This text was co-authored with Anastasia Gravas and Yasmine Sahihi.
On 23 April 2024, the USA Federal Commerce Fee (FTC) voted to ban non-compete clauses, which stop a employee from in search of or accepting new employment inside an trade after the termination of their employment. The ruling, whereas already topic to authorized problem, stands as one of the expansive measures taken by a rising listing of worldwide jurisdictions which have moved to limit using non-compete clauses. A authorized replace on the FTC ban written by our US colleagues could be accessed here.
The Australian Authorities additionally seems to comply with this momentum.
In August 2023, the Australian Treasurer introduced a Competitors Evaluation to be carried out by a devoted Taskforce, with the intention of assessing whether or not Australian competitors legal guidelines, insurance policies and establishments stay fit-for-purpose.
As a part of that evaluate, the Treasury launched an Points Paper on 4 April 2024 relating to using non-compete clauses and different restraints of commerce (Points Paper).1 The Points Paper notes rising concern with the prevalence of non-competes and different restraint of commerce clauses in Australia, citing proof that these phrases of employment negatively affect job mobility, innovation, and wage progress.
The Competitors Evaluation Taskforce is presently in search of suggestions from stakeholders in response to the Points Paper on the affect of non-competes and different restraints of commerce. Public submissions are open till 31 Might 2024.
Different elements of the Competitors Evaluation and vital developments within the Australian competitors regulatory panorama had been just lately mentioned on this article by our Competitors legislation crew here.
Authorized standing of restraint of commerce clauses in Australia
Restraint of commerce clauses are a standard characteristic of Australian employment contracts.
Non-compete clauses are a restraint situation which search to limit former employees from working for a competitor or establishing a competing enterprise, sometimes for a interval post-termination and inside an outlined geographic space.
Different widespread restraints of commerce embrace non-solicitation clauses which search to limit former employees from soliciting former shoppers and former co-workers, and non-disclosure clauses which search to limit former employees from disclosing confidential info gained throughout their employment.
There’s a presumption at legislation in Australia that restraints of commerce are void and unenforceable except they’re fairly mandatory to guard the official enterprise pursuits of the employer.2 When figuring out what is fairly mandatory, a courtroom will consider whether or not the scope of the restriction, such because the geographic space and period of the restraint, is affordable given the character and extent of the protected enterprise curiosity (for instance, commerce secrets and techniques, confidential info relating to suppliers and clients).
Each non-compete and non-solicitation clauses have historically solely been included in employment contracts for senior employees and key staff with entry to confidential and commercially delicate info. Nevertheless, these clauses have develop into more and more widespread in employment contracts for low-income employees in industries comparable to fast-food, childcare, and safety.3 In keeping with latest knowledge from the ABS, roughly 46.9% of all Australian companies use a minimum of one sort of restraint of commerce clause with 25.4% of companies utilizing non-solicitation clauses for some staff, and 20.8% of companies used non-compete clauses for a few of their employees.4 The ABS survey reported that 45.3% of companies used a non-disclosure clause for a few of their employees in 2023.5
Contemplating the widespread use of restraint clauses, the Points Paper acknowledges considerations relating to the present authorized framework and uncertainty in regards to the enforceability of restraint of commerce clauses. This uncertainty could significantly drawback lower-paid employees who lack the assets to problem non-compete clauses, even when they could be unenforceable.
Even for restraints that are legally enforceable, the Points Paper means that using these clauses could considerably affect labour mobility, innovation, and wage progress. A coverage query is posed by the Points Paper as as to whether the advantages to enterprise of non-competes and different restraints outweigh the broader prices to the economic system. The consideration of those points is prone to inform potential legislative reform to those clauses.
What may potential reform seem like: Worldwide examples
Within the US, the latest FTC rule makes it unlawful to incorporate or preserve a non-compete clause in an employment contract. The rule additionally applies retrospectively and offers that present non-competes will develop into unenforceable 120 days after the ban comes into impact. Nevertheless, an exception to the ban on non-competes is carved out for senior executives, outlined as employees making greater than US $151,164 yearly in “coverage” making roles. As well as, the rule additionally doesn’t have an effect on non-competes between franchisors and franchisees, and non-competes associated to the sale of a enterprise.
Different jurisdictions have taken a extra conservative method to restraining non-competes by implementing selective or restricted bans. For instance, non-compete clauses have been banned for workers beneath an revenue threshold in some EU nations comparable to Austria and Luxembourg. Previous to the FTC’s ban on non-competes, the state of Hawaii banned non-competes within the expertise sector.
The UK Authorities has additionally just lately introduced a proposal to impose a statutory restrict on the period of non-competes to a few months. If handed by Parliament, employers could solely impose a non-compete for as much as three months, whereas present English authorized limitations on enforceability will nonetheless apply for clauses lower than three months in period.
One other various which can be thought of by legislators in Australia is obligatory compensation. Within the EU, many states impose obligatory compensation all through the non-compete. For instance, EU nations comparable to Germany, the Netherlands and Spain require that post-employment non-competes be paid to employees at a portion of their pay all through the non-compete. In Germany, a non-compete clause will solely be enforceable if the employer agrees to pay a minimum of 50 % of the renumeration obtained throughout employment.
Subsequent steps
There may be evidently rising worldwide momentum to manage non-competes, however presently, the affect of this in Australia stays unsure. For giant multinational firms, diminished urge for food for using non-competes could already be influenced by world developments, significantly the FTC’s ban on non-competes within the US.
Nonetheless, whereas many worldwide jurisdictions have regulated non-competes, they sometimes have preserved the flexibility for employers to make use of longer paid discover durations and backyard go away (ie the place an worker isn’t required to do any energetic work throughout their discover interval). Different restrictive covenants, comparable to non-disclosure and non-solicitation clauses, have been largely unaffected. For example, the main target of the UK laws is on limiting the period of non-compete clauses, moderately than different restraint circumstances.
Whereas reform to restraint clauses would require appreciable assist, the Authorities has demonstrated urge for food for reform. Lately we now have seen a willingness of the Authorities to manage contractual relationships, such because the latest prohibition on pay secrecy clauses in employment contracts. In any occasion, even when Australia doesn’t legislate to impose a ban on non-competes akin to the US, it stays prudent for employers to evaluate and take into account employment contracts and reliance on restraint clauses. From an operational perspective, we now have already seen an rising variety of shoppers shifting away from blanket non-competes, reserving such clauses just for probably the most senior of staff, and as a substitute focussing on well-crafted non-solicitation restraints – designed to deal with and shield their key belongings and proprietary pursuits. Such strikes could also be prudent in anticipation of potential restrictions on using such clauses and probably better regulatory oversight.
In reviewing contracts and safety of their enterprise and proprietary pursuits, employers ought to be certain that they’ve well-drafted non-solicitation and confidentiality provisions, and take into account the strategic use of discover durations and alternate options comparable to backyard go away.
If you need to debate efficient safety of your organisation’s proprietary pursuits, otherwise you want to make a submission to the Competitors Evaluation’s Points Paper, please contact us for a confidential dialogue.
