The pros and cons of non-compete clauses

Non-compete clauses for employees have polarised opinion for some time and major legislative changes could be on the way. These experts argue the pros and cons.

A non-compete clause (NCC) is like a prenuptial agreement, says Andrew Leigh. As Assistant Minister for Productivity, Competition, Charities and Treasury, he is driving the removal of such clauses in employment contracts that prevent staff from working in a similar industry or area for some time after their job ends.

“Negotiating over a non-compete clause is a bit like negotiating over the terms of your divorce settlement when you’re getting married,” says Leigh. Unseemly.

For a recruit, it can be awkward to begin by brokering what happens when it’s over — so, most don’t. At least one in five Australian workers — including low-wage care workers, labourers, even yoga instructors — have signed an NCC, according to 2023 analysis by think tank e61 Institute.

These workers are worse off by at least $2700 — some $500 a year — says Leigh, a Harvard PhD who was an Australian National University economics professor. He calls it a $7b hit across the workforce and wants to reward employees and unleash economy-boosting job mobility.

“[NCCs] aren’t just bad for workers, they’re bad for the whole economy,” he says. “One of the ways we get productivity growth is by people moving from sluggish firms to growing firms. Anything that slows down that process throws sand in the gears of the economy.”

Labor’s 2023 budget announced a plan to ban NCCs for most workers from 2027. The ban would apply for anyone below the high-income threshold of the  Fair Work Act 2009, which is now $183,100. Traditionally, NCCs have been the province of senior roles in law, finance and business services, where contracts protect trade secrets and client relationships.

For well-paid workers, says Leigh, “We haven’t said we’re doing nothing, but we’ve said that our first priority is to focus on [those below the threshold].”

It’s more common for high earners to negotiate — and be compensated for — the value of the non-compete time, which often cascades in a contract to favour the maximum enforceable period for the employer. 

Global trend

Australia’s proposed ban is in sync with worldwide trends. With NCCs proliferating across the income scale globally, several jurisdictions are acting to limit their use. Austria and Luxembourg now restrict NCCs below a set income threshold. Other European countries require compensation as the price of an NCC. The UK has proposed a three-month limit.

The US Federal Trade Commission estimated freeing burger flippers, security guards and other low-paid Americans from non-competes would earn them collectively an extra US $400 billion-plus in the next decade. It issued a nationwide ban on non-competes, with limited exceptions, in April 2024. The move faced immediate legal challenges from employers and the US Chamber of Commerce, and a Texas judge enjoined it. The Trump administration may choose not to defend it.

The Albanese government is now consulting on transition arrangements. It’s unclear whether Australia’s changes will apply to independent contractors, labour hire and gig workers. Penalties and exemptions are up for discussion. But Leigh calls himself “an ambitious reformer”.

“All of the modelling we’ve seen suggests this is one of the best productivity-boosting reforms you could put in place,” he says. “It will encourage firms to focus on not shackling their workers to their jobs, but encouraging workers to stay through having better pay and conditions. It will be good for startups, which in a full-employment economy need to hire workers from other firms. We need more startups and we need regulatory settings that are good for new firms, not just incumbents.”

For: Ditching restraints will drive dynamism

As chair of the Productivity Commission, Danielle Wood was also a member of the panel that advised the government on the issue. She says NCCs cool the “healthy, competitive churn of people from lower- to higher-productivity jobs”. Reining these in is an important play in the government’s productivity agenda, which could add $5b to GDP.

Independent economist Nicki Hutley is shocked at the proliferation of NCCs for low-wage workers. “Restricting somebody who’s a yoga instructor? OK, so they might want to go off and set up their own business. If they can be better, then that’s the whole point. You don’t want people handcuffed to firms that are slowly dying. We don’t have enough business dynamism. Labour mobility has become more constrained in recent decades and NCCs are part of that.”

She compares NCCs to a protection scheme. “If somebody’s got the talent to be headhunted… so long as they’re not stealing company secrets, why should you give a company the right to hang onto them? When clearly you couldn’t keep them happy? [Employers will argue] you invest all this time, train somebody up and then they leave. The question is, why have they gone somewhere else? You’re basically saying, ‘I’m not being a good employer, so I’ll give you a handcuff to make sure you stay with me’. How is that OK?”

