The use of non-compete clauses (NCCs) in employment contracts – which restrict one in five Australian workers – is set to be scrutinised as part of a wider government review stemming from concerns that reduced competition is exerting drag on productivity growth.
To be driven by a newly appointed expert Competition Taskforce within Treasury, the review will examine competition laws, policies and institutions “to ensure they remain fit for purpose”, Dr Andrew Leigh, Assistant Minister for Competition, Charities and Treasury said in kicking off the new two-year review.
Panel members – which include Grattan Institute CEO Danielle Wood and former ACCC chair Rod Sims – will explore a range of issues including competition issues raised by new technologies, the net zero transformation, and growth in the care economy; proposed merger reforms and competition law issues; and options for co-ordinated reform with states and territories.
Yet it is the fourth term of reference for the Committee – an examination of non-compete and related clauses “that restrict workers from shifting to a better-paying job” – that may prove most contentious.
NCCs are widespread across the Australian workforce, particularly in technology companies where companies fight viciously to attract talent and use the NCCs to prevent their employees jumping ship – and taking company secrets with them – due to a better offer elsewhere.
A recent e61 Institute study of 3,000 workers found that 22 per cent of Australian workers are subject to NCCs, and a further 26 per cent had signed non-disclosure agreements that constrain their ability to transition into a new role at another company.
Some 16 per cent said they had signed agreements restricting the poaching of clients after they left a company, and seven per cent were enjoined from hiring co-workers away from the company they worked for.
While 39 per cent of managers were subject to non-compete clauses, the study also found the restrictions – which had become a default option in many employment contracts – are being applied across a broad range of work situations, with even 43 per cent of gig workers reporting that they were constrained by NCCs.
By applying not just to senior roles in law, finance and business services – but even to outward facing customer roles like childcare workers, yoga instructors and IVF specialists – e61 called it “striking that low wage workers that typically lack bargaining power, such as clerical workers and labourers, are subject to NCCs.”
Moving away from non-compete clauses
Non-compete clauses can be problematic for tech workers seeking to switch companies, as dozens of former Twitter employees found out in July when company lawyers threatened to sue Meta CEO Mark Zuckerberg for “systemic, wilful, and unlawful misappropriation of Twitter’s trade secrets and other intellectual property.”
The employees “had and continue to have access to Twitter’s trade secrets and other highly confidential information,” the lawyers for the company, now called X, wrote in arguing that the employees “owe ongoing obligations to Twitter.”
Those “obligations” are the residual effect of NCCs – which are legal in Australia if they reasonably protect “legitimate business interests” of the employer – and the burden they place on workers has recently come under scrutiny, here and overseas.
Recognising the considerable challenges that NCCs impose on workers, earlier this year the US Federal Trade Commission (FTC) proposed a ban on the clauses – and tests to identify de facto NCCs that would “have the effect of prohibiting the worker from seeking or accepting employment with a person or operating a business after the conclusion of the worker’s employment.”
The new rule – which is expected to be put to a vote next year – could increase wages by nearly $460 billion ($US300 billion) per year and “expand career opportunities for about 30 million Americans,” agency chair Lina M Khan said, warning that “non-competes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand.”
Banning non-competes could also close racial and gender gaps by 3.6 to 9.1 per cent, the FTC said, and double the number of companies in the same industry founded by a former worker.
The outcomes of the new Competition Taskforce – which will be handed down progressively rather than in one large final report – could well include a similar crackdown on NCCs – particularly in the wake of a newly released Intergenerational Report that has forecast stagnant productivity in coming decades.
“We need to ensure our competition policy settings are fit for purpose in the face of the big shifts underway in our economy,” Leigh said, “so we can make the most of digitalisation, the growth in services, the net zero transformation, while supporting our nation’s most vulnerable.”