Restrictive covenants in Australian employment contracts – an evolving area of law

If a clause is deemed unreasonable, it’s void at common law. The exception to this is in New South Wales, where the Restraint of Trade Act 1976 (NSW) allows for the modification of restraint clauses to enable enforceability.

Non-compete and non-solicitation clauses offer several commercial advantages. They help employers protect both tangible and intangible knowledge, as well as their connection with customers and other employees. In turn, this can encourage investment in innovation. However, there is growing opposition to these clauses within Australia on public interest grounds, with critics arguing that they stifle wage growth, limit employee mobility, and create barriers for new entrepreneurs trying to enter the market due to the difficulty in securing talent.

Movement to eradicate restraint clauses

The Australian Labour Party, having formed a commonwealth government in 2022, has introduced a range of significant employee-friendly legislative amendments to improve wages and conditions for employees. The government also established the Competition Taskforce (Taskforce) to build a more dynamic and productive economy. 

The Australian 2023 Employment White Paper highlighted that non-compete clauses might be hindering labour force mobility, innovation, and wage growth. The Taskforce is now advising on reforms to either eradicate or strictly limit the use of non-compete and related clauses as part of future legislation. There have been a range of submissions to the Taskforce from key figures in Australian labour law, many of them in support of radical legislative intervention.

Proposed reforms include: 

• A complete prohibition on non-compete clauses for employees below prescribed income levels; 
• Limiting the maximum duration of non-solicitation clauses to 3 months; and 
• The imposition of mandatory compensation for employees subject to restraints. 

These proposals are consistent with similar international reforms. The US Federal Trade Commission has banned non-compete clauses nationwide, effective 04 September 2024. In early 2023, the United Kingdom faced proposals to limit non-compete clauses to three months, and while no legislation has been enacted yet, changes are expected.

Where to next?

Once a very stable area of Australian law, rapid legislative change is expected, which means corporations employing personnel in Australia may need to reconsider their reliance on non-compete and non-solicitation clauses, and explore alternative strategies for protecting their commercial interests.

---

Brian Powles is a Partner at Walter Baden. He acts for employers across Australia in all areas of workplace law, including general protection applications, unfair dismissals, employment contracts, policies, breach of contract, workplace investigations, redundancy, restraint of trade, intellectual property disputes and discrimination.