Wood notes employers’ attachment to NCCs must be balanced around the broader economic cost. Her case extends to high earners. “They could bring a lot of know-how and skills to new and emerging firms,” says Wood. “As much as they might argue non-competes are good for business, they’re good for existing industry, incumbent businesses. They’re not good for new businesses trying to attract talent and grow.”

Against: The ban is a blunt tool

“[Business restraint cases] are almost the only thing I’m doing,” says Michael Michalandos, a partner at Baker McKenzie. “I’m seeing organisations that come into the market and try to build their practice simply by poaching other people's business,” he says. “It’s not simply that one employee’s going, but they’ll take four or five… Why should an employer invest in helping its employees build expertise and relationships if the next fly-by-night comes in and decides, ‘I’m just going to pay these people a sign-on bonus and take that business away’?”

Michalandos cites a burgeoning head-hunting industry as fuelling this, saying it’s happening in industries where there is a tight labour market such as banking, finance, IT and financial services.

George Haros, a Gadens partner specialising in employment law, says the reform could potentially alter merger and acquisition deal structures because investors may baulk at acquiring businesses without protections that keep key employees. Where value is tied to their know-how, an absence of NCCs adds uncertainty that could deflate prices. Many such employees wouldn’t meet the high-wage threshold — which doesn’t include incentives, overtime or superannuation contributions — so, the impact of the ban could be much broader than anticipated. Haros says some salespeople on salaries less than $180,000 take home double (or more) their wage in bonuses or commissions — yet they would fall into the ban.

He adds that if employers can’t stop someone from nurturing sales relationships for a while, “[employees] can set up in competition [and] leverage existing relationships and clientele they developed during their time with their employer. A real step in the process is removed if you just [ban non-compete restrictions]”.

Haros concedes when it comes to genuine low-income earners, it’s almost impossible for NCCs to be enforced. “The courts naturally work out an acceptable balance. Being adjudicated on a case-by-case basis is a better way to go than a prohibition.”

Yet people threatened with — or taken to — court told harrowing stories to the government’s competition task force. “It can be pretty scary,” says Wood, noting even the possibility [of legal action] has a chilling effect on worker mobility.

But Haros calls NCCs a shield, not a sword. “They can only protect that business for an adequate period of time, for that former employer to get the ducks in a row,” he says.

Smaller businesses are at real risk, says Michalandos. “Most hairdressers engage staff on a lot less than $180,000. They form relationships with clients. Their ability to run across the road or join a competing hairdresser can kill the business. You can say they’re not banning non-solicitation provisions, but we’re not too sure what the government’s going to do in terms of other restraints. The consequence may be that employers will be more reluctant to spend money on training and development. There will be a countervailing negative impact.”

He says the government should consider “giving more certainty as to the length of non-competes, depending upon certain variables such as the industry, length of service of the employee – so there's no confusion. Simply saying you’re going to ban them all would be quite destructive.”

On the fence: Make reform meaningful

“It [removing NCCs] is clearly not better for small businesses,” says UNSW economics professor Richard Holden. “But I’d be surprised if it was the end of the world. If you can’t move, the employer has more bargaining power. So NCCs put downward pressure on wages. And, of course, a small business doesn’t want upward pressure on wages.”

Holden believes in some cases NCCs play an important role, but “to the extent they prevent labour-market mobility, that’s a really bad thing. We’ve had low productivity growth for a considerable period of time, so any productivity gains are welcome. And the politics of getting this through right now are pretty easy.”

With that in mind, Michalandos suggests companies take steps now to protect their businesses. “Most could be a whole lot smarter about ring-fencing their confidential information, but also using notice periods to extract information, to protect and develop their business.” He also believes those organisations investing in employee wellbeing will find it reciprocated.

Hutley agrees. “If companies do the right thing by the employees, give them the right opportunities, they shouldn’t have anything to fear. But if you’re not paying attention to whether your company is an attractive place to work, you’re not doing your job as a good board and management team.”

This article first appeared under the headline 'Thou shalt not compete’ in the September 2025 issue of Company Director magazine.