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Are the days of non-compete terms numbered?

Victoria Quayle, ||

The Australian Government has directed the Australian Competition and Consumer Commission (ACCC) to investigate, among other things, the effect of contractual non-compete terms in employment contracts on wage growth.

In a speech to the Per Capita think tank and Maurice Blackburn Lawyers, Assistant Minister for Competition, Charities and Treasury, The Hon Dr Andrew Leigh MP, cited numerous findings overseas of the negative impacts non-compete terms can have on wage growth and worker mobility, as well as the wider economic impacts of labour market concentration. Minister Leigh also indicated there is a lack of evidence in Australia of the prevalence of non-compete terms.

Minister Leigh’s comments also come on the back of a recent proposal by the US Federal Trade Commission to prohibit the use of non-compete terms in employment and independent contractor agreements.

In my practice, I have seen increasing use of non-compete terms in employment contracts – to the point where it is now rare to see contracts that don’t include some form of post-employment restraint against competition.

Are non-compete terms unfair and is there a better way?

The law recognises that employees have a right to earn an income and to use their skills and industry knowledge for their own benefit. The law also recognises that businesses have the right to protect their proprietary interests and goodwill in order to reap the rewards of their investments, including investments in the training and development of its workforce, and its investments in developing its products and market position.

Post-employment restraints are therefore used to protect a company’s business interests and may be enforceable by a Court so long as the restraints are reasonable in their scope, and are not contrary to the public interest (such as unreasonably preventing competition or depriving the community of accessing a vital service). Find out more in our Plain English Guide to Post-Employment Restraints of Trade & Protection of Confidential Information.

A well drafted, reasonable restraint of trade term which balances the competing interests of the employer and employee may be a blunt instrument, but it is not inherently ‘unfair’. Fairness in a restraint term can be achieved provided that the party drafting the clause makes an effort to tailor the restraint term so that its scope goes no further than is reasonably necessary.

Non-compete terms specifically can also provide businesses with added protection in the event of theft of commercially valuable information by imposing a blanket prohibition on a former employee from working in any business that might be capable of exploiting misappropriated confidential information. This has become increasingly important for businesses that are vulnerable to data theft because of the ever-expanding and changing technology platforms that are used for sharing data which makes it far easier for today’s workers to steal company data than ever before.

Unlike Australia, the USA has specific legislation for the protection of trade secrets. Part 18, chapter 90 § 1832 of the United States Code provides civil and criminal causes of action for data theft by employees and businesses. Relief and penalties ranging from injunctions and damages through to fines of $5,000,000 or more and imprisonment of up to 10 years. In Australia, only government bodies have statutory protection under criminal law from misappropriation of sensitive data by employees.

It seems likely that laws prohibiting the use of non-compete terms in employment contracts will eventually come, particularly contracts with lower paid and unskilled workers. However, having regard to the above, the Australian Government may need to consider implementing its own specific civil and criminal data theft laws before introducing legislation to prohibit use of non-compete terms in Australia, even if the ACCC finds that they hamper wage growth and worker mobility.

If your business is currently using non-compete terms in employment contracts and you have concerns regarding the potential impacts of this announcement, please contact Coleman Greig’s Employment Law team for assistance.

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