# Worker non-compete clauses and other restraints

### Competition Review Taskforce The Treasury

**6 June 2024**

**_Telephone +61 2 6246 3788_**
**_Email mail@lawcouncil.au_**
**PO Box 5350, Braddon ACT 2612**
**Level 1, MODE3, 24 Lonsdale Street,**


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## Table of Contents 

**About the Law Council of Australia ................................................................................. 3**

**Acknowledgements ........................................................................................................... 4**

**Executive summary ........................................................................................................... 5**

**Non-compete clauses ........................................................................................................ 6**

General Comments .......................................................................................................... 6

Discussion Question 1. .................................................................................................... 6

Discussion Question 2. .................................................................................................... 9

Discussion Question 3. .................................................................................................. 10

Discussion Question 4. .................................................................................................. 12

Discussion Question 5. .................................................................................................. 14

**Non-solicitation of clients and other business contacts ............................................. 14**

Discussion Question 6. .................................................................................................. 14

Discussion Question 7. .................................................................................................. 17

**Non-solicitation of co-workers ....................................................................................... 17**

Discussion Question 8. .................................................................................................. 17

Discussion Question 9. .................................................................................................. 18

**Non-disclosure clauses .................................................................................................. 18**

Discussion Question 10. ................................................................................................ 18

Discussion Question 11. ................................................................................................. 19

Discussion Question 12. ................................................................................................ 19

**Restraints on workers during employment ................................................................... 19**

Discussion Question 13. ................................................................................................ 19

Discussion Question 14. ................................................................................................ 20

**No-poach and wage-fixing agreements ......................................................................... 20**

Discussion Question 15. ................................................................................................ 20

Discussion Question 16. ................................................................................................ 21

Discussion Question 17. ................................................................................................ 21

Discussion Question 18. ................................................................................................ 22

Discussion Question 19. ................................................................................................ 22


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## About the Law Council of Australia

The Law Council of Australia represents the legal profession at the national level; speaks on behalf of its
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The members of the Law Council Executive for 2024 are:

-  Mr Greg McIntyre SC, President

-  Ms Juliana Warner, President-elect

-  Ms Tania Wolff, Treasurer

-  Ms Elizabeth Carroll, Executive Member

-  Ms Elizabeth Shearer, Executive Member

-  Mr Lachlan Molesworth, Executive Member

The Chief Executive Officer of the Law Council is Dr James Popple. The Secretariat serves the Law
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[The Law Council’s website is www.lawcouncil.au.](http://www.lawcouncil.au/)


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## Acknowledgements

The Law Council acknowledges the assistance of the Law Society of New South Wales
and the Law Institute of Victoria in preparing this submission.

The Law Council is also grateful for the contribution of members of the following
committees:

-  Industrial Law Committee of the Federal Dispute Resolution Section;

-  Competition and Consumer Committee of the Business Law Section; and

-  Corporations Committee of the Business Law Section.


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## Executive summary

1. The Law Council is grateful for the opportunity to provide a submission to the
Competition Review Taskforce in response to the April 2024 Issues Paper Non_competes and other restraints: understanding the impacts on jobs, business and_
_productivity (Issues Paper)._

2. The Law Council recognises that, in certain circumstances, non-compete and other
restraint clauses are necessary to support the legitimate interests of employers in
protecting their investment in human resources, intellectual property and confidential
information, and client connections.

3. However, in practice, under the current common law, the restraint of trade doctrine
typically favours employers due to an inequality in bargaining power when clauses
are negotiated and the uncertainty, cost and time issues of litigation when a dispute
arises. As a result, the Law Council generally accepts that non-compete clauses
have become overly prevalent in Australian employment contracts—particularly in
relation to lower-income workers.

4. Lower-income workers generally have less bargaining power to negotiate or remove
a non-compete clause, less capacity to absorb a loss of income between jobs and
fewer resources to resolve a dispute if they leave. By and large, lower-income
workers are also less likely to have access to information or connections reasonably
requiring protection. Reduced job mobility amongst lower income workers serves
neither the interests of individual workers nor the broader public interest.

5. Therefore, the Law Council considers that the Australian Government should
consider legislating additional limitations on the use of non-compete clauses. Such
protections could include:

(a) legislating an income threshold below which non-compete clauses are
generally not permitted;

(b) requiring employers seeking to include a non-complete clause in a contract to
identify the ‘legitimate interest’ that they are seeking to protect;

(c) requiring employers to provide reasonable compensation when seeking to
enforce non-compete clauses; and

(d) limiting the maximum length of the non-compete clauses or otherwise limiting
cascading clauses.

6. However, the Law Council considers that several of the other types of restraints
discussed in the Issues Paper, including non-solicitation clauses and non-disclosure
clauses, play a crucial role in protecting the viability of businesses. Such clauses are
less in need of regulation at this time.

7. The Law Council responds to each of the Discussion Questions in turn below.


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## Non-compete clauses

### General Comments

8. Restraint clauses are used by many Australian businesses. A recent survey
conducted by the Australian Bureau of Statistics (ABS) found that 46.9 percent of
Australian businesses include some type of restraint clause in their employment
contracts.[1] The ABS survey demonstrated that non-disclosure clauses were the
most frequently used restraint clause.[2] The next most frequently used clauses were
non-solicitation of clients, non-compete, and non-solicitation of co-workers.[3]

9. As a species of restraint clause, non-compete clauses restrict employees or
independent contractors from working for competitors or establishing competing
businesses. They typically operate for specific periods of time and in defined
geographical locations.

