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Legal employers need to keep an eye on non-compete developments

If Australia follows the lead of the United States and bans almost all non-compete clauses, there will be “far-reaching” implications – and law firms and in-house teams will see impacts following the departures of lawyers and other senior employees.

user iconJerome Doraisamy 08 May 2024 Politics
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As has been widely reported, late last month, the US Federal Trade Commission (FTC) effectively banned almost all non-compete clauses, which prevent workers from seeking or accepting new employment within an industry following termination of their employment.

There are some exceptions in the FTC ruling for executives who earn over a specific threshold amount and for certain commercial contexts, and in most circumstances, the ruling will have a retrospective effect.

Later in April, Treasury released an issues paper – Non-Competes and other restraints: understanding the impacts on jobs, businesses and productivity – regarding the use of non-competes and other restraints of trade, which identified concerns about the “chilling effect” of restraint clauses on worker mobility, the high cost of litigation, and economic consequences of “potentially inefficient allocation of labour and information”, which the paper said could impede productivity growth and innovation.


It has been suggested that the FTC prohibition could embolden the federal government to implement similar restraints in Australia, particularly following the publication of Treasury’s issues paper. Should this happen, there could be “far-reaching” implications for businesses, stretching to law firms and in-house teams.

Watch this space

In conversation with Lawyers Weekly, King & Wood Mallesons partner Ruth Rosedale said law firms and in-house legal teams will “need to keep a watching brief” on developments in this space, noting changes to the law in Australia could potentially impact the departures of legal professionals and other senior employees.

“Consideration may need to be given going forward to adopting other contractual levers to ensure commercial and business interests can continue to be protected if non-compete restrictions are banned or limited,” she said.

“For example – including longer notice periods and relying on periods of garden leave to shore up client and employee connections and potentially protect against the use of confidential information. Of course, there are practical and cost implications with adopting these approaches, and these will need to be weighed against the interests a business is seeking to protect.”

For Swaab partner Michael Byrnes, a blanket ban on non-competes in Australia would be a “drastic, unnecessary step”.

“To the extent there are issues with non-compete clauses, they can largely be managed in other ways. The value of law firms is essentially its people and client relationships – it is likely they would want to retain the option of using non-competes in their business protection toolkit (along with extended notice periods and non-solicit clauses),” he said.

For law departments, Byrnes said, the concept of a senior lawyer for a company leaving and working with the legal team of a direct, major competitor the next day “would be justifiably concerning, even with the specific professional obligations lawyers have in relation to confidential information”.

Non-compete clauses can, he said, “have a legitimate role to play in such circumstances”.

Ultimately, to strike the right balance, barrister Ian Neil SC advised, firms and businesses with in-house teams should “look carefully and reasonably at what interests they have that truly need to be protected, and in what way and for how long, and apply restraints accordingly”.

The right balance moving forward

K&L Gates partner Michaela Moloney said that the current legal position in Australia “already strikes an appropriate balance” by only allowing post-employment restraints to be enforced where it is reasonably necessary to protect an employer’s legitimate business interests.

“Ultimately, whether or not a restraint is reasonable will depend very much on the individual circumstances of the employee’s role and the nature of the business,” she said.

“A legislative one-size-fits-all prohibition would not allow such an individualised approach.”

Neil supported this, saying that in his view, restraints of trade for employees whose seniority and responsibilities are such that they have access to confidential information and customer connections that could be exploited by a competitor to the employer’s detriment “are justified and should be excluded from any ban”.

Byrnes also agreed, noting that Australian courts have “carefully developed” principles over many decades that seek to strike the right balance between the protection of the legitimate business interests of the employer and the right and need of the former employee to earn a living.

To the extent that there are problems, he said, “it is not with the principles once they are applied in the rare matter that actually gets to court, but the brinkmanship by correspondence between parties in restraint disputes which often rely upon bluff and bluster”.

Instead of a ban, Rosedale said, Australia could adopt a high-income threshold test – “similar to that under Fair Work in respect of eligibility to access the unfair dismissal regime, guarantees of annual earnings, etc.”, she pointed out – or a cap could be placed on the duration or geographical scope of the operation of a non-compete, “such that workers are not held out of the market for prolonged periods of time”.

The impact of banning non-competes Down Under

If the government does determine that non-competes should be prohibited in Australia, in ways similar or identical to the US-based FTC’s ruling, such a ban “could have a significant impact” on many industries, Moloney warned, where restraints on the many classes of employee who have significant access to an employer’s confidential information, client lists, and connections, even if they are not executives, are “key to the survival of those businesses and their investment in their unique offerings”.

Rosedale was also of this view, reflecting that the hypothetical implications “could be quite far-reaching”.

In particular, she said, “it may mean that businesses no longer have the protection they expected when entering into employment agreements (and potentially independent contractor agreements if Australia also chose to extend restrictions as widely as the US), in respect of their commercially valuable and sensitive information and trade secrets”.

Byrnes felt that such a ban would likely not make much substantive difference to non-executive employees; it could stop employers from issuing threats against such employees to enforce non-compete restraints made without proper foundation.

This is, he said, one of the concerns driving the push to ban or restrict the use of non-compete clauses.

“It is a mischief that should be addressed, not necessarily by prohibiting non-compete clauses, but by measures such as education and accessible advice,” he said.