Federal Treasurer Jim Chalmers this week announced as part of Labor’s 2025-26 Budget that from 2027, non-compete clauses will be prohibited for employees earning under the high income threshold in the Fair Work Act 2009 (Cth) (currently $175,000). This article considers what this might mean for your business.
This change follows a broader government review of competition laws, which looked at how restraint clauses affect workers and businesses in 2024. If your business uses non-compete clauses in employment contracts, now is the time to prepare for potential changes.
What are non-compete clauses?
Non-compete clauses are a type of restraint clause. They are designed to prevent an employee or contractor from moving to a competitor and using strategies and confidential information learned in one business to compete with another. This also includes seeking to prevent the individual from setting up their own business in competition with their old employer.
Other types of restraint clauses exist in some written employment contracts and include:
Non-disclosure clauses which prevent an ex-employee from revealing certain confidential information they learned during their employment; and
Non-solicitation clauses which prevent an ex-employee from poaching clients or current employees to go and work with them at another business.
Restraint clauses are typically expressed to operate for a certain period of time and in a particular geographic area.
The law currently requires that any restraint clause periods and areas must only be so long and broad enough as is reasonably necessary to protect the legitimate business interests of the employer or former employer.
What is the proposal?
The mechanics of how the proposed ban on non-compete clauses will be implemented are not yet clear. We know it will be the subject of further consultation on the details of the policy, including any exemptions, penalties and transition arrangements. We also know the ban will operate prospectively to give employers and workers time to adjust.
This sounds like a slightly different approach may be taken from the approach to banning pay secrecy clauses in the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Act 2022 (Cth) which amended the Fair Work Act. This involved:
Inserting a provision permitting employees to disclose information about their pay, and ask other employees about their pay;
Prohibiting pay secrecy terms from being included in employment contracts, with penalties for contravening this; and
Rendering any existing pay secrecy terms in employment contracts ineffective from a certain date.
The scope of the proposed ban on non-compete clauses is also not clear. There is no clear indication that other types of restraint clauses will be included in the proposed ban, however the government has indicated that it will consider and consult further on non-solicitation clauses, as well as non-compete clauses for high income workers.
The government has also indicated that it will introduce other legislative changes that will:
Prohibit businesses from using “no-poach” agreements to block staff from being hired by competitors; and
Stop businesses from fixing wages by making anti-competitive arrangements that cap workers’ pay and conditions, without the knowledge and agreement of affected workers.
How Will This Affect Your Business?
Although the legal starting point is that restraint clauses are unenforceable, any such statutory ban would put this beyond doubt.
Given the uncertain scope of the proposed ban, it is not yet clear how far it would extend.
We know restraint clauses are common. Australian Bureau of Statistics data from a 2023 survey indicates that almost half of all businesses utilised some form of restraint clause in employment contracts, with one in five using non-compete clauses specifically. Most businesses used at least one type of restraint clause.
The proposed ban therefore has the potential to impact a significant proportion of employers.
What Should Your Business Do Now?
With changes on the horizon, businesses should take this opportunity to review their employment contracts. Consider:
How much your business relies on non-compete clauses;
Whether other clauses, like non-solicitation or confidentiality agreements, can still protect your business interests; and
Updating policies to align with future regulations.
While it is possible that not all restraint clauses will be included in any proposed ban, this is a good opportunity for businesses to review their employment contracts and ascertain the extent of reliance on restraint clauses and non-compete clauses across the workforce.
For further information please contact Joe Murphy or Caroline Beasley in our Employment & Workplace Relations team.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.