Restraint of Trade Changes
After the re-election of the Albanese Labor government on 3 May 2025, it is now very likely that substantial reform to laws regarding restraint of trade clauses in employment contracts will come into effect in the medium term.
What are ‘restraint of trade’ clauses?
Restraint clauses in employment contracts are conditions that restrict an employee from doing certain things in competition with the employer after their employment ends. They typically fall within one of two categories:
- ‘Non-compete’ clauses, which prevent the employee from working for a competing business for a particular period of time; and
- ‘Non-solicitation’ clauses, which prevent the employee from targeting their former employer’s clients and/or staff for a particular period of time.
It is the first category (non-compete clauses) that have been marked for reform initially, although the Albanese government has foreshadowed reform to the second category down the track.
A non-compete clause is a clause whereby an employee agrees not to compete with their employer, in a similar industry or area and for a specific period, upon ceasing to be employed by their employer. These clauses have traditionally been justified in Australia as a means of protecting employers’ legitimate business interests and upheld by the Courts where those clauses prescribe a reasonable scope and duration of application. However, in recent years, regulators have expressed concern that such clauses unduly restrict job mobility and legitimate market competition.
Incoming reform
As part of what it describes as the ‘second tranche of reforms under the Government’s revitalised National Competition Policy’, on 25 March 2025, the Government announced that as part of the upcoming Budget, it proposes to ban non-compete clauses from being included in the employment contracts of workers making less than the high-income threshold (currently $175,000 per annum, excluding any compulsory superannuation contributions).
The Government noted in its media release that any amendment to the Fair Work Act 2009 (Cth) would not come into force until 2027 and only apply prospectively, in order to give businesses and workers appropriate time to adjust. In the interim, the Government is consulting with regard to precisely what implementation of this policy shift would involve (for example, the applicability of any exemptions, penalties, and/or transition arrangements).
The basis for reform
The restraint of trade space has been the focus of considerable political and economic research in recent years and considered ripe for reform. In June 2023, E61 Institute published what it claimed to be the ‘first Australian evidence on the prevalence of non-compete clauses’, finding more than 1 in 5 Australian workers are subject to non-compete clauses and approximately 2 in 5 were subject to non-solicitation clauses.
In what was also a first in Australia, the ABS conducted a survey in late 2023 directed solely to employers. Publishing its results on 21 February 2024, it found:
- 9% of Australian businesses in 2023 included a restraint clause in their employment contracts;
- 3% of ‘’ non-disclosure clauses ‘’;
- 4% of ‘’ non-solicitation of clients ‘’;
- 8% of ‘’ non-compete ‘’;
- 18% of ‘’ non-solicitation of co-workers ‘’.
Notably, Treasury’s ‘Working Future’ white paper of September 2023, found that while 97% of surveyed employers said restraint clauses were ‘either essential or important to their business’, only 5% of that number had ever threatened, or taken legal action to enforce such clauses.
What about non-solicitation clauses?
In announcing the reforms, the Government noted that part of its consultation process would see it ‘consider and consult further on non-solicitation clauses for clients and co-workers’.
There is no further information than the above statement at the time of writing, however given the even greater prevalence of non-solicitation clauses in Australian employment contracts as flagged above, it would not be surprising to see the Government consider broadening the reforms to address non-solicitation clauses. The same may prove true in relation to non-compete clauses for employees earning above the high-income threshold.
What does this mean for employees and employers?
Employers who rely on non-compete clauses for departing employees should assume they have a limited shelf life and consider what other measures can be put in place to protect themselves. While they will not be as effective as a valid non-compete clauses, employers can rely on a number of other contractual vehicles in similarly enforcing what might be ‘lost’ by way of the impending ban. Those options might include entrenching longer notice periods, in combination with for example, the inclusion of clauses ensuring that an employee’s duties can be altered and their access to clients and confidential information restricted during that notice period. Further, businesses might consider alternative legal mechanisms outside of the employment contract in protecting their investment in staff, such as via confidentiality agreements and incentive schemes.
While the Government has stated that the reforms won’t apply retroactively, it is not completely clear whether that statement is in reference to simply the ban only being effective from a given date, or whether that might refer to the enforcement of possible civil penalties. The reforms could well render void existing non-compete clauses in employment contracts. As flagged above, at this stage, other categories of restraint of trade clauses are not proposed to be banned and will remain valid, for the time being. It is prudent that employers consider drafting non-compete clauses in contracts prior to implementation of the ban to be separate from any other restraint of trade clauses, or clauses addressing for example, the matters referred to in the paragraph above. If, for example, a contractual provision addresses both non-compete and non-solicitation matters, there is the possibility that the reforms could render that provision unenforceable in its entirety, not only the proportion of the clause addressing non-competes.
In light of these impending reforms, now is the time for employers to have their employment contracts reviewed by their lawyers for proper drafting. Alternative means of protecting legitimate business interests might warrant exploration. Employees should also have their contracts reviewed by a lawyer, whether to simply better understand the obligations they and their employer have under their contract, or where there is concern their employer could be seeking to illegally enforce a restraint clause against them.
If you would like to discuss the matters above in further detail, please get in touch.
Author: Ben Schier