Business implications of Issues Paper on employment restraint clauses released by Australian Government

183What you need to know

• On 4 April 2024 the Australian Government's Competition Taskforce released an Issues Paper on employment restraint clauses as part of its broad Competition Review.
• The Issues Paper seeks feedback on issues concerning non-compete, non-solicitation and non-disclosure (confidentiality) clauses, restraints during employment, and no-poach and wage-fixing agreements.
• Currently, most employment-related restrictions are effectively "carved out" of the application of the competition law rules in the Competition and Consumer Act 2010 (Cth), such as the prohibition on cartel conduct. If this changes as a result of reforms arising from the Issues Paper, employment restraints may fall under the oversight of the ACCC and attract the significant penalties applicable to competition law breaches.
• Public submissions in response to the Issues Paper are due by 31 May 2024.

What you need to do

• All businesses should review the extent to which they rely on employment restraints, including confidentiality clauses, both during and after employment. Particular attention should be paid to any potential arrangements that may exist in your industry which have the effect of aligning wages and benefits or preventing poaching of staff between businesses, including through industry associations or benchmarking practices.
• If employment restraints perform an important function in protecting your business' legitimate interests, consider making a submission to the Competition Taskforce about how business interests should best be protected in light of concerns about national productivity and job mobility.

Why is this an issue now?

The Issues Paper cites a 2022 Australian Bureau of Statistics survey which found that 46.9% of Australian businesses use some form of restraint of trade clause to restrain their employees.

The Issues Paper forms part of the Australian Government’s Competition Review, which is examining competition settings with a view to promoting a more dynamic and competitive economy. It has been released in response to concerns that the proliferation of restraints has contributed to a decline in job mobility and restricted employees' ability to start their own businesses, thereby having negative effects on Australian innovation, productivity and wages.

The Issues Paper recognises that these clauses may perform legitimate functions in some instances, such as protecting proprietary knowledge and encouraging investment in an employer's workforce, but there can be, for example, an abuse of power and overreach in the use of cascading restrictions.

The Issues Paper has also been released in the context of increasing global scrutiny of employment restraints, with the UK Government recently responding to public consultation on similar issues, and the Singapore Government responding to Parliamentary notice papers, to announce their intentions to intervene to rein in the use of employment restraints.

Importantly, on 23 April 2024, the Federal Trade Commission (FTC) in the United States voted to issue a rule banning most non-compete clauses nationwide as being an unfair method of competition. There is an exemption for non-compete provisions in connection with a bona fide sale of a business, and also for enforcing existing non-compete clauses in senior executive contracts, but otherwise the FTC rule (if it takes effect following some Court challenges that have already been commenced) will prevent companies across the United States from using non-compete clauses going forward.
The changes considered to the regulation of no-poach and wage-fixing agreements would also bring Australia into line with most other jurisdictions. The US Department of Justice, the European Commission and the UK Competition and Markets Authority have all taken recent enforcement action against no-poach or wage fixing agreements as forms of cartel conduct. The European Commission's 2023 Horizontal Antitrust Guidelines specifically identify wage-fixing as per se illegal. In contrast, Australian competition law explicitly does not apply to these forms of agreement insofar as they relate to the employment terms and conditions of employees.

The current intersection of employment and competition law

In Australia, the Competition and Consumer Act currently provides that acts done or provisions of a contract, arrangement or understanding in relation to remuneration, conditions of employment, hours of work or working conditions of employees are not subject to the relevant competition law prohibitions contained in Part IV of the Act including, importantly, the prohibitions on cartel conduct, concerted practices and other anti-competitive agreements.

This exception reflects a policy decision taken by the Australian Government through successive reviews of the competition law that labour markets typically operate differently to other markets for goods or services, and are best regulated through the Fair Work Act 2009 (Cth) rather than the competition law.

As a result, companies in Australia have not traditionally had to deal with the extent to which their employee engagement strategies have been compliant with the competition law, and – with the exception of secondary boycott cases involving certain union activities – the ACCC has not prioritised any concerns or complaints with respect to employee restraints or restrictions.

