The Federal Government’s proposed ban on non-compete clauses is touted to benefit lower income workers; however, it is those very employees who will be hit the hardest, writes Commercial Litigation Partner, Charles Lethbridge.
With the election on May 3rd just days away, the Federal Budget last month delivered an unexpected proposal to ban non-compete clauses for those considered to be lower income workers, earning under $175,000.
When Treasurer Jim Chalmers handed down his fourth budget on March 25, few were expecting him to announce the ban on non-compete clauses.
Non-compete clauses have always been a source of controversy. They are, in fact, legally unenforceable on their face unless proved by an employer to be reasonable and valid.
While news reports following the announcement were quick to frame the ban as a victory for low paid workers, the reality is arguably quite different. In fact, the ban is more likely to disadvantage the very workers it claims to protect.
In my view, it’s hard to see how Treasurer Chalmers’ proposal represents good policy. After all, the employers most likely to be adversely affected by the ban are, for the most part, small business owners and constituents of the government.
For businesses, banning non-compete clauses will likely lead to increasing costs as the frequency of training new staff will undoubtedly go up when staff are free to move around without restriction and renegotiate employment contracts.
Non-compete clauses are a type of “restraint of trade” clause, typically found in employment contracts aimed at confining an employee’s actions when they leave their job. The non-compete clause’s purpose is to prevent employees from competing with their former employer by being employed by a nearby competitor or setting up their own business in the same field, close by.
They are not to be confused with another “restraint of trade” – a non-solicitation clause. This restraint of trade clause is intended to stop former employees from soliciting or liaising with clients or customers of their former employer or encouraging fellow co-workers to leave, often for a specified period after leaving their former employer.
The issue with a ban on non-compete clauses
The debate about non-compete clauses has been founded on considering the interests of workers who wish to be free to move to competitor businesses or set up on their own.
Although designed to stop an employee from acting in a detrimental way to their employer when they leave a job on the one hand, non-compete clauses genuinely protect a business’ confidential information and goodwill. They allow the legitimate business interests of employers who rely on them to protect their businesses and business relationships.
A ban could make it more difficult for businesses to protect their goodwill and intellectual property, guard trade secrets and other confidential information, if employees are free to move to competitors without time or location restrictions when employees move on.
The ban also increases the likelihood of employees being approached by other firms and perhaps also make it less likely for employers to invest in training of their staff if they know the employee can take that training to a competitor.
Crucially, a ban could have a detrimental effect on businesses being bought if potential purchasers don’t feel they have the protection of non-compete clauses. It’s hard to imagine how this is a good thing for the economy.
A common argument against non-compete clauses is that they unfairly tilt the balance of power towards employers by restricting how employees can use their skills and experience to advance their careers after leaving a job. It’s also argued that such clauses could deter potential employees, especially if they’re unfamiliar with non-compete agreements or if these clauses aren’t standard within the industry.
According to the Australian Bureau of Statistics, around 20 per cent of employees across Australia have non-compete clauses in their employment contracts. In the finance industry, that figure can rise to as high as 40 per cent, with these clauses being actively enforced by businesses in this sector.
Some have argued the timing of the ban is a governmental reflex action to counter the cost-of-living crisis and a vote winner ahead of the Federal Election. No doubt a consideration for this recent budget announcement.
By dismissing restrictions on employee movement, it is likely the Treasurer considers employees’ salaries will be more likely to increase due to unencumbered competition from other potential employers. For example, if people can move from one employer to the next without repercussion in order to improve their remuneration.
Equally, incumbent employers may be more inclined to increase their employees’ remuneration if they know those employees are free to work for a competitor down the road. In any case, on a cursory level, the idea is that this added pressure on employers to offer better wages could improve the position of employees.
However, there are many factors to consider and potential issues that could arise from the proposed ban. For example, a business’ confidential information is already protected under common law, regardless of whether a written non-compete clause exists. So, does the government also intend to overturn that 400-year-old law?
Paradoxically, it may be that a ban on non-compete clauses will lead to more costly litigation between employers and employees which no doubt few can afford in the current cost of living crisis.
