The Australian government has signaled that non-compete clauses will be abolished for millions of Australian workers. Often described as a ‘grey area’ of commercial and employment law, below we provide an explainer on the operation of non-compete clauses in employment agreements and where they are headed in Australia.
Non-complete clauses may be valid and enforceable, particularly in transactional matters such as a sale of business or for employment of highly paid workers. However, in the employment space, changes are coming to regulate their use – subject to the circumstances of the employer and employee.
Key points:
- The Australian government has signalled their intention to abolish non-compete clauses from employment agreements for workers earning up to $175,000 per year.
- It’s likely that non-competes will still be enforceable in higher part/ executive employment agreements, provided that they are reasonable in the circumstances.
- Poorly drafted ‘blanket’ restraints may be deemed void and unenforceable.
- Restraints need to balance the employer’s rights to protect their legitimate interest while allowing an employee to make a living.
- The current reforms seek to ensure that non-competes go no further than necessary and don’t unnecessarily reduce worker mobility, impact productivity and wage growth.
- In the meantime, employees should carefully consider non-compete clauses in new employment agreements and employers should ensure the non-compete is relative and reasonable (and consider alternative options – eg notice periods/ garden leave/ termination deeds/ paid non-compete leave)
Are non-complete clauses on the way out
In handing-down its Federal Budget for 2025-2026, the Australian government announced plans to abolish non-compete clauses for most workers, which currently restrict over three million people from exploring better job opportunities. The reform aims to make career advancement easier by removing the need for legal intervention or employer approval to switch jobs or start a business.
The reforms were announced as part of the Federal Budget on 25 March 2025 and the Bill needs to be passed by both houses of parliament before it becomes law.
What are non-compete clauses and how are they used?
Non-compete clauses (also referred to as ‘restraint of trade clauses’ or ‘post-termination obligations’) are often included in employment agreements and are designed to place restrictions on employees moving to a competitor and encourage employee loyalty.
Typically, they define a specific time period and/or geographic area over which the ‘non-compete’ applies after the employee leaves the employer.
At common law, a restraint of trade provision is prima facie invalid unless the party seeking to enforce the restraint (typically the former employer) demonstrates that, at the time of entering into the contract, circumstances were justifying the restraint and whether it is reasonable in the circumstances of the particular case. In an employment context, a restraint should not exceed the legitimate business interests of an employer. Otherwise, such a provision risks being deemed void and unenforceable.
Recent data from the Australian Bureau of Statistics indicates over 20% of Australian businesses use non-complete clauses and almost 47% of Australian businesses use at least one type of restraint clause – such as a non-disclosure clause. In most cases, the use of restraint clauses has either remained the same or increased over the past 5 years.
Non-compete obligations can cover a number of activities before, during and after a period of employment, encompassing confidentiality, use of intellectual property rights, trade secrets and know-how, supplier and customer lists, goodwill, pricelists and prohibitions regarding soliciting an employer’s clients and recruiting colleagues to a new employer or a new business venture.
Typically, obligations which continue beyond the end of employment, eg confidentiality and intellectual property provisions may be enforceable. However, these obligations may need to balance the employer’s right to protect its legitimate interests and the employee’s reasonable right to earn a living and use their skills for the benefit of society at large.
However, the relative bargaining power between employers and employees can be inherently unequal. Even if an employee ‘seemingly’ agrees to such restraints by signing an employment agreement, this does not definitively deem these obligations valid and enforceable.
As recent Australian case law has demonstrated, it ultimately comes down to the individual circumstances of the matter:
McMurchy v Employsure Pty Ltd
In McMurchy v Employsure Pty Ltd, the New South Wales Court of Appeal upheld the validity of a non-compete clause on account of Mr McMurchy commencing employment with a competitor while still employed at Employsure and encouraging and inducing another employee to leave his employment.
Shire Real Estate Pty Limited v Kersten
In Shire Real Estate Pty Limited v Kersten, the New South Wales Supreme Court held that the enforceability of a non-compete clause is reduced when the employee’s employment is terminated by company (in this case by redundancy), and is further weakened if the period of employment was for a relatively short time.
It is noted that Australian businesses already have legislative and common law protections at their disposal in respect of improper use of information for personal gain or for a third party’s gain or to cause detriment to the company (eg, under section 183 of the Corporations Act 2001 (Cth)), and protection for certain personal information collected by some businesses (under the Privacy Act 1988 (Cth)).
Lochdyl Ltd v Lind [2024]
In the recent case of Lochdyl Ltd v Lind, the South Australian Magistrates Court found that although the employer had a legitimate business interest in protecting its customer base, it ultimately found that the restraint clause was ‘void and unenforceable’’ on account of it being longer than necessary and taking into account the absence of any form of compensation to the employee for the non-complete clause.
What are the current concerns about non-competes?
In several Western countries, non-compete clauses are outlawed, including the US where the Federal Trade Commission recently banned non-compete clauses nationwide, in an effort to increase competition, maintain the freedom for workers to change jobs and increase innovation and new business formation. These changes will render non-compete clauses in existing agreements unenforceable however, they will remain valid in limited circumstances, eg for ‘senior executives’.
It is also thought that the reduction in mobility of workers to higher productivity businesses has resulted in a slowdown in aggregate labour productivity growth.
