Key Takeaway
- March Federal Budget announcements include an intention to make non-compete clauses in employment contracts for employees below the high-income threshold unlawful.
- By removing non-compete clauses in employment contracts the Government expects a growth in remuneration and productivity.
- The actual intended changes do not make meaningful change to the employment landscape.
- Nonetheless, businesses should ensure their contracts are appropriately drafted if they ever intend to pursue enforcement of post-employment restraints.
As has been flagged for some time now, with its announcement in the March 2025 Federal Budget, the Government seeks to make post-employment non-compete clauses so prevalent in modern contracts unlawful. The first intention is to ban non-compete restraints for employees earning less than the high-income threshold (currently $175,000) and will consider whether to extend the ban to high-income earners in future years.
The Government also intends to outlaw certain agreements that prevent competitors from poaching staff; the rationale being that the removal of such clauses will increase wages and productivity by allowing greater job mobility. But what do these proposed bans on post-employment restraints actually mean and what real impact will they have on business?
Restraint categories
When navigating the landscape of post-employment restrictions, it is useful to identify three primary categories. These include: first, a prohibition against the utilisation of the former employer’s proprietary and confidential information; second, a restriction on the solicitation or recruitment of the former employer’s employees or customers; and third, a limitation on accepting employment with a competing entity.
The first category is the easiest to enforce as it is statutorily prohibited under the Corporations Act and is expressly prohibited under most written contracts of employment. The second category is often enforceable provided the restraint period and/or territory is reasonable. The third category is the most difficult to enforce and is what the Government are intending to outlaw by way of legislation.
Operation of restraint
On its face, the latter two forms of contractual restraint are void but can be enforced if the restriction is deemed reasonable and goes no further than to protect a legitimate business interest. This is particularly salient in service roles where an employee builds a genuine connection with clients or customers and the former employer needs a period of time to break that connection and retain the customer.
In the recent matter of Lochdyl Pty Ltd v Lind [2024] SAMC 43 (Lochdyl) a hairdressing business sought damages of $85,000 from a former employee for a breach of her post-employment non-solicitation restraint after she posted messages on her social media announcing that she:
• had ceased employment with her former employer and had opened her own salon (which she tagged in the post); and
• had a “wonderful first week” and thanked “all her wonderful clients who have stayed with her” on her new business Facebook page.
In the circumstances, the Court found that the employer had a legitimate business interest to protect and would have been prepared to enforce a restraint for a reasonable period to allow the former employer to break the outgoing employee’s customer connection and retain them as customers. However, the Court found that a 2-year restraint did more than what was necessary to protect that legitimate business interest and determined the restraint unenforceable. A good lesson for employers is to ensure that any non-solicitation restraints within employee contracts are appropriately drafted, typically by way of ‘cascading’ restraints which allow the Courts options and scope.
Sidenote: in no other state or territory other than in New South Wales can the Courts ‘read down’ a restraint; the contractual clause is either enforceable in full, or not enforceable at all. Only in New South Wales, under the Restraints of Trade Act 1976 (NSW), the scope of a contractual restraint can be adjusted by the Court in circumstances where it is reasonable and is in the public interest.
The third form of restraint, a restrictive covenant preventing an employee from taking up employment with a business that competes with their former employer is notoriously difficult to enforce. The Courts simply do not want to interfere with employers and employees from engaging in commercial activity and certainly do not wish to stand in the way of an individual from earning income in their profession, industry or skill-set. This is what the Government intends to make unlawful.
As it stands, Courts simply will not stand in the way of competition and prevent an employee from working for a competitor unless there is a very compelling reason to intervene. To reiterate, the underlining principle for a restrictive covenant to be enforced is to ensure that a legitimate business interest is protected and goes no further to ensure that protection.
A good example exists within real estate. Should an agent, who has an encyclopaedic knowledge of the purchasers and vendors within a confined territory, decides to quit their employment and open a competing agency within that confined territory, a Court might be prepared to enforce a non-compete restraint, the reason being there is a legitimate business interest to protect. Again, the restraint must not go further other than to protect that legitimate business and as noted in Lochdyl, will either be enforceable in full or not enforceable at all (noting the exceptions in NSW or under cascading restraints).
The intentions set out in the Federal Budget seek to remove these grey areas. They do not intend to interfere with non-solicitation restraints, nor do they seek to undermine the statutory protections with respect to misuse of confidential information. They simply intend to remove the ability for employers to attempt to injunct former employees from working for competitors.
The practicality of enforcement
Case law demonstrates that Courts are prepared to enforce non-solicitation restraints provided they are reasonable and go no further than to protect legitimate business interests but often pause at enforcing non-compete restraints, for a variety of public policy reasons. Particularly for SMEs who do not have access to internal human resource expertise or in-house counsel, the current bonanza of downloadable content is very tempting, including employment contract templates that are highly generic and include non-compete restraints that, in practice, are completely unenforceable.
As it stands, the intentions laid out in the Federal Budget hardly move the needle with respect to enforcement of non-compete restraints, particularly with respect to employees below the high income threshold but may allay employee anxiety if and when a former employer makes threats post termination. Similarly, employers might take this opportunity to customise their employment contracts such that any restraint is confined to legitimate and enforceable reasons.
Conclusion
Restraint clauses need to be nuanced and appropriately tailored to your business if they have any chance of being enforceable. Should your business require them, Contact our Workplace Relations experts for guidance and expertise in drafting, reviewing and implementing post-employment restraints within your contracts.