Any change to the exemption under the Competition and Consumer Act as a result of any reforms arising from the Issues Paper could significantly change the scope of Australia's competition laws, and also attract major interest from the ACCC.

Restraints during employment

The Issues Paper poses questions about the use of non-competition and non-solicitation clauses post-employment. However, surprisingly, it also questions the appropriateness of restraints during employment, particularly in the context of part-time, casual and gig workers. It is acknowledged that these types of workers often require multiple jobs to ensure financial stability. This issue is of keen interest to the ACCC given its ongoing Digital Platforms Inquiry, and the importance of this particular type of worker to the gig economy, where they regularly work for multiple platforms during the same day (or potentially even simultaneously). The Issues Paper notes that restraints during employment may be justified for more senior employees, but not necessarily for less senior employees.

The implications of removing restraints during employment would be even greater if such a change were introduced together with a ban on post-employment restraints. This is because many employers already rely on termination notice periods and gardening leave to restrain departing employees, just on full pay (whereas many restraint periods are unpaid). If post-employment restraints are removed, employers will be even more reliant on termination notice periods and gardening leave as their primary protection of their legitimate interests to delay a departing employee from joining a competitor with "fresh" confidential information. However, gardening leave assumes that non-competition restraints apply during employment. If this assumption is removed, there will be little utility in placing departing employees on gardening leave.

Restraints during employment have also traditionally been one criteria by which employees are distinguished from independent contractors. The Fair Work Act has recently been amended to define employees by ascertaining the 'real substance, practical reality and true nature of the relationship', which includes not only the contract, but other factors such as how the contract is performed in practice. Altering a key current indicator of employment, in the form of restraints during employment, may impact on how the new definition of "employee" is applied in practice.

Confidentiality clauses as restraints

Another surprising aspect of the Issues Paper is the classification of confidentiality clauses (referred to as Non-Disclosure clauses) as restraints.

The Issues Paper questions why businesses include these clauses in employment contracts, whether there are alternative protections, such as section 183 Corporations Act 2001 (Cth) (which prohibits employees and officers from improperly using their position for personal or third party gain) and how these clauses impact worker mobility and the creation of new businesses. The Issues Paper does not consider alternatives for organisations not covered by the Corporations Act.

Confidentiality and non-disclosure agreements have been the subject of extensive review globally in the context of sexual harassment and silencing victims. However, the mental health and well-being concerns that form the foundation of the #MeToo reviews arguably do not apply in this context.

Potential practical implications if post-employment restraints are changed as a result of the Issues Paper

Given the widespread adoption of restraints of trade in Australian employment relationships, many employers have an interest in the outcome of the current Review. Potential practical implications for employers of changes include:

• Higher remuneration and seniority may be required to use/enforce restraints

While the common law provides that restraints must be reasonably necessary to protect the legitimate interests of the employer, the Issues Paper comments that uncertainty in restraint enforceability can influence worker behaviour regardless of their legal effect. This deterrence impact is usually more significant for workers on lower wages who lack the means to seek legal advice and the skills or resources to bargain or commence litigation. This can also be detrimental to employers as seen in the Fair Work Commission's recent refusal to reduce compensation awarded to an employee it found had been unfairly dismissed. The employee had not applied for jobs for 12 months after the termination of his employment because he believed an unenforceable restraint clause prevented him from doing so.

A potential reform is a requirement that workers be of a certain level of seniority or remuneration before non-compete clauses are legal and/or enforceable against them. This accords with the Singapore Government's view that restraint of trade clauses should be avoided for lower-paying jobs due to the greater impacts they have on the livelihood of employees in such roles, and with the approach of the FTC in the United States to include a "carve out" for senior executives only.

• Cascading restraint clauses may be prohibited

Many employers adopt "cascading" clauses which include multiple different levels of restriction upon employees to allow unenforceable portions to be severed and reduce the risk that the whole restraint clause is struck out.