10. Complex non-compete clauses risk uncertain results because employees and
employers do not have a clear understanding of whether clauses will be upheld by
the courts as reasonable and enforceable.

11. Competition restraints can be difficult to successfully enforce, both in jurisdictions
where the common law doctrine of restraint of trade applies,[4] and in states that
modify the common law such as New South Wales. Whilst recent ABS data
indicates that large businesses with 1000 employees or more had the highest use of
non-compete clauses at 40.0 per cent,[5] the extent to which the non-compete
clauses used by these businesses were, or may be, enforceable remains unclear.

### Discussion Question 1. 

**Does the common law restraint of trade doctrine strike an appropriate balance**
**between the interests of businesses, workers and the wider community? If no,**
**what alternative options are there?**

12. Under the common law, restraints of trade are presumed to be against the public
interest, and therefore unenforceable, unless they are reasonably necessary to
protect the legitimate interests of the employer.[6] In this regard, the common law can
be seen to initially prioritise the rights of the worker by offsetting the presumed
inequality of bargaining power in favour of the employer.

13. However, the Issues Paper identifies legitimate concerns about uncertainty, cost and
time that arise out of the existing common law position and the reliance on litigation
to resolve disputes.[7] It also identifies the indiscriminate use of non-compete clauses
for lower-income workers and the impact that these clauses can have on individual

[1 Australian Bureau of Statistics, Restraint Clauses, Australia, 2023 (21 February 2024).](https://www.abs.gov.au/articles/restraint-clauses-australia-2023)
2 Ibid.
3 Ibid.
4 For example, in Victoria: see Just Group Limited v Peck [2016] VSC 614 at first instance, and then on appeal
from the first instance decision [2016] VSCA 334.
[5 Australian Bureau of Statistics, Restraint Clauses, Australia, 2023 (21 February 2024).](https://www.abs.gov.au/articles/restraint-clauses-australia-2023)
[6 See eg, Herbert Morris Ltd v Saxelby [1916] 1 AC 688; Competition Review, The Treasury, Non-competes](https://treasury.gov.au/sites/default/files/2024-04/c2024-514668-issues-paper.pdf)
[and other restraints: understanding the impacts on jobs, business and productivity (Issues Paper, April 2024)](https://treasury.gov.au/sites/default/files/2024-04/c2024-514668-issues-paper.pdf)
10 (‘Issues Paper’).
7 Issues Paper, 14.


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employees and the broader Australian economy by hampering labour mobility, wage
growth and innovation.[8]

**Limitations of the common law doctrine**

14. In practice, the doctrine arises at two key points in the employment relationship:

(a) when entering into the employment relationship; and

(b) when exiting, or considering whether to exit, the relationship.

15. A number of common issues arise at each of these points, which may support the
over-inclusion of unnecessary or unreasonable restraints.

16. At the point of entry, many workers lack the bargaining power to challenge the
inclusion of restraint clauses that may go beyond what is reasonably necessary to
protect their employer’s interests. Often the worker will be advised that these
clauses are ‘standard clauses’ which are non-negotiable and may lack an
appreciation of what they are permitted to do after the point of exit. This is most
often the case in lower-paid jobs or where there are few alternative employment
opportunities.

17. At the point of exit, while the onus will be on an employer to take some action to
enforce a restraint, in practice, the threat or possibility of action is often sufficient to
create practical adherence to a restraint clause. The option of a worker challenging
a restraint clause through the court system in a proactive way is uncertain, stressful
and can be prohibitively expensive.

18. Litigation is inherently uncertain, and striking an appropriate or reasonable balance
of interests relies not only on the restraint of trade doctrine itself, but on a court
weighing up various factors when applying the doctrine to any specific factual
circumstance. These factors include the activities restrained, the duration and
geographical area covered, the bargaining power of the parties, whether any
specific consideration was paid to the worker to agree to restraints, and the general
public interest.[9]

19. One result of the common law restraint of trade doctrine is the trend of a contractual
hierarchy of time-based and area restraints, in descending order of time and
geography (a ‘cascading’ restraint clause). Cascading restraint clauses add to
complexity, effectively allowing employers to opt out of any meaningful attempt to
properly define the appropriate scope of the clause. As noted in the Issues Paper,
they also tend to encourage those taking a precautionary approach to comply with
the broadest formulation of the restraint.

20. As a result of the uncertainty, cost and time issues identified above, the Law Council
generally accepts that non-compete clauses have become overly prevalent in
Australian employment contracts.

8 Ibid 4, 18-23.
9 As discussed at page 10 of the Issues Paper.


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**Options for reform**

**Legislation**

21. The Law Council considers that the common law position—that non-compete
clauses are unenforceable unless they are reasonably necessary to protect the
legitimate interests of the employer—is the appropriate starting point for regulating
non-compete clauses and should underpin any reform.[10]

22. The Law Council does not support a blanket ban on non-compete clauses. However,
given the issues identified above and explored in the Issues Paper, there is scope
for improvement through legislative reform to provide additional protections for
employees—particularly those on lower incomes. Elements of such protection could
include:

(a) legislating an income threshold below which non-compete clauses are not
permitted;[11]

(b) requiring employers seeking to include a non-compete clause in a contract to
identify the ‘legitimate interest’ that they are seeking to protect;

(c) requiring employers to provide reasonable compensation when seeking to
enforce non-compete clauses; and

(d) limiting the maximum length of the non-compete clauses or otherwise limiting
cascading clauses.

