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Labor plans to limit the use of non-compete clauses, on the basis that such constraints on the movement of workers to rival employers suppress both wages and innovation. By Jason Koutsoukis.
Inside Labor’s plan to restrict non-compete clauses
The Albanese government is moving ahead with plans to severely restrict the use of employment contracts that make it harder for workers to leave one company for a rival.
Regulating so-called “non-compete” clauses in employment contracts would be one of the government’s last legislative accomplishments before the next election, due within 10 months. The move promises to set up a fight with employer groups.
Assistant Minister for Competition Andrew Leigh tells The Saturday Paper the inclusion of non-compete clauses and other restraints on workers in employment contracts has spiralled out of control, keeping wages lower, limiting worker mobility and suppressing innovation. Non-compete clauses prevent workers from joining a competitor or starting a new business in competition with their current employer for a period of time.
“I wouldn’t say that there is 100 per cent support for banning non-compete clauses, but there’s certainly a recognition that the status quo is unsustainable,” says Leigh. “The goal of this reform would be to help create more jobs and more startup businesses.”
A ban on the use of non-compete clauses in employment contracts would bring Australia into line with the United States, where the Federal Trade Commission announced a ban on the use of such contracts in April. The rule is expected to come into effect on September 4.
Earlier this year, Treasury released data indicating that the use of non-compete clauses was far more widespread than previously thought in Australia, applying broadly across workers and industry sectors from financial services to childcare and fast food.
According to Treasury, one in five Australian workers has a non-compete clause in their employment contract; half of the labour force have some kind of restraint clause in their contracts; 40 per cent of large corporations use non-compete clauses; and 21 per cent of all businesses use non-compete clauses in their standard contracts.
“When I started talking about this a year ago, lots of people said, ‘Oh, this is really only a handful of tech execs, these things aren’t being used across the economy,’ ” Leigh says. “And then we did the surveys, and it turned out that one in five workers was constrained by non-compete clauses from moving to a better job.”
“They are having a pernicious effect on the economy. Banning them, as the US Federal Trade Commission estimates, will boost average wages in the US by $500 a year and create another 8000 businesses,” Leigh says. “These are the big gains to be had from non-compete reform.”
Leigh points to sectors such as hairdressing, private security and yoga teaching as examples of how non-compete clauses had gradually crept into areas of employment without most ordinary workers’ knowledge.
“Part of the reason for this is that a lot of employees have standard form employment agreements,” Leigh says. “So when someone is employing a new hairdresser, they don’t sit down and write an employment agreement from scratch, they go to employment lawyers who say, ‘Well, there’s no harm to you including a non-compete clause, so why don’t we throw one in?’ ”
Other types of constraint employers impose on their staff include: non-solicitation clauses that prevent workers from soliciting former customers and co-workers; non-disclosure clauses that prevent workers from disclosing confidential information relating to their employment; no-poaching agreements between businesses who agree not to hire each other’s staff; and wage-fixing agreements between businesses to cap wages or staff conditions.
While many clauses found in off-the-shelf employment contracts were probably not enforceable, Leigh says most employees would be loath to challenge them in court because of the cost of litigation.
“What we’re doing about non-compete clauses really reflects an increased realisation that a lack of competition doesn’t just hurt consumers, it can hurt workers too,” Leigh says. “If you are prevented from moving to a better-paying job, then that hurts the economy because startups don’t get access to the talent they need, but it also hurts you as an employee.”
Joellen Riley, professor of law at the University of Technology Sydney and a strong supporter of reform, says it is past time to address the harm such anti-competitive practices are doing to Australia’s labour market.
“Employment contracts have become like abracadabra to a lot of organisations, they’ve got no idea what it all means, they’re just a set of magic words that lawyers tell them to use,” Riley tells The Saturday Paper.
They’re often not properly amended to suit the actual employment areas they’re supposed to cover, she says, and most people don’t even look at the fine print of the contracts they sign.
“Until such time as there is a dispute, when some mean-spirited middle manager gets really pissed off that a bright person who they thought was a loyal staff member tries to go off to a competitor, and they decide they’re just going to make their lives as difficult as they can,” Riley says.
