Employers’ ‘game of bluff’ with non-compete clauses is over

With the Albanese government announcing the banning of non-compete clauses in budget 2025, employers can no longer bind their workers to these clauses as a form of enforcement.

Treasurer Jim Chalmers handed down a pre-election budget earlier this week, in which he announced the banning of non-compete clauses for workers who earn less than the high-income threshold ($175,000).

Non-compete clauses operate to prevent workers from either seeking or accepting new employment within the same industry they were working in following the termination of their employment.

In a move that has been praised by workers and unions and scolded by employer groups, the ban seeks to “lift the wages of affected workers by up to 4 per cent, or about $2,500 per year for a worker on median wages”, Chalmers said.

Australian Council of Trade Unions (ACTU) president Michele O’Neil was one of the many applauding the actions of the Albanese government, claiming that more than 3 million Australian workers – who are currently covered by non-compete clauses – will be granted more “freedom”.

“Three million workers are now looking forward to more freedom and higher wages because of the ban on non-compete clauses in employment contracts. Non-compete clauses have stopped workers [from] changing jobs even if that job will pay them more or give them better conditions, driving down wages and stifling competition,” O’Neil said.

Australian Chamber of Commerce and Industry (ACCI) chief executive officer Andrew McKellar failed to share O’Neil’s enthusiasm for the removal, citing the ban could put the confidential information of businesses at risk.

“Banning the use of non-competes for anyone earning less than $175,000 a year means employers cannot ensure that the majority of employees do not unfairly use intimate knowledge of advantages or assets at a new employer,” McKellar said.

“I urge the government to preserve the legitimate use of non-compete clauses to protect genuine business interests – the policy does not achieve this balance.”

“All businesses have the right to protect their confidential information. Any suggestion that they should not be able to do so is abjectly inappropriate. Restraints derived from business-sale agreements, confidentiality clauses and NDAs have zero impact on labour force mobility – limitations should be expressly off the table.”

Speaking to HR Leader, Stephen Roebuck, associate director of consultancy at Peninsula Australia, touched on the changes that employers will have to make moving forward to ensure the protection of confidential information that McKellar has expressed concerns over.

“The proposed ban on non-compete clauses, aimed at empowering low- and middle-income employees, may make it harder for businesses who are struggling to fill roles in a historically tight labour market,” Roebuck said.

“It may result in increased wages as employees enjoy more bargaining power. Should this measure take effect, business owners should have employment contracts with comprehensive confidentiality and intellectual property clauses to protect their interests.”

‘Game of bluff’

HR Leader reached out to Michael Byrnes, employment law partner from Sydney-based firm Swaab, who argued that the change enacted by the government was largely pushed by “theoretical economists”.

“This is a change largely driven by theoretical economists who demonise non-compete clauses and largely fail to properly recognise that the courts, over an extended period of time, have carefully developed principles that balance the protection of legitimate business interests of employers with the right of employees to earn a living,” Byrnes said.

Despite these criticisms, Byrnes noted that the move to cut that ban off under the high-income threshold works to protect the confidentiality that both Roebuck and McKellar raised.

“It is sensible that, at this stage, the prohibition or non-compete clauses will only apply to employees earning less than $175,000 per annum. As a general proposition, that cohort of employees have not had the access to confidential information or client connections during employment to support court enforcement of non-compete clauses against them by a former employer,” Byrnes said.

Byrnes alluded to employers often using non-compete clauses as a scare tactic or “game of bluff” to refrain employees from joining competitors – given the fact that these clauses often won’t stand in court.

“To some extent, employers who purport to bind such employees with non-compete clauses have been playing a game of bluff, hoping to achieve enforcement through threats that could never realistically be carried through to conclusion in a court,” he said.

“The employer knows that but includes the restraint in the employment contract and then, after the employment ends, uses the contractual restraints as the basis for a letter of demand.”

“While the applicable legal principles would support the employee giving the letter short shrift (given a court would probably not ultimately enforce the restraint), employees nevertheless get concerned and either defer joining the competitor or cancel plans to do so altogether. Restraints that would likely be unenforceable end up having a chilling effect. This reform brings that to an end.”

When asked if the introduction of the ban was merely a stepping-off point regarding the government perhaps extending the removal of non-competes past the high-income threshold, Byrnes noted that it was possible.

“It is possible the prohibition will be extended to higher income earners. That is a policy change that has been previously canvassed,” Byrnes said.

“Given the post-employment restraints that are ultimately enforced by courts tend to be against employees [who are] high-income earners (on the basis they have had access to confidential information and customer connections), it would have a far more significant practical impact.”