However, these clauses may be prohibited as they create significant uncertainty for employees who can only determine both the exact terms of their restraint, and its enforceability, by taking legal action. The Issues Paper comments that this often leads to employees taking a precautionary approach and following the most restrictive form of the restraint.

• Financial compensation may be required to enforce non-compete periods

The Government may consider introducing mandatory pay during non-compete periods to achieve a more appropriate balance between the benefits to businesses of non-compete clauses and their costs to workers. This could deter businesses from using non-compete clauses where not strictly necessary, and reduce financial pressure on employees during transitions between jobs. The Issues Paper notes that Finland and Germany currently require former employees to be paid 40% and 50% of their salary respectively during non-compete periods.

However, the UK Government rejected a similar proposal on the basis it would place a substantial burden on businesses at a time where it is economically desirable to increase growth. The UK Government also noted that it may also have unintended adverse effects on productivity and innovation by reducing the willingness of employees to challenge non-compete clauses in order to obtain new jobs or start their own businesses.

• A maximum length for non-compete periods may be imposed

Restrictions on the maximum length of non-compete periods already exist in Finland and Germany (12 and 24 months respectively) and the UK Government has proposed to introduce a three month maximum period. The Australian Government may consider introducing similar restrictions to increase job mobility and allow businesses to fill vacancies more quickly.

• Restrictions on confidentiality clauses may be imposed

While confidentiality clauses are intended to protect confidential information, the Issues Paper notes that they may hamper economic growth by preventing workers from drawing on their experience in new roles and when establishing their own businesses. As section 183 Corporations Act and the common law already prevent the improper use of confidential information by current and former employees, the Government may consider prohibiting these clauses altogether or requiring the protected confidential information to be specified with a high degree of particularity.

• Gardening leave may cease to act as an alternative to a post-employment restraints if restraints during employment are banned

Gardening leave assumes that non-competition obligations apply during employment. If this assumption is removed, there will be little utility in placing departing employees on gardening leave.

Specific changes to no-poach and wage-fixing agreements

As a general rule, no-poach and wage-fixing agreements are currently not subject to the prohibitions and serious penalties for cartel conduct and other competition law prohibitions contained in the Competition and Consumer Act. This is because of the carve out for certain employment related conditions described above.

The Issues Paper states that "wage-fixing agreements are recognised to promote anti-competitive behaviour on the basis that they artificially reduce workers’ wages and decrease competition between employing businesses, which may result in reduced output or less innovation". The Issues Paper specifically asks for submissions on whether regulation of no-poach and wage-fixing agreements should be considered under competition laws, including by amending the existing exemption from competition laws. The Issues Paper also expressly asks if Australia can learn from the enforcement approach to these restrictions in other countries.

If the Government ultimately looks to the approach in other countries, it is highly likely that the current exclusion from the application of Part IV of the Competition and Consumer Act for employment-related terms will be removed. Competition regulators in many other jurisdictions have brought recent successful cartel prosecutions against businesses for no-poach and wage-fixing agreements, including decisions in the US, numerous EU Member States, and the UK. Some jurisdictions, including the EU, the UK and Canada, have taken the step of expressly identifying no-poach and wage-fixing agreements as prohibited anti-competitive conduct. It is likely that the ACCC will seek similar amendments to Australian law in response to the Issues Paper, and if changes are made will look to take significant enforcement action.

Making submissions

Businesses which rely on employment restraints, including confidentiality clauses, should consider making a submission to the Competition Taskforce about how business interests should best be protected.

Submissions can be lodged online, by post or by email to competitiontaskforce@treasury.gov.au. Alternatively, employers can complete a short questionnaire on their use of employment restraints. All responses are due by 31 May 2024.

Authors: Jennie Mansfield, Partner; Richard Bunting, Consultant; Julie Mills, Counsel; Max Moffat, Lawyer; Alyssa Phillips, Partner; and Rowan Kendall, Senior Associate.