Should non-compete clauses be banned in Australia?

According to the Australian Bureau of Statistics (2024) and the not-for-profit economic research body, e61 Institute (2023), one in five workers are subject to a non-compete clause, 50 per cent of workers possess some kind of restraint clause and 21 per cent of all businesses use non-compete clauses.

Luiz Izzo from Australian Business Lawyers & Advisors explains that there are three main types of clauses.  “There’s non-competes which are the most common and the most onerous for employees … when they leave their employment, they can’t work for businesses doing similar services or competitive businesses.

“Those clauses can tend to be the most difficult to enforce because they really constrain a person’s ability to actually earn a living,” he says.

Izzo adds that there are two other categories of restraint clauses including the non-solicitation of clients and suppliers, and the non-solicitation of employees. “The position broadly is that in all jurisdictions, all three clauses are on their face unenforceable because they are against public policy. [The notion is that] people should have an ability to go and earn a living and do those things. But the courts will enforce the clauses to the extent that they are necessary to protect the legitimate business interests of the party trying to enforce the clause,” he says.

Courts are usually reluctant to enforce the clause unless they can be satisfied “that there is real risk of confidential information of one employer being inevitably used in the next [employer]… or it might be that the role [the person] is coming from, it would be impossible to do the next role without having what’s in their brain because obviously …. It’s not like a computer, you can’t just delete what’s in an employee’s brain as if it never existed,” he says.

Izzo explains that the courts may consider other factors like the levels of customer connection, employee seniority, remuneration for the restraint, and whether there is genuine competition between the businesses. “They’ll look at the balance of convenience, the impact on the employee … if the employee has gone somewhere else, the extent to which the employee has acted with clean hands. Have they gone and taken company information?” he says.

When it comes to the legal profession, Izzo explains that confidential information in this context does not refer to general knowledge of the law. “[I]t would be things like specific knowledge about particular clients, specific knowledge about a particular billing arrangement, discount arrangement, or retainer arrangement that they could then go and set up elsewhere,” he says.

Izzo points out that law firms would be more worried about protecting “customer connections.” “A particular lawyer may have strong, deep connections with certain clients and the concern would be that the firm can’t rebuild those relationships or protect them ,” he says.

“One of the big things that goes to ‘reasonableness’ is whether the firm is prepared to pay [an employee] to sit out during the restraint period,” he says.

There are two contexts where these clauses might come up. One is in a sale of business context, where the purchaser wants to ensure that it obtains values for the money that it paid for the business and to ensure that the seller of the business is not going to set up a competing business the very next day. The other scenario is in the employment context. Izzo says that we need to separate the two. “We need to accept that in a sale of business context, there’s a much bigger role for them to play, They actually promote economic activity. They shouldn’t be viewed as being necessarily against public policy,” he says.

He acknowledges the concern that employees may not “have the bargaining power at the commencement of the [employment] relationship to try and negate to take these clauses out.

“As a result, they sign up to something not fully appreciating its impact. Five years down the track, they look to go elsewhere, and all of a sudden, their very livelihood can be at risk,” he says.

Michael Byrnes, partner at Swaab, says “the restraint needs to be reasonable. It needs to properly balance the right of a worker, an employee, to change positions and to be able to earn a living, to not be stuck in a particular employment situation they are unhappy with because they are unable to move due to the restraint,” he says.

“But it also needs to be long enough to give the former employer, seeking to enforce the restraint an opportunity to protect its interests,” he says.

When it comes to the enforceability of restraint clauses including non-compete clauses, Byrnes says “most restraints are in cascading form, which is something of a contrived form of drafting if you think about it,” he says.

“Ordinarily, an obligation is clearly spelt out … but with cascading clauses, it’s almost like it’s a choice, like one of those choose your own adventure books …”

There can be no doubt that lawyers, regardless of seniority, come into contact with client information and other sensitive material in the course of their work.

”There is no question in all of this that confidential information must remain confidential. That is an immutable principle,” says Byrnes.

“Particularly for lawyers, any information about clients and their matters remains confidential. … The real question is: to what extent should a post-employment restraint, such as a non-solicit or certainly a non-compete [clause], be applied and enforced against a junior solicitor?” he says.

Byrnes believes that it would depend on the seniority of the lawyer, but the client relationship generally resides with the partner or more senior lawyer than the junior lawyer. “It would be much more difficult, than it should be, to justify the enforcement of a restraint, a non-compete restraint, on a junior lawyer than a senior lawyer,” he says.

But he points out that often a senior lawyer at a special counsel or senior associate, may apply or seek partnership in the firm but is turned down as their “business case is not strong enough” or they don’t have enough “client connections.” If that senior lawyer then leaves the firm to be a partner at another firm, their former firm may seek to enforce a non-compete clause against that lawyer.

“To me, that’s a disconnect there…,” Byrnes says.

Michael Byrnes doesn’t subscribe to the assertion that restraints aren’t worth the paper they’re written on.

“That’s a blanket statement that overlooks the complexities and nuances involved in the question of whether a particular non-complete, [and] also to some extent non-solicit clauses, are enforceable against an employee,” he says.

Whether the clauses are enforced depends on a range of factors. In Byrne’s experience, very few of these kinds of matters ever make it to court. “Most disputes resolve by way of either agreement, or one party capitulates. Either the former employer just forgets about it, makes the demand and doesn’t follow through with it, or the former employee who is subject to the restraints, modifies their behaviour in some way…,” he says.

He gives the example of an accredited specialist in personal injury who is subject to a non-compete clause and the clause prevents that person from working in firms or do any work in  personal injury for six months.

The employee might argue that it prevents them from earning a living but on the other hand, the employer may argue that it only prevents them from working in the personal injury space for six months. “But it doesn’t stop you doing conveyancing … employment law or family law …,” he says.

“The argument … might be … well I am an accredited specialist in personal injury law. This is what I do, this is where my practice lies. … it’s not really open to me now just to suddenly decide for the next few months to become a family lawyer. That’s not the way it works,” he says.

Byrnes points out that if you practice in one area of law, whether you are an accredited specialist or not, it will be harder for the former employer to enforce that restraint.

Is legislative reform needed?

When it comes to regulating non-compete clauses, countries like Austria, Finland and Germany are already on the front foot while other jurisdictions such as the United States and the United Kingdom have taken the step of either limiting the use of such clauses or banning them altogether.

Luiz Izzo says any reform would need to keep a number of factors in mind. “[T]hey need to get the balance right between sale of business and employer/employee constraints. They can’t deal with them in the same way … I really do think there needs to be differential regulatory treatment of those two.

“… If you look at the common law principles, the common law has always sought to ensure that they are enforced where there’s a legitimate business interest …,” he says.

“I think if we saw a codification of the common law position so that we had a relatively consistent position federally, and perhaps if we did adopt the NSW model where it can be rewritten to a form that’s reasonable. I think that’d be a welcome form of regulatory intervention.

“…If we come in and just tear them up, it may have some benefits in some contexts, but equally, it’s likely to have an impact in other ways,” he says.

Byrnes has a similar viewpoint. “I think Australia should do what it’s doing now. … The legal profession has this right because the relevant principles seek to strike the important balance between protecting legitimate business interests and employees being able to earn a living,” he says.

Byrnes points out that in New South Wales, there is the Restraint of Trade Act 1976 (NSW), which enables the courts to read down restraints.

“The principles established by our courts already grapple with these matters …” he says.