Do non-compete clauses prevent healthy competition and compress wages? The Australian government has started conversations about potentially banning them from employment contracts.
Imagine you’re in the business of making fast cars. How do you make them go faster? One easy approach is to take key employees from a competitor.
This scenario occurred in the Formula 1 racing world recently when the Aston Martin team recently enjoyed some success after years of defeat. Much of the credit for this turnaround has been given to a shrewd recruiting move by Aston Martin in 202, to bring on the Head of Aerodynamics (the employee) at Red Bull, along with several other staff from his department.
The matter was taken to court, with Red Bull claiming it would hold the employee to the terms of his contract until 2023, which included a six-month gardening leave period. However, the dispute was settled in 2022 and the employee was released from his contract with Red Bull.
The case for non-compete clauses
Many employers have become concerned about their employees leaving to go to a competitor and taking their intellectual property, clients and/or other employees with them. In Australia, non-compete and non-solicitation clauses are standard in employment agreements for many employees.
On the other hand, employee and pay equity advocates object to the existence of these clauses, as they can restrict employee and pay mobility, and may prevent legitimate competition between businesses.
In Australia, courts have sought to balance these interests by adopting the position that restraint clauses are by default not enforceable, unless the employer can demonstrate that they go no further than reasonably necessary to protect the employer’s legitimate business interests (such as confidential information and client relationships).
Some other jurisdictions around the world have taken a different approach. For example, in California non-compete clauses are prohibited and can never be enforced.
Should non-competes be banned in Australia?
Recently, the Assistant Minister for Competition, Charities and Treasury announced that the Federal Government had requested advice from the Australian Competition and Consumer Commission and Treasury for advice about the competitive impacts of non-compete clauses and any action the government should take in response.
The reasons given for such a request were that there is a “growing body of evidence” that non-compete clauses hamper job mobility and wage growth. Reference was also made to the US Federal Trade Commission recently concluding that banning non-compete clauses could increase worker earnings by almost US$300 billion (AUD$445 billion), and also ease racial and gender pay gaps by up to 9 per cent.
In the announcement, the Federal Government cautioned that it “has not reached a fixed view on whether new action is needed to tackle the impact of market concentration on wages”, and it is “watching developments [in the USA] closely and seeking advice from the key economic and competition agencies”.
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What would be the effect of a ban on non-competes?
Firstly, it is important to distinguish between non-competes and non-solicitation restrictions. A non-compete seeks to prevent a person from working for a competitor altogether for a set period of time, while a non-solicitation clause allows a person to work for a competitor, although without poaching their former employer’s clients and staff.
Accordingly, employers could use other protections available to them, in the form of non-solicitation clauses and confidential information obligations.
Non-competes are also already much harder to enforce than non-solicitation clauses, as they require a court to be persuaded that the threat to an employer’s legitimate interests is serious and unavoidable, should the person work for the competitor.
Courts are generally reluctant to enforce them as they often prevent individuals from earning an income until the non-compete expires ─ unless, of course, the individual is being paid for the duration of the non-compete.
Non-solicitation clauses are generally easier to enforce as they do not prevent a person from earning an income, so long as it is not at the expense of their former employer’s clients and staff and use of the employer’s confidential information.
If a prohibition was introduced on non-competes, it is expected that non-solicitation clauses would still be enforceable, as they are understood not to have the same impact on job mobility and wage growth.
The other key employer protection that is not under threat is the integrity of an employer’s confidential information. Under both the Australian Corporations Act and case law, an employee is not able to misuse an employer’s confidential information, either for their own benefit or someone else’s, during or after their employment.
This protection has no set time limit, unless the employee is able to demonstrate that the information is no longer confidential for whatever reason, such as the employer disclosing the information.
What should employers do now?
While nothing has been set in stone yet, that’s not to say that the Government could soon choose to ban non-compete clauses. With this in mind, employers should:
- Think through how a prohibition on non-competes might impact them, to ensure they have the maximum protection available to them should they be banned in the future
- Ensure they are not over-reliant on non-competes to protect their interests. Apart from being difficult to enforce, it is feasible that they may be prohibited in the future.
- Review their employment agreements (both their templates and existing agreements with senior employees) to ensure their clauses regarding confidential information and post-employment restraints, excluding non-compete restrictions, are as robust and thorough as possible
- Ensure that offboarding processes are in place to fully “re-educate” (or at least re-acquaint) exiting employees with their post-employment restraints and obligations. This should include the possible consequences of any breaches, to minimise the risk of any accidental or deliberate breaches of those obligations.
It is also essential that employers take urgent action should they become aware of a former employee breaching their restraints or other obligations. In these matters, any delay can sink the chances of successful proceedings against the employee before they even begin.
Aaron Goonrey is a Partner and Luke Scandrett is a Special Counsel at Lander and Rogers employment law firm.
As a previous small business owner I know the cost and damage involved in poaching employees by big firms, even big clients. Training up of consultants and IT staff over a 12 months to 2 years is expensive and time consuming. On average it seemed 15% salary and the big name was enough.
The article seems to ignore the impact on the business. We considered ourselves as leading edge and spent time developing methodology and supporting software systems (R&D) so the impact of seeing employees walk to opposition was significant.
Full disclosure, my company does not have anti compete clauses (though our corporate office would like us to), but I have to agree with Max on this topic – these over-reactions fail to take proper consideration of the impact on business, especially small, innovative businesses, in lieu of big companies that can afford to buy up talent rather than invest in innovation of their own. I think that both here and in the US, they are merely “reacting” more for the ‘look at how cool and progressive I am’, rather than fully reviewing and properly considering all facets of this… Read more »