Issue
Use of restraint of trade (ROT) contract clauses is of
growing interest in Australia. This includes non-compete clauses (NCCs), which
are used in contracts to prevent former
employees working for a competitor or engaging
in work of a similar nature. Of particular interest are the effects
of NCCs on productivity and wages, and options for reform.
Key points
- NCCs
are used to protect business interests like intellectual property.
- Research
suggests NCC use has increased over time in Australia, including among lower
skilled workers.
- The
Productivity Commission (PC) suggests that limiting unreasonable NCC use
would improve productivity and wage growth.
- While
NCCs can promote innovation and investment in workers, their impact on skills
transfer and training remains uncertain.
- Globally,
there are a range of different approaches to regulating NCCs and mitigating
their impacts.
Context
In a capitalist system, open competition between rival firms
fuels progress. This competition allows innovation to flourish and pushes
prices for consumers downward. It also means employees have a choice of alternative
workplaces, improving their bargaining position for salaries and conditions.
At the same time, if a company builds an employee’s productive
capacity through training and skills development, it will likely want a return
on that investment. Historically, employers have used NCCs to protect business
interests such as commercially
sensitive trade secrets, where competitors may access proprietary
information, client lists, product formulas and intellectual
property, pp. 15-16).
Available evidence suggests that NCCs are used by around a
fifth of Australian businesses and apply to around a
fifth of employees, although this is based on limited survey data. The
existence of NCCs can have various ‘chilling’ effects including:
Recent
research suggests NCC use has increased and is a default option in many
employment contracts. In addition to the finance
and insurance sectors and senior roles traditionally covered by NCCs, they
now increasingly apply to ‘outward facing customer roles’ such as childcare
workers, yoga instructors (p. 2), hairdressers
and IT professionals (pp.
19-32). More
broadly, NCCs are ‘no longer confined to highly paid executives but now
apply across income, age, occupational and education groupings’ (p. 1).
What are the arguments against NCCs?
The economic consensus is that NCCs generally do more harm
than good, lowering productivity, wages, and living conditions. Research
also indicates that NCCs can reduce employee mobility, with subsequent
negative impacts on wages and productivity.
Job mobility
While acknowledging inherent methodological challenges, a 2024
study found increased use of NCCs (as opposed to non-disclosure agreements,
or ‘NDAs’, which are an alternative for safeguarding trade secrets) correlated
with decreased job mobility. This was particularly seen in lower-skilled
workers, while impacts across worker age groups were consistent.
Factors other than ROT clauses have also contributed to
lower job mobility in Australia compared with 30 years ago, such as the ageing
of the overall workforce (older workers are less
likely to move between jobs). Regardless, the decrease in job mobility is
notable if looking only at younger cohorts.
Figure 1 Employed people who changed jobs
during the year by age
Source: Australian Bureau of Statistics (ABS), Job
Mobility.
The
COVID-19 period saw a dip in labour mobility for young workers due to lower
demand for less skilled entry-level workers and the negative impact of
shutdowns on industries such as retail and hospitality (where many young
workers are employed). However, this declining trend in mobility started much
earlier (from around 2008) which suggests other reasons may have discouraged
young people from changing jobs. The annual retrenchment rate for all workers
(or rate of job loss due to economic reasons) has fallen
steadily since the early 1990s. As a result, workers are now more likely to
cease jobs voluntarily, mainly for personal reasons, higher wages or better
working conditions.
The 2023 Australian Bureau of Statistics Short
Survey of Employment Conditions noted:
Given the general decline in job
mobility over time, there is an increasing interest in understanding potential
factors that may prevent employees from changing jobs and employers, or that
make it more difficult or less appealing to make a change, or that limit the
ability of employers to attract potential employees to fill vacant jobs. Restraint
clauses are one potential factor. [emphasis added]
Wages
Studies
have shown Australian firms with NCCs paid workers 4% less on average than
comparable firms only using NDAs. While all the workers started with similar
wages, those employed at firms using NCCs experienced slower wages growth over
the first few years of their employment. A further US
study found that states where NCCs were enforceable had 6% lower wages.
However, evidence
on NCCs impact on wage levels is conflicting, with specific caution against
‘confusing correlation with causation’. For example, in the US data has shown
some workers subject to NCCs being better off and earning higher wages. But
this could be due to other factors, such as higher educational attainment.
Contentions that workers subject to NCCs receive more
training is also debated. While some studies supported this view, other
perspectives suggest that firms may need to provide more employee training
given NCCs constrained them from hiring high-skilled workers (pp. 23-24).
Productivity
In 2024 the Productivity Commission (PC) published
modelling into the impacts of the Government’s proposed competition reforms. It
found:
Non-compete clauses constrain job
matching and act as a barrier to labour productivity – therefore, we modelled
this reform as having the direct effect of improving labour productivity, with
the exact magnitude depending on the current prevalence of non-compete clauses
in each industry (p. 24).
The PC’s modelling showed removing all ROTs could increase
Australia’s GDP by up to 0.19%, and the removal of NCCs in industries with
higher use of these clauses could increase wages by 2.4% (Table 1).
Table 1 Summary of labour mobility reforms
| No. |
Short name |
Key direct effects |
Key flow-on effects |
|
L1
|
Restraint of trade clauses
|
Estimated effects:
Increased wages for workers (up to 2.4% in industries with
high use of non-compete clauses and up to 1.4% in others)
|
GDP: +2,569—5,137 m (+0.10—0.19%)
CPI: -0.05—0.10%
Net govt revenue (Cth): +$333—666 m
Net govt revenue (S/T): -$28—55m
|
Source: adapted from PC, National
Competition Policy: modelling proposed reforms Study report (2024): p.
24.
How have other countries regulated NCCs?
Various
jurisdictions have undertaken NCC related regulatory reform (see also OECD
(2023)). Options include:
Australian Government approach
While research on the impacts of NCCs in Australia is in its
early stages, the ABS Short
Survey of Employment Conditions (2023) found 20.8% of 7,000 Australian
businesses used NCCs while a survey
of 3,000 adult respondents using the McKinnon poll by the e61 Institute found
22% were subject to a NCC.
Given this notable impact, the Australian Government has
proposed reforms to NCCs, as part of a broader package of competition reforms.
This includes a
ban on NCCs for workers earning less than the high-income threshold,
currently $175,000
and indexed annually. Following passage of necessary legislation, the reforms
are scheduled to take effect from 2027.
Further reading
- Dan
Andrews and Andrea Garnero, Five
facts on non-compete and related clauses in OECD countries, OECD
Economics Department Working Papers, No. 1833 (OECD Publishing, April
2025).
- Cassie
Boyle, Samantha Saltzman, Jose Francisco Irias and Alison Lewandoski, ‘Non-competes
around the world: Top issues and strategies for global employers’, DLA
Piper GENIE (27 September 2023).
- Treasury,
Non-competes
and other restraints: understanding the impacts on jobs, business and
productivity, Issues Paper (April 2024).
- World
Law Group, Global
Guide to Non-Competition Agreements (The World Law Group Ltd, 2018).