The proposed ban on non-compete clauses: what employers should know

Many employment contracts include a non-compete clause, stopping a departing employee from joining or starting a competing business for a period. The Australian Government has proposed banning these clauses for a large group of workers. If you rely on non-competes to protect your business, this is worth understanding now. This guide explains what is proposed and how to prepare.

What is a non-compete clause

A non-compete, or post-employment restraint, is a term in an employment contract that restricts what an employee can do after they leave. A typical clause stops them working for a competitor, or starting a competing business, within a defined area and for a defined period. Restraints are also common in business sale agreements, where the seller agrees not to compete with the buyer.

In NSW, post-employment restraints are governed partly by the general law and partly by the Restraints of Trade Act 1976 (NSW). They are only enforceable so far as they are reasonable to protect a legitimate business interest. The proposed reform would change the picture significantly for employment restraints.

What is proposed

The Government has proposed banning non-compete clauses for workers earning below the high income threshold, which is currently $175,000 and is updated each year. For those workers, a non-compete clause would not be enforceable. The change would amend the Fair Work Act.

The proposed start date is 2027. The Government has said it will consult further on the detail, including exemptions, penalties, and transitional arrangements, and it is also considering non-solicitation clauses and whether the ban should extend to workers above the threshold.

It is a proposal, not yet law

This is the important caveat. As things stand, the ban is a proposal, not enacted law. Existing non-compete clauses are not automatically void, and restraints remain governed by the current law in the meantime. So this is a reason to plan, not to panic.

That said, the direction of travel is clear, and a non-compete you rely on today may not be enforceable against many of your staff once the change commences. It is better to understand your exposure now than to discover it when a key employee leaves.

What employers should do to prepare

Our practical advice is to stop relying on the non-compete as your main protection, and to strengthen the protections that will still work. A non-compete is only ever part of the picture, and for many businesses it was never the strongest part.

The protections worth focusing on include well-drafted confidentiality clauses, which protect your genuine confidential information and trade secrets, clear ownership of intellectual property created during employment, and properly drafted non-solicitation terms, though these too may be affected in time. Good protection of client relationships and information, built into the contract and into how the business actually operates, does not depend on a non-compete.

For business sale agreements, restraints on a seller stand on a different footing from employment non-competes, and remain an important protection for a buyer. If you are buying or selling a business, the restraint should still be carefully drafted.

How we help

We review employment contracts and restraints to tell you what is likely to be enforceable now, and to prepare you for the proposed change. The aim is practical. Protect the things that genuinely need protecting, in ways that will survive the reform, rather than leaning on a clause that may soon be unenforceable. If your contracts rely heavily on non-competes, that is worth a review.

Frequently asked questions

Are non-compete clauses banned now? No. The ban is a proposal, not yet law. Restraints remain governed by the current law in the meantime.

Who would the ban cover? Workers earning below the high income threshold, currently $175,000 a year, under the proposal.

When is it proposed to start? 2027, subject to further consultation and legislation.

What should I do to protect my business? Focus on confidentiality, intellectual property ownership, and client-relationship protections that do not depend on a non-compete, and get your contracts reviewed.

Keep reading

• Corporate and commercial law
• The right to disconnect now covers small business
• Restraint of trade clauses when buying or selling a business

This article contains general information only and is not legal advice. For advice about your situation, please contact us. Liability limited by a scheme approved under Professional Standards Legislation.