Prior to the Federal Budget announcement, a recent Australian Treasury issues paper on the non-competes and other restraints outlined the impact non-competes have on businesses, workers and the broader economy, including:
- worker mobility, particularly for low-paid workers with low levels of bargaining power;
- the high cost of litigation;
- lack of use of cascading restraint clauses, which leave workers and employers with uncertainty around whether pre-agreed restrain clauses are reasonable and enforceable;
- impact of lower-paid workers who may not have the resources to challenge a non-compete obligation; and
- the economic impacts of potentially inefficient allocation of labour, in hampering productivity growth and innovation.
Under this backdrop, there has been a growing view that non-competes are outdated and are overly restrictive in terms of an employee’s career mobility, opportunities to innovate and wages growth (more on this below).
So, are current non-competes enforceable?
As noted above, the default position at law is that non-compete clauses are presumed unenforceable unless the specific restraints can be deemed ‘reasonable’. To establish reasonableness, an employer must demonstrate that:
- it has a legitimate interest in imposing the restraint; and
- the scope of the restraint is no wider than reasonably necessary to protect that legitimate interest.
Legitimate business interests may include:
- confidential information – to protect sensitive or proprietary information that could give competitors an unfair advantage if disclosed;
- trade secrets – proprietary or specialist knowledge acquired during employment; and
- customer relationships – established client relationships or networks that the employee has developed while working for the employer with its clients/customers.
We note in New South Wales, legislation provides that restraint clauses are valid to the extent only that they are not against public policy.
However, in certain circumstances, and if correctly drafted relative to the nature of the business and circumstances of the employee, non-compete clauses can be valid and enforceable.
Non-compete clauses are increasingly drafted in a cascading form which can change the geographical reach and time period of the restraint to the extent that it is enforceable. In contrast, wide-ranging blanket restraint clauses are not recommended as they are more likely to unenforceable and may create unnecessary and costly disputes when the employment ends.
So, in short, currently, non-complete clauses are only enforceable if an employer can demonstrate that it has legitimate interest that needs to be protected.
When can a non-compete clause be enforceable?
Currently in Australia, a non-complete clause is typically enforceable if it meets certain criteria. These clauses are used in employment contracts to prevent an employee from working for a competitor or starting a competing business for a certain period after leaving their current employer.
For a non-compete clause to be enforceable in Australia, it generally needs to meet the following requirements:
- Reasonableness
The clause must be reasonable in terms of duration, geographical area, and scope of activities restricted. Courts assess reasonableness to ensure that the clause does not unfairly restrict the individual’s ability to earn a livelihood.
2. Protecting Legitimate Interests
The clause must protect a legitimate business interest of the employer. This might include protecting confidential information, trade secrets, or customer relationships.
3. Not Contrary to Public Policy
The clause should not be deemed contrary to public policy. This means it should not overly restrain trade or an individual’s right to work.
4. Clear and Specific
The clause should be clearly worded and specific in detailing what is restricted. Vague or overly broad clauses are less likely to be enforceable.
5. Consideration
In employment contracts, the clause must be supported by adequate consideration, such as a benefit or compensation provided to the employee in exchange for agreeing to the restriction.
Australian courts use these criteria to determine whether a non-compete clause is enforceable. If a clause is too broad or imposes excessive restrictions, it may be partially or entirely unenforceable. It’s often a good idea for employers and employees to seek legal advice to ensure that any non-compete clause is drafted appropriately and stands a good chance of being enforced.
What should I do if I am starting a new job or ending my current employment
Before signing a new employment agreement or resigning to accept a new role, it is essential to read the relevant employment agreements thoroughly and seek professional advice to:
- ensure that you understand your obligations; and
- help determine whether or not such obligations are valid and enforceable.
Even if the law regarding non-competes changes, as the Australian government’s recent announcement suggests, many employment agreements may retain legacy restraint clauses that need to be reviewed or removed to ensure the agreements are legally compliant.
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What should employers do?
In anticipation of changes in Australia, employers should take care when seeking to invoke non-competes – particularly those containing long durations, wide geographical areas and restrictive effects (for example those that cover entire industries and a large number of competitors).
While some uncertainty remains about the use of non-compete clauses in Australia, employers should carefully consider means to protect their business interest with respect to employees such as:
- considering whether non-completes are legally applicable to the particular employee;
- if applicable, ensuring the restraints are relative to the position and reasonable in the circumstances (noting circumstances change during the term of employment/ at the time of termination);
- using cascading non-complete clauses in terms of the restraint period and restraint area;
- including longer notice periods and garden leave;
- using separate deed to deal with confidential information and intellectual periods; and
- considering paid non-compete periods.
Using a combination of the options above can be an effective way of helping to determine whether a non-complete clause is legally applicable. It is also necessary to consider whether restraints are reasonable in the circumstances when employment ends.
The options always depend on the circumstances of the employee’s engagement and can depend on factors such as their seniority, level of compensation and likelihood of obtaining alternative employment (while adhering to the restraints).
In any case, we recommend employers seek professional advice before issuing an employment agreement to ensure the contract is correctly drafted, relevant and reasonable to the prospective employee if confidential information, intellectual property, trade secrets or customer relationships are important to their business.
Need help?
If you require assistance with employment non-compete matters, either email us or book a free 15-minute consult via our website.
Disclaimer
The information in this article is general in nature, does not constitute legal advice and should not be treated as such. You must not rely on this information as an alternative to legal advice from a qualified lawyer.