23. These potential reforms are discussed further below.

**Court or tribunal reform**

24. Given the financial barriers to engaging in court proceedings to contest a restraint
clause, which are particularly faced by lower-income workers, consideration could
be given to expanding the jurisdiction of inferior courts to determine these types of
matters, and to provide a clearer and easier mechanism for workers to challenge the
enforceability of these restraints (beyond simply seeking declarations). Currently,
most proceedings concerning restraints are commenced by employers seeking to
enforce those clauses by way of injunctions and related orders, and commenced in
a superior court. While this reform may assist in reducing the cost of litigation to
some degree, we note that it would not address the inherent uncertainty and cost of
litigation.

25. The Law Council would not support the creation of a new jurisdiction or role for the
Fair Work Commission in this area, acknowledging the limitations that would arise
as a result of the Commission’s status as an industrial tribunal, and not a court.

10 See eg, Herbert Morris Ltd v Saxelby [1916] 1 AC 688.
11 There may be limited circumstances in which a non-compete clause for a lower-income worker may be
reasonably necessary to protect the legitimate interests of a business. For example, where an employee has
access to certain intellectual property (such as computer program source code). See further discussion at
paragraphs 61-67 below.


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**Education and guidance**

26. There is a lack of understanding amongst workers as to the enforceability of
unreasonable restraint clauses, even in competitive markets with high job mobility.
As such, the Law Council considers that the potential legislative approach set out
above could be supplemented by greater education and awareness measures as to
workers’ rights in this area (as discussed further in our response to Question 4
below).

### Discussion Question 2.

**Do you think the Restraints of Trade Act 1976 (NSW) strikes the right balance**
**between the interest of businesses, workers and the wider community?**
**Please provide reasons. If not, what alternative options are there?**

**Broader concerns with the NSW Act**

27. Subsection 4(1) of the Restraints of Trade Act 1976 (NSW) (the NSW Act) reverses
the general law position, in that it provides that a restraint will be valid to the extent
that it is not against public policy. It also provides a mechanism for the court to ‘read
down’, or declare invalid, what it considers would otherwise be an unreasonable
restraint. However, this means that it can operate as a means for a court to ‘save’
what would otherwise be an unreasonable restraint.

28. In the experience of members of the legal profession in NSW, the operation of the
NSW Act tends to favour the interests of employers in enforcing restraints over the
interests of workers. This is supported by Figure 2 at page 16 of the Issues Paper,
which depicts a significant difference between NSW and the rest of Australia in the
prevalence of non-compete clauses and in their successful enforcement.[12]

29. The Law Council notes that subsection 4(3) of the NSW Act is arguably underutilised
by the courts as a means of declaring altogether invalid clauses that are manifestly
unreasonable, such as where an employer has made no real attempt to impose a
reasonable restraint, but rather has drafted an overly broad restraint, with the
expectation that a court will do the work of reading it down significantly.

30. Given its reversal of the common law position and its practical impact in supporting
the more frequent use of non-compete clauses, at this time, the Law Council would
not support the adoption of the NSW Act at a national level.

**Impact of the NSW Act on cascading clauses**

31. However, it has been suggested that the NSW Act may have some benefit as a
means of reducing uncertainty and associated challenges, particularly by limiting the
use of cascading clauses.

32. Cascading clauses can be confusing to workers, and create uncertainty in
employment contracts, which can serve to reinforce the power imbalance between
employers and workers.

33. The use of these clauses arose largely from the common law position, allowing a
court to sever (but not alter) those parts of a restraint which may go beyond what is
reasonably necessary, with the potential for the remaining parts to then be enforced.

12 Issues Paper, 15 (Figure 2), citing H Chia and I Ramsay, ‘Employment Restraints of Trade: An Empirical
Study of Australian Court Judgments’ (2016) 29(3) Australian Journal of Labour Law 283.


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As a means of increasing the likelihood that a restraint will remain in place and
enforceable, the use of cascading clauses has become standard in many
employment and other similar contracts, particularly in circumstances where the
NSW Act does not apply.

34. Under subsection 4(3), where there has been a manifest failure of an employer to
attempt to make a restraint reasonable, a court has a discretion to treat that restraint
as being altogether invalid, or invalid on such terms as it thinks fit, on public policy
grounds. The consequence should be that, in most circumstances, the use of
cascading clauses is unnecessary, at least in relation to employment contracts to
which the NSW Act applies.

35. Regardless of whether the NSW model is adopted more broadly, the Law Council
notes that there is scope for Australian courts to apply common law principles in
declaring cascading clauses void for uncertainty, particularly where numerous
alternatives are proposed for the activities covered, duration and/or geographical
area, leading to a large and unreasonable number of possible combinations.[13]

### Discussion Question 3. 

**Are current approaches suitable for all workers, or only certain types of workers?**
**For example, senior management, low-income workers, or care workers etc?**

36. In our view, different types of restraint clauses require consideration of a range of
different factors and different regulatory responses.

