Non-compete clauses are provisions in employment contracts that restrict employees from working for competitors or starting a similar business for a certain period after leaving a job. This has often been considered to be the most severe form of restraint.
Several countries have moved to restrict or outright abolish non-compete restraint of trade clauses in employment contract. Notably, the US has banned most clauses for employees across the US, but some senior executives may still be subject to existing non-competes.
The Albanese Government announced some significant changes to target non-compete clauses in employment contracts in early 2025 as part of its 2025-26 Federal Budget. It is forecast to inject approximately $5 billion into the economy and potentially increase individual wages by up to 4% on average annually.
While restraint clauses remain a common feature of commercial and employment agreements, their enforceability is subject to careful judicial scrutiny, with courts balancing the reasonableness of the restraint against the interests it seeks to protect.
Purpose and Intention
Starting in 2027, the government plans to ban non-compete clauses for employees earning less than $175,000 per year.
This change aims to accommodate job mobility and to allow workers to pursue better opportunities to advance themselves and their careers without the fear of legal constraints or the threat of litigation. Ultimately, the aim is to boost wages, job mobility and productivity, support small business growth and encourage fair competition.
It is important to note that other types of restraints, like confidentiality and non-solicitation clauses, are not affected and can still be used to safeguard legitimate business interests.
Enforceability of Restraint Clauses
With an exception to NSW, restraint of trade clauses are presumed by the Courts to be void unless the enforcing party is able to satisfy a Court that the restraint is reasonably necessary.
The Restraints of Trade Act 1976 (NSW) permits the Court to read down unreasonable restraint clauses so as to preserve and enforce their reasonable components, rather than striking them down in their entirety.
In summary:
- Restraints must protect legitimate business interests (including client lists, IP, trade secrets).
- Must be reasonable in scope, time and geography (2-3 months is acceptable, 1 year less so).
- Presumption of unenforceability if the restraint is too broad and the burden of proof is on the employer.
The proposed reforms mark a significant change to the use of non-compete clauses in Australia, with the aim of increasing job mobility, competition and wage growth. While employees are likely to benefit from greater freedom to pursue new opportunities, employers will need to rely on other contractual protections to safeguard their business interests.
We are closely monitoring developments and are available to provide tailored guidance and support.
If you would like advice on how these proposed changes may affect your business, please contact Priscilla at priscilla@morganenglish.com.au
