“They’ll say, ‘Well, why should I spend all this time and money training someone when they can just leave?”
Mr Meagher said compliance costs for businesses wouldn’t be insurmountable, given the clauses would just be rendered obsolete with no need to rewrite contracts, but there were other concerns for businesses.
“One is this notion that it could devalue some businesses. You might see smaller firms predated upon and have their staff poached,” he said.
“That’s always existed; it’s just free-market choice. But at the same time I think it could become problematic if there aren’t protections for business.
“At the end of the day, employees don’t employ people, employers do. You’ve got to keep small business; they’re the biggest source of employment in Australia.
“You’ve got to make sure they’ve got at least some protection or certainty with employment. It’s a good, sensible decision, but it probably needs a little bit more clarity.”