37. We acknowledge that the intention of non-compete and other restraint clauses is to
support the legitimate interests of employers in protecting their investment in human
resources (having acquired talented and/or experienced staff and equipping those
staff with specific skills and industry knowledge) and client connections. However,
we suggest that restrictions on the use of non-compete clauses for certain
categories of workers are warranted, as set out below.

38. The current trend internationally is to severely restrict the use of restraint clauses—
and particularly restraint clauses purporting to operate for longer periods—to senior
executive levels. The Law Council is of the view that this is an appropriate approach
in the modern labour market.

39. We would support legislative reform that places restrictions on the use of noncompete clauses for workers who are not high-income employees. One option may
be to determine the threshold by reference to the existing definition of ‘high income
employee’ in section 329 of the Fair Work Act 2009 (Cth) (the FW Act), as this
definition is relied on in various aspects of the FW Act and is generally wellunderstood. However, the Law Council has received some feedback that the current
threshold may be too high, and therefore overly restrictive, in the context of
prohibiting non-compete clauses.[14]

40. High income employees often have access to an array of sensitive information
which is required to perform their roles, and which validly requires protection in
some form. High income employees are more likely to have bargaining power to
negotiate the terms of these clauses, such as the duration of the clause, or the

13 See discussion at page 11 of the Issues Paper.
14 _Fair Work Act 2009 (Cth) s 329 defines a ‘high income employee’ by reference to the ‘high income_
threshold’ (see s 333) which is prescribed by the Fair Work Regulations 2009 (Cth). At the time of writing, the
high-income threshold is $167,500 per annum.


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compensation payable, so that a fair balance is struck between the interests of the
employer and the employee. High income employees are generally also better able
to absorb any loss of income in order to comply with a non-compete clause. They
are also likely to be in a stronger position to negotiate compensation or a settlement
in the event of a dispute.

41. By contrast, lower-income workers generally have less bargaining power to
negotiate or remove a non-compete clause, less ability to absorb a loss of income
between jobs, less capacity to negotiate better terms of employment if they remain
in their current jobs, and fewer resources to resolve a dispute if they leave. Reduced
job mobility amongst lower income workers serves neither the interests of individual
workers nor the broader public interest.

42. As noted above, the existing common law places the onus on the employer to prove
that a restraint clause is reasonably necessary to protect the employer’s business
interests. One possible approach to strengthening protections for lower-income
workers is to legislatively impose a more stringent test for the employer to meet, so
that the court may only uphold a clause where the worker’s role is so commercially
critical to the business that a breach would manifestly cause significant damage to
the employer—for example, in some critical sales roles or roles involving unique, but
commercially critical, technical skills. This could, in practical terms, discourage the
use of restraint clauses as ‘standard’ terms for the vast majority of lower-income
workers.

43. We would not support measures relating to non-compete clauses that differentiate
particular sectors of the workforce, such as the care sector. We acknowledge that
there may be public interest merit in policies that enhance competition in sectors
where there is a shortage of workers, by supporting job mobility and increased
competition for labour within those sectors. However, in our view, differentiating
lower-income workers is likely to be a more effective means of protecting the
mobility of the most vulnerable workers across all sectors and lead to less
disputation arising in the context of whether a worker is within or outside of any
particular sector.

**Recommendation**

-  **The Australian Government should consider legislating an income**
**threshold below which non-compete clauses are not permitted.**


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### Discussion Question 4. 

**Would the policy approaches of other countries be suitable in the Australian**
**context? Please provide reasons.**

44. We note the discussion of various options for regulating non-compete clauses which
were identified by the United Kingdom’s (UK’s) Department for Business and Trade,
in its response to a consultation on measures to reform post-termination noncompete clauses in contracts of employment (the UK Government report).[15]

45. This report does not appear to have been considered as part of the Issues Paper.
However, the Law Council considers that some of the potential reforms discussed in
this report are worthy of consideration in the Australian context.

**Statutory limit**

46. Non-compete restraint clauses operating for 12 months or longer can act as a
significant barrier to change of employment, which can have a disproportionate
impact on young individuals who hold junior positions, and low-income workers such
as individuals who provide care in the aged care, health, and disability sectors.
Longer-term clauses can also have a disproportionate impact on new employees
who are subject to a probationary period. Such employees may leave their employer
after a short period of time such as a few weeks or a month, yet remain bound by a
restraint for a year.

47. The UK Government has committed to introducing a statutory limit of three months
on non-compete clauses, as a means of boosting workplace mobility, flexibility and
dynamism in the labour market.[16]

48. In principle, the Law Council would not be opposed to introducing a similar measure
for lower-income workers. In addition to striking a balance between worker and
employer interests, a statutory limit on the period of non-compete clauses for some
or all workers would bring clarity and may remove the use of cascading clauses (at
least in relation to restriction periods).

49. However, in the context of other restrictions suggested by the Law Council—
including requiring an employer to identify the legitimate interest it is protecting and
pay for it—a limit of 3 months may be overly limiting.