“And they are delighted to find that there’s one of these clauses in the contract that no one’s paid any attention to up until now and they just think, Oh, great, we’ll just sic the lawyers on to them, and they’ll very quickly find a barrister who’s more than happy to take a few grand to go to court to get this urgent interrogatory injunction to stop the employee from taking a new job.”
Riley says the boon to lawyers is more like a tax upon the fortunes of working people.
“I rather cynically say to my students that I think part of the problem is that we stopped teaching the doctrine of illegality in contract law a few years ago in the law curriculum, and now the barristers and even the judges don’t really think about the fact that, actually, some contracts can be illegal,” Riley says. “They forget that, and we now have a situation where they just want to enforce everything that’s in a contract over time.”
After releasing an issues paper in April that canvassed a range of reform options, Treasury received 47 submissions from a wide range of interested parties including unions and peak business, industry and legal organisations.
The Australian Council of Trade Unions is strongly in favour of a complete ban on non-compete clauses and other restraints, and has found rare common ground with gig-economy stalwarts such as Uber that are seeking rights for casual, part-time and gig workers to work at competing firms during their employment.
Among the biggest supporters of the status quo is the Council of Small Business Organisations Australia (COSBOA). Chief executive Luke Achterstraat stated in a submission to Treasury that small businesses used non-compete clauses and other restraint-of-trade clauses for reasons such as protecting trade secrets and confidential information, especially in industries where such information gave the business a competitive advantage.
Other uses cited by Achterstraat include safeguarding client relationships, and the need to retain talent and protect investments undertaken in training where a lot of personal time and effort is given to upskill an employee.
Echoing the COSBOA, the Australian Financial Markets Association, which represents the interests of 130 participants in Australia’s wholesale banking and financial markets, asserted that because financial services firms held significant intellectual property, confidential information and customer relationships, non-compete clauses and other forms of restraint were the most effective tools for such firms to keep this information from being transferred to competitors.
In AFMA’s submission to Treasury, chief operating officer Rob Colquhoun also contended that non-compete clauses benefited employees. He said the clauses gave employers the confidence to invest in their workers and to give them access to confidential information and intellectual property at early stages of their careers.
Perhaps the strongest opponent of significant changes to the law is the Australian Industry Group, which represents more than 60,000 businesses employing more than a million staff across Australia.
“Our members tell us they use these clauses in an appropriate and reasonable manner to support productivity, innovation, investments in employees, business continuity and growth, as well as protecting legitimate commercial interests,” Ai Group wrote in its submission to Treasury.
While it may be reasonable for the federal government to investigate the impact of non-competes and other restraint clauses in employment, any policy changes must be based on relevant and rigorous evidence, Ai Group said, otherwise business will suffer significant and adverse effects if any decision is made to limit the use of these clauses.
“Our members also tell us that non-competes and other restraints are highly valuable contracting devices which support innovation, productivity and business success in competitive industries.”
According to Joellen Riley, such arguments amount to little more than sophistry.
“If you want to keep your staff, there are legitimate means of doing it, and they are: pay good wages and be a good employer,” she says.
She adds that below the surface rhetoric, most employer lobbies will probably have mixed views.
“On the one hand, they will want to be able to have contracts that hold their staff to themselves, but on the other hand, if they are in fact suffering from labour shortages, they may start to see some advantage in a liberty to hire good people from other places, knowing that they won’t have to wait for them to come,” she says. “Many of them, I think, will actually come to see that for a lot of these restraints, they don’t really get any benefit from them when it comes down to it.”
The federal government is expected to announce a formal policy position in the coming months. In the meantime, the assistant minister for competition says when it comes to businesses that have significant intellectual property, there are questions as to how that intellectual property can be protected.
“We’re taking a more empirically focused approach to this than might have been true in the past,” says Leigh. “The data is just so much better now, and that’s the real pleasure for me as a policy wonk. It’s not my theory versus your theory; what we’re having now is an inherently informed discussion.”
This article was first published in the print edition of The Saturday Paper on August 10, 2024 as "Clause out".
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