Employment non-competes: Restraining the restraint
Employment non-competes: Restraining the restraint
The United States Federal Trade Commission (FTC) has voted to adopt a ruling providing for a near-blanket ban on non-compete clauses in employment contracts, with the final rule coming into effect from September 4th, 2024.
The FTC’s ruling has retained the use of non-competes for bona fide business sales.
This decision has been delivered as the Albanese government is pondering potential limits on employment non-competes in Australia, with the 2023 Employment White Paper calling for investigation of the impact of non-competes on competition.
With suggestions that up to 22% of Australian workers are subject to a non-compete clause, following the United States’ approach could have a significant impact.
Non-competes in context
Non-compete clauses have a legitimate role in protecting a business’ intellectual property, confidential information, client relationships and contacts, particularly in a business sale context. However, the use of non-competes in employment agreements has gradually extended beyond influential senior leaders to middle management and frontline workers, in some cases extending to roles such as dance teachers and hairdressers.
The negative impact of the “non-compete creep” on competition has attracted criticism, and was the catalyst for the FTC’s ruling in the US.
Current Australian position
New South Wales has the Restraint of Trade Act 1976 specifically addressing the use of non-competes. The Act provides that a non-compete clause is valid to the extent it is not against public policy. No other state has similar legislation.
The common law assumption is that non-compete clauses are unenforceable unless reasonably necessary to protect a legitimate business interest. Australian Courts have also shown a willingness to “blue pencil” non-compete clauses, severing unreasonable restraints where possible, resulting in a confined, but enforceable clause. Australian non-competes are often drafted with ‘cascading’ time and geographic application to maximise the permissible restraint.
The Restraint of Trade Act in NSW additionally enables judicial drafting to narrow restraints to a permissible level, resulting in restraints being more likely to be upheld in NSW than in other states.
Australian Reaction to the FTC Decision
The US blanket-ban approach has had some criticism in Australia, with suggestions a total ban would deter entrepreneurialism and make maintaining goodwill in a business more difficult if key employees can move to competing businesses more freely.
The contra view is that confining the use of non-competes will increase wage growth due to greater employment mobility and promote both innovation and competition.
Momentum for change
Both views are of course valid, but the momentum both in Australia and internationally is that more needs to be done to limit overzealous application of non-competes on workers, and changes can be expected limiting their use for lower-level workers.
For example, the United Kingdom has proposed to restrict the length of non-competes to 3 months. Several European countries including France have made it mandatory to compensate workers for the duration of the non-compete. In Austria, an income threshold has been applied to prevent low earners from being unfairly restrained.
Whilst the government may be emboldened by the FTC’s ruling, the investigation on the impact of non-competes is already underway, with the Treasury Competition Taskforce calling for submissions to an Issues Paper until 31 May 2024.
Although it is too early to predict the likely outcome of the Treasury investigation, employers should consider whether non-compete clauses are being appropriately used in their business, and if other mechanisms and controls might also assist to protect their business interests and to promote employee retention.
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