**Mandatory compensation**

50. Another option is the introduction of mandatory compensation for enforcing noncompete clauses. The UK Government report found that this measure may be
helpful in encouraging employers to consider whether the use of a non-compete
clause is necessary and reasonable for that particular role in the circumstances.
Mandatory compensation would also provide a degree of financial security to the
worker.[17]

51. We note that the UK Government does not propose to proceed with this measure,
based on the likely cost to employers in a time of economic recovery, and the risk
that it would increase the enforcement of non-compete clauses, and thereby

[15 Department for Business and Trade (UK), Non-Compete Clauses: Response to the Government](https://assets.publishing.service.gov.uk/media/645e27612c06a30013c05c57/non-compete-government-response.pdf)
[consultation on measures to reform post-termination non-compete clauses in contracts of employment (12](https://assets.publishing.service.gov.uk/media/645e27612c06a30013c05c57/non-compete-government-response.pdf)
May 2023).
16 Ibid 19.
17 Ibid 11.


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potentially stifle competition and innovation.[18] However, mandatory compensation of
workers has been proposed or implemented in a number of other nations including
Finland, Denmark, Portugal, Sweden, France, Germany, Netherlands and Spain.

52. The Law Council suggests that this option is worthy of further consideration.
If implemented alongside a restriction on non-compete clauses for lower-income
workers, it is likely that the impact on employers would be substantially minimised. It
is likely that inclusion and enforcement of non-compete clauses would be reserved
for circumstances where the likely benefit of a clause would outweigh the cost of
enforcing it.

53. Compensation could help to offset this cost for workers, while also protecting the
interests of employers. Consideration could be given to the level of compensation
being a portion of the worker’s salary and/or determined by reference to any other
salary or wages earned by the worker during the restraint period. Any compensation
scheme should not impose unreasonable costs on the employer.

**Independent legal advice**

54. As noted above, there is a lack of understanding among workers regarding noncompete clauses, including as to their enforceability. While improving transparency
around the use of non-compete clauses may not overcome the difficulty of uneven
bargaining power between lower-income workers and employers, it would go some
way to informing workers of their rights—both at the point of entry and at the point
where the worker is contemplating changing employers—and may help to reduce
the overall incidence of unfair non-compete clauses.

55. One option for improving transparency which was identified in the UK report is to
provide that a non-compete clause is unenforceable unless the employer has paid
for the worker to obtain legal advice as to the effect, and enforceability, of the
clause, before entering the employment agreement.[19] In principle we would support
such a measure, and note that it would not preclude the worker from later
challenging the non-compete clause.

**Guidance**

56. Transparency would also be enhanced through the provision of guidance to workers
and employers.[20] We suggest this type of guidance should be produced by
government and be publicly available in a form much like the Fair Work Information
Statement, and through relevant websites. The information should include guidance
on what might be fair and reasonable in different circumstances, and how to
interpret cascading clauses. It should include plain language and visual information
and be available in major community languages.

57. Consideration could also be given to requiring an employer to provide this guidance
to a worker in order for a contractual restraint to be enforceable.

18 Ibid 11-12.
19 Ibid 18.
20 Ibid.


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**Recommendation**

-  **The Australian Government should consider legislating additional**
**limitations on the use of non-compete clauses to provide further**
**protections to employees and ensure that non-compete clauses are**
**only sought when necessary. Such protections could include:**

-  **requiring employers seeking to include a non-disclosure clause**
**in a contract to identify the ‘legitimate interest’ that they are**
**seeking to protect;**

-  **requiring employers to provide reasonable compensation when**
**seeking to enforce non-compete clauses; and**

-  **limiting the maximum length of the non-compete clauses, or**
**otherwise limiting cascading clauses.**

### Discussion Question 5. 

**Are there other experiences or relevant policy options (legislative or non-**
**legislative) that the Competition Review should be aware of?**

58. Beyond the policy options discussed above in response to Discussion Questions 1-4,
the Law Council did not receive feedback on additional options for reform.

## Non-solicitation of clients and other business contacts

### Discussion Question 6. 

**What considerations lead businesses to include client non-solicitation in**
**employment contracts? Are there alternative protections available?**

59. The Law Council appreciates that losing clients to competitors when particular
workers leave can have a significant commercial impact on a business. The main
considerations that lead to the use of non-solicitation clauses are to protect valuable
client connections and to maintain the stability of the employer’s workforce and
business security. Professional and client service based relationships can take many
years to establish and maintain, and are the lifeblood of some businesses. Losing
clients to a former employee, who either works for a competitor or has set up a new
competitive business, can be disruptive to a business and significantly impact its
viability.

60. There are limited alternative protections available to employers. Some protections
may be available to the employer in equity (including breach of obligations of
confidence or fiduciary duties) and by statute (including, for example, section 183 of
the Corporations Act 2001 (Cth), which prohibits an employee from improperly using
their position—including the company’s information gained through their position—
for personal gain, third-party gain, or to cause detriment to the company). However,
these protections can be difficult to establish and enforce, and more limited in scope
than non-solicitation clauses. Confidentiality clauses are widely used in employment
contracts, but are of limited assistance in retaining client relationships, as client
information is not necessarily confidential to the employer and may be accessible
from the client or other sources.


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**Comments on non-competes in the context of Intellectual Property**

61. The Law Council submits that there are legitimate reasons for businesses to use
non-compete clauses and similar restraints, particularly in relation to executives,
employees involved in the development of new products, ideas and innovations for a
business, and employees who have developed close relationships with clients or
suppliers of the business where it is difficult for them to “unknow” the confidential
and sensitive information they have acquired in the role and similar personnel.

