Show some restraint: the Federal Government’s changes to non-compete clauses are coming

Minister for Employment and Workplace Relations, Amanda Rishworth, has confirmed that Labor will press ahead as a “real priority” with their election commitment to ban non-compete clauses for low and middle-income earners. These proposed reforms are part of a broader agenda aimed at “encouraging aspiration, unlocking opportunity, lifting wages and making Australia’s economy more dynamic and competitive.” The government has positioned the move as a key step toward “boosting wages and building a stronger economy.”

Non-compete clauses, which restrict workers from working for a competitor or starting a similar business post-employment, have become increasingly common across all industries. A 2023 survey, which formed the basis for Labor’s proposed reforms, found that:

• almost half of all businesses use some form of post-employment restraint clause;
• 22% of businesses impose non-compete clauses, and most of these apply to over 75% of their workforce; and
• these clauses are not limited to executives or high-income earners – they appear across managerial and non-managerial roles – roles which can hold considerable amount of sensitive business information.

Timing and scope of the proposed amendments

The government has confirmed that the ban will apply prospectively from 2027. We anticipate that this will mean that the changes will be implemented in a similar manner to the fixed term contract prohibition (see article here). That is, that restraints that are in employment contracts at the time will survive until a variation of that contract or a new contract is entered into after the law commences. We understand that the legislation will not operate retrospectively to invalidate non-compete clauses, thereby allowing employers time to adjust and safeguard business interests.

Employers are encouraged to review employment contracts and seek legal advice on ways to adjust or strengthen their positions in order to protect legitimate business interests.

What can employers be doing now?

The following practical steps can assist employers prepare for the upcoming reforms and reduce a reliance on non-compete clauses.

1. Review existing employment contracts

Identify workers currently subject to non-compete clauses, particularly those earning under the high-income threshold, as these clauses are likely to be unenforceable after 2027.

Review other clauses, including non-solicitation and non-poaching, noting that consultation will also occur in relation to these types of restraints.  Additionally, bolstering IP and confidentiality will be important, as these clauses will remain enforceable.

2. Bolster alternative protective measures

Employers should consider strengthening alternative contractual obligations, including:

• Extending notice periods to provide the business time to protect interests. It would be reasonable to implement three, six or even 12 month notice periods in some circumstances. There is no better restraint than a notice period. Similarly, consideration may be had to longer notice obligations being placed on the worker.
• Implementing garden leave provisions to maintain control over information during exit or notice periods. Remembering that in the absence of a specified gardening leave clause, directing a worker not to perform their usual duties can be problematic.
• Reinforcing confidentiality, non-solicitation, and IP clauses to clearly set out obligations and remedies for breach post-employment.
• Inserting a clause to current contracts which clarifies any non-compete clause is intended to survive any changes in law (subject to legality). This could assist employers preserving restraints in the short term, but they would need to be drafted carefully to be enforceable.

3. Exercise caution with contract variations

Employers should avoid unnecessary variations to existing contracts, particularly those that could be considered substantial or material changes. Such changes may trigger the need for an entirely new contract. This could result in the new contract being subject to the post 2027 amendments.

4. Consider income levels of your workers

Given the threshold, employers should review the remuneration of workers that are close to that amount and consider increasing worker’s remuneration levels so that they will not be covered by the new legislation (noting that it is likely that the remuneration amount will be indexed similar to the high-income threshold).

Additionally, we expect that there will be arguments run that those workers earning above the threshold are more likely to be subject to non-compete clauses in their employment contracts, given the government has turned its mind to what constitutes an unenforceable restraint.

With the ban expected to take effect from 2027, employers are presented with an opportunity to proactively review their contractual arrangements. Considering these will assist in mitigating risk when the new laws commence.

Our Workplace Advisory and Disputes team is closely monitoring these developments and is available to assist employers with compliance strategies, contract updates, and advice to mitigate risk.

If you require assistance ensuring your workplace is compliant with the latest workplace reforms and practices, please contact our team of Employment Advisory experts.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here.

Authored by:
George Haros, Partner
Grant Klemm, Associate
Megan Grimshaw, Graduate