62. Relevant intellectual property includes, for example:

-  copyright, including in materials such as computer program source code, client
and customer lists, records of important business methodologies and
specifications, plans, blueprints and manuals; and

-  confidential information, including know-how, trade secrets and other
commercially sensitive and valuable information.

63. A key feature of the types of intellectual property listed above is that they are
intangible and therefore very difficult to trace and contain. It is also worth noting that,
unlike in other jurisdictions such as the United States, Australia does not have a
legislative regime for the protection of trade secrets. Of the mechanisms available to
Australian businesses, non-compete clauses and similar contractual restraints are
usually the simplest to enforce. By contrast, pursuing a former employee for
copyright infringement or breach of confidence is generally cumbersome,
excessively costly and forensically difficult to prove. It often requires Australian
businesses to apply for one or more preliminary or interim measures—such as
preliminary discovery, interim injunctions and/or Anton Piller orders—which alone
can cost hundreds of thousands of dollars to obtain, and still may not be sufficient to
uncover all of the wrongdoing of a former employee. That is particularly the case
where the former employee deliberately or unintentionally obscures, destroys or
loses incriminating evidence of their misconduct, which is easy to do when dealing
with intangible intellectual property.

64. As one example, the Law Council notes the recent judgment of the Federal Court of
Australia in Motorola Solutions Inc v Hytera Communications Corporation Ltd [2022]
FCA 1585, which was delivered in December 2022 but only published (with some
redactions) in June 2023. In summary:

-  Several former employees of Motorola downloaded its confidential files
containing software source code before taking jobs at Hytera, a competitor in
the supply of digital mobile radios.

-  The source code was key to enabling participants in that market to satisfy
stringent industry standards for digital mobile radios, which gave Motorola an
important competitive advantage.

-  Hytera soon developed a similar product, and Motorola commenced Federal
Court proceedings alleging copyright and patent infringement.

-  To prove that Source Code A infringes the copyright in Source Code B, it is
necessary to conduct a side-by-side comparison to assess whether Source
Code B contains substantial part of Source Code A. However, Hytera claimed
to have lost significant portions of the source code in its digital mobile radio
products, which meant that Motorola and the Court were required to engage in
difficult comparisons between source code and object code.


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-  The result was an extremely lengthy and complex case, with a judgment
running to 2,315 paragraphs (over 500 pages) and a subsequent appeal,
which is likely to have cost Motorola millions of dollars in legal fees. Motorola
ultimately succeeded in its claims, but only partially and with great difficulty,
and the appeal judgment is currently pending.

65. This case is just one example of how extremely difficult it is for businesses to
enforce their intellectual property rights, particularly when dealing with intangibles
(such as copyright) upon intangibles (such as source code). In breach of confidence
claims, various other difficulties may arise—for example, it is often difficult to
delineate proprietary knowledge of the business from personal skills and knowledge
of the employee and, while an employee can promise to not utilise information that
they have learned on the job when moving to work for a competitor, it may be
impossible for that employee to ‘un-know’ that information.

66. Non-compete clauses and similar restraints provide an important buffer, to mitigate
the risk of a former employee disclosing confidential information, infringing other
types of intellectual property or, in the case of intellectual property such as
patentable inventions and registrable designs, disclosing information that may
compromise the registrability or value of that intellectual property. Non-compete
clauses and similar restraints also enable Australian businesses to mitigate such
risks proactively, rather than being forced to act only once unlawful conduct has
actually occurred or been threatened.

67. The Law Council accepts that non-compete clauses may not be appropriate in every
circumstance. They are most appropriate for employees who have access to
valuable intangible assets of a business, such as confidential know-how, confidential
business/client information such as pricing, confidential supplier information, trade
secrets, and copyright materials that are not in the public domain. This applies to all
industries and sectors, particularly those that are involved in innovation, such as the
technology, telecommunications, healthcare, scientific, pharmaceutical,
manufacturing, food and beverage, mining, energy and resources, and consumer
goods industries.

**Business sale restraints of trade**

68. Employment contracts are not the only place individuals can be bound by restraints
of trade. It is common for business sale agreements, shareholders’ agreements and
equity incentive plans to restrain parties to the agreement (including founders,
senior executives and other employees with equity interests in the business). The
commercial basis for restraining these individuals in a business sale context differs
from post-employment restraints, in that it is designed to (among other things):

-  restrain former owners of a business from using their knowledge of the
business’ commercially sensitive trade secrets to operate a new business in
competition with the business they sold, to ensure the protection of the
goodwill of the business being acquired by the purchaser; and

-  restrain former owners from poaching key employees of the business they
sold.

69. Business sale restraints can be crucial to ensure that key executives and ‘founders’
are retained by the business post-completion, as it is often the case that those
individuals have knowledge of (or are the ‘face’ of) the business and their departure
would significantly devalue the entity.


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70. Business sale restraints of trade can be crucial to protecting the goodwill and giving
the purchaser of a business or the remaining shareholders the full value of the
business they are acquiring.

71. The Issues Paper is silent on the use of restraints of trade in a business sale
context. The difficulty with this is that there are restraints that ‘cross-over’ between
business sale and post-employment contexts. For example, if a senior executive
holds a substantial but minority equity interest in a company, through a
shareholders’ agreement or equity incentive plan, they may be restrained from
competing against the business they managed from the time they cease to hold an
equity interest in the company (which can coincide with the cessation of their
employment).

### Discussion Question 7. 

**Is the impact on clients appropriately considered? Is this more acute in certain**
**sectors, for example the care sector? Please provide reasons.**

72. Consideration could be given to imposing limits on the use of clauses for the nonsolicitation of clients on lower-income workers, due to their reduced means and
bargaining power, as discussed above. However, in most cases, the effect on a
worker of a non-compete clause, which prevents them from working in their chosen
occupation for some period, or in a specific location, is markedly different from the
effect of a non-solicitation clause, which allows the worker to continue in their
occupation, but without their taking existing client relationships to the new employer.
This suggests that, even in relation to lower-income workers, there is a stronger
case for regulating non-compete clauses than in regulating non-solicitation clauses.

73. Consideration could also be given to limiting the use of non-solicitation clauses in
particular roles in which a personal relationship with the client, or skills and
experienced only developed through working with a particular client, is central, for
example in certain care, medical, therapeutic, education, and personal fitness or
coaching roles. Care would be required in defining these categories so as not to
cast these limits too widely. We would not generally support a differentiated outcome
based upon the workers’ sector.

## Non-solicitation of co-workers

### Discussion Question 8. 

**What considerations lead businesses to include co-worker non-solicitation in**
**employment contracts? Are there alternative protections available?**

74. The Law Council’s view is that employers should be able to restrict solicitation of coworkers as this practice can lead to significant loss of skill and expertise within an
organisation.


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### Discussion Question 9. 

**Is the impact of co-worker non-solicitation clauses more acute for start-ups/new**
**firm creation or in areas with skills shortages in Australia?**

75. The Law Council considers that non-solicitation clauses are not the key issue facing
start-ups. Rather, start-ups often face the challenge of a general skills shortage in a
specialist area, and share that challenge with all businesses operating in the area.

76. Members of the legal profession report that it is relatively uncommon for an
employer to seek to enforce a non-solicitation of co-workers restraint in isolation,
and, for that reason, it is not generally that type of clause that has the most acute
impact for a new or start-up business.

## Non-disclosure clauses

### Discussion Question 10. 

**What considerations drive businesses to include non-disclosure clauses in**
**employment contracts? Are there alternative protections, such as s 183 of**
**_Corporations Act 2001 available?_**

77. We note that the general law provides some limited protection through the equitable
duty of confidence. However, it is important for businesses to have an appropriate
means of protecting their confidential information, and preventing or restricting
former workers from using that information while employed elsewhere, or from
disclosing that information to a new employer or other party.

78. Typically, non-disclosure clauses (or confidentiality clauses) are not considered to
be restraints and are not viewed by employers and workers in that light. In our view,
regulatory responses to non-disclosure clauses should not necessarily mirror those
for non-compete or non-solicitation clauses.

79. The enactment of section 183 of the Corporations Act attests to the commercial
need to protect organisations from a loss of corporate information. As noted at
paragraph 60 above, section 183 prohibits an employee from ‘improper use’ of their
position for personal gain, third-party gain, or to cause detriment to the company.[21]

80. Importantly section 183 prohibits the misuse—not necessarily the disclosure—of
information by officers and employees of a corporation. The inclusion of
non-disclosure clauses in employment contracts often complements section 183,
both by providing a contractual remedy for the employer (rather than relying on a
court to impose a civil penalty), and by bringing the issue to the worker’s attention.

81. It is important to note that, for non-corporate entities, section 183 provides no
protection, and the inclusion of non-disclosure provisions becomes even more
important.

21 A useful analysis of section 183 was recently undertaken by Derrington J in Smart EV Solutions Pty Ltd v
_Guy [2023] FCA 1580 [67]-[83]._


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### Discussion Question 11. 

**How do non-disclosure agreements impact worker mobility?**

82. The Law Council understands that non-disclosure agreements have little to no
impact on worker mobility. In practice, workers are able to manage the issue of
confidentiality as they transition from one role to another.

### Discussion Question 12. 

**How do non-disclosure agreements impact the creation of new businesses?**

83. Again, in the experience of members of the legal profession, non-disclosure
agreements do not pose a significant barrier to new businesses. The value that new
employees bring to a new business primarily takes the form of skills and general
industry experience rather than the information or intellectual property of
competitors.

## Restraints on workers during employment

### Discussion Question 13. 

**When is it appropriate for workers to be restrained during employment?**

84. It is appropriate in most circumstances for workers to be subject to restrictions
during their employment to prevent them from engaging in conduct in competition
with their employer, setting up a competing business, or taking advantage of a
business opportunity that arose during their employment which is relevant to their
employer’s business or operations.

85. The question as to whether a full-time employee should be permitted to engage in
secondary employment without obtaining consent from their primary employer is a
more complicated issue. The issue is often considered to be one of whether the
secondary employment will have any negative effect on the employee’s
performance and productivity in their primary role. In our view, this matter should
remain regulated by the employment contract entered into between the parties, and
by the common law.

86. In relation to part-time employees and casual workers, in our view, the ability for a
primary employer to regulate engagement in secondary employment should be
much more restricted. However, we support restricting these workers from using the
primary employer’s time or resources to set up a competing business, or take
advantage of a business opportunity that arose during their employment which is
relevant to their employer’s business or operations.

87. In addition, any change made to the enforceability of post-employment restraints
raises further issues for the ability of employers to restrain the conduct of their
workers during employment. For example, if an employer is prevented or restricted
from relying upon a post-employment restraint, then this may have the consequence
of increasing the reliance of employers on longer notice periods and the imposition
of ‘garden leave’. While the use of this mechanism results in a worker continuing to
be paid during that period, it has the effect of limiting job mobility while limiting that
worker’s productivity.


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### Discussion Question 14. 

**Is it appropriate for part-time, casual and gig workers to be bound by a restraint**
**of trade clause?**

88. Subject to the points raised in our responses above, we do not support imposing
restraints on casual workers or gig workers, for whom job mobility is of prime
importance.

## No-poach and wage-fixing agreements

### Discussion Question 15. 

**Should there be a role for no-poach and wage-fixing agreements in certain**
**circumstances, for example:**

89. No-poach agreements, with two or more businesses agreeing to refrain from actively
recruiting each other’s workers or prohibiting them from hiring each other’s workers,
are only used in limited circumstances. For example, it is relatively common for that
type of agreement to be included in the context of secondment arrangements and
labour hire arrangements.

90. Often the no-poach agreement operates for a limited period or with some form of
payment being payable by the contracting party seeking to recruit or hire the worker
as a form of compensation to the other party. We suggest that, without the
availability of some type of no-poach agreement, commercial parties may be less
willing to enter into secondment arrangements and the general labour hire business
model may be materially adversely affected.

91. In the experience of members of the legal profession, the use of no-poach
agreements between unrelated but competitive businesses (described as being in a
horizontal or naked context) is rare.

**a)** **If the agreement is between unrelated businesses (e.g., competitors)?**

92. In our view, no-poach agreements between unrelated but competitive businesses
and wage-fixing agreements, while rarely seen, are anti-competitive by design and
should be expressly prohibited. Given that these agreements are entered into
between two commercial entities, we do not consider that the FW Act is an
appropriate vehicle for regulating agreements of this type.

**b) If agreement is between businesses that are co-operating in some way**

**(e.g., joint venture partners)?**

93. We consider that there is a continuing role for no-poach agreements between
cooperating businesses, such as in the context of joint venture agreements,
secondment arrangements and where labour hire businesses are conducting
business.

94. In the case of joint venture agreements, no-poach agreements allow a joint venture
partner to lend its employees to work in, or for, the joint venture itself, while
minimising the risk of losing employees to the other joint venture partner. Similar


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issues arise where an employee is seconded to provide services for the benefit of
another entity.

95. In the case of a labour hire business without a no-poach agreement in place, that
business may incur costs in finding and placing an appropriate individual with a host
entity, to be left with a significant commercial risk that the host entity will simply look
to directly employ that individual so as to avoid payment of any continuing fee to the
labour hire provider. In those circumstances, the labour hire business model may
become unsustainable for some providers.

96. The Law Council also understands that it is not uncommon for no-poach
agreements to be made in circumstances where a competitor is undertaking due
diligence over the business in question. These agreements will usually be for limited
periods of less than 12 months and include a carve out for employment arising out
of a response to a bona fide advertised job position. Such arrangements may be a
necessary and valid protection of a business’ workforce.

**c)** **If it is part of a franchise agreement, either horizontally (where franchisees**
**through a common agreement do not to poach each other’s staff) or**
**vertically (where franchisors make agreements with each franchisee)?**

97. The Law Council considers that there is a continuing role for no-poaching
agreements in a franchise context, but that such agreements should be disclosed
(as suggested in our response to Question 18).

### Discussion Question 16. 

**Are there alternative mechanisms available to businesses to reduce staff**
**turnover costs without relying on an agreement between competitors?**

98. As discussed in the response to Question 15(a), in our view, the use of no-poach
and wage-fixing agreements between unrelated and competitive businesses should
be prohibited. For the reasons set out above, there is a continuing role for the
inclusion of non-solicitation of co-worker clauses in individual employment contracts.

### Discussion Question 17. 

**Should any regulation of no-poach and wage-fixing agreements that harm**
**workers be considered under competition law as an agreement between**
**businesses (for example reconsidering the current exemption), or under an**
**industrial relations framework?**

99. As discussed in our response to Question 15(a), the regulation of no-poach and
wage-fixing agreements as between commercial entities should be regulated under
competition laws such as the Competition and Consumer Act 2010 (Cth), rather than
in an industrial relations framework and under the FW Act.


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### Discussion Question 18. 

**Should franchisors be required to disclose the use of no-poach or wage-fixing**
**agreements with franchisees?**

100. Yes, to the extent that such agreements are in place between a franchisor and its

franchisees, the use and terms of those agreements should be disclosed, consistent
with the currently prescribed Franchise Disclosure Document.

### Discussion Question 19. 

**Are there lessons Australia can learn from the regulatory and enforcement**
**approach of no-poach and wage-fixing agreements in other countries?**

101. As stated earlier, in our view a cautious approach should always be taken when

considering applying approaches adopted in other jurisdictions to the Australian
context, due to factors such as population, the level of competition and geographical
location.


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