As a business owner, I’m glad non-compete contracts are getting the boot

Nestled among the big ticket items such as energy bill relief, higher education debt relief, additional funding for Medicare and a tax cut in the budget papers this week sat a curious item: a government commitment to end non-compete clauses for Australian workers earning $175,000 or less.

For those who aren’t constrained by these kinds of employment clauses, the issue may seem like a strange thing for a government to be prioritising in an election year. But when you break down the numbers, it quickly becomes clear why the almost 3 million Australians currently bound by these clauses, and economists, were excited by the proposal.

Many workers have been stung by non-compete clauses in their employment contractsCredit: iStock

Like all employment contracts, specifications and clauses vary from one to the other. But broadly speaking, non-compete clauses are designed to restrict what an employee can do if and when they decide they want to leave a job.

Usually, they aim to prevent an employee from moving to a competitor business, or restrict them from starting their own business or working within a specific area or region for a set period of time.

From an employer perspective, these kinds of clauses broadly aim to protect a company’s investment in staff and its success in the market. For example, if you have a sales agent who you spent months training, and they now bring in streams of revenue, are loved by clients and do an all-round excellent job, you’d understandably be keen to keep them.

When another company comes along and offers them a pay rise you can’t match, a non-compete clause restricting them from working for a competitor for 12 months solves the problem quick smart. You get to keep your employee, and the revenue they bring in, without having to offer a pay rise.

I’ve always believed if an employee wants to move on or is being offered something better, the best thing you can do is let them go.

From the employee’s side of things, though, it’s a seriously rough deal because not only do they lose the opportunity to earn more money, but they might also feel as if they’re at best a cash cow and at worst, as if they’re being held hostage.

In 2023, the Australian Bureau of Statistics published a study into restraint clauses that looked into the different kinds of clauses being used in employment contracts and their prevalence in our jobs sector.

It found that almost half of all employers (46.9 per cent) now use at least one restraint clause, be it a non-compete, non-disclosure or non-solicitations of clients or colleagues.

According to the survey, one in five Australians (20.8 per cent) now have non-compete clauses in their contracts – almost 3 million people. If you work for a large-scale business with over 1000 employees, you’re twice as likely to have a non-compete included in your employment contract (40 per cent) than if you work for a small business with fewer than 20 employees (20.2 per cent).

Non-compete clauses are common in the financial sector.Credit: Louie Douvis

The odds also increase even further if you work within financial services, insurance or real estate, where between 30 and 40 per cent of the industry uses them.

The ABS data also shows that once Australian companies adopt the use restraint clauses, they really embrace them. For non-competes specifically, 68.2 per cent of employers using clauses acknowledged using this particular one, and reported applying it to between 76 and 100 per cent of their employees.

In a sector like banking, for example, that means that a receptionist or office administrator could be held to the same employment standards as a financial advisor or a senior associate. It doesn’t take a genius to understand that the work, responsibilities and remunerations of these roles are vastly different. So holding them all to the same employment standards (or ransom, as some would call it), makes absolutely no sense.

You might think it’s strange for me as an employer and small business owner to be so against these clauses, but I’ve always been of the firm belief that if an employee wants to move on or is being offered something that I can’t give them, the best thing you can do for your business is let them go. Though this may hurt or be inconvenient in the short term, ultimately, it works out for the best.

Which brings me to two other fun statistics to add to the brewing mess: the ABS found that among employers who used non-compete clauses, only 5 per cent threatened to or did take legal action against employees when they deemed clauses had been breached, and only 1 per cent of job offers were declined because of these clauses.

I’m sorry, but if the purpose of these clauses is to keep employees where they are, those are, by any measure, very unsuccessful rates. Which begs the question of if their real intention is something else entirely.

That seems to be the case in just one example given by the government where a 17-year-old girl who left her job at a dance studio after experiencing harassment, only to receive a letter telling her that she couldn’t continue in her new job at a different studio because of a three year non-compete clause in her previous contract.

While just about any employment expert will tell you non-competes aren’t worth the paper they’re written on and are for the most part unenforceable, they clearly work when it comes to intimidating workers and deterring them from moving on.

As an adult with decades of experience, it’s easy to say what we’d do in the scenario above, but to a 17-year-old at the start of their career, with little to no employment experience, a need for income and a recent experience of harassment, it’s an entirely different ball game.

Of course, not all employers are misusing non-compete clauses, and it’s entirely understandable that businesses want to protect their investment in staff. And though the vast majority of companies say they don’t try to enforce them, the side effect, whether intentional or not, is that employees overwhelmingly see them as a tool of entrapment.

For better or worse, they work to prioritise the needs of the business, not the needs of the worker or, by extension, the economy.

And that’s why economists and the Productivity Commission have long been raising the issue. According to the government’s Competition Review, a ban on non-compete clauses alone could increase the annual GDP by as much as $5 billion and see wages lift by between 2 and 4 per cent - around $2500 a year – for workers currently stuck on these constricting contracts.

So, given the state of our national finances, and our declining productivity rate, it’s no wonder this was an addition to this week’s budget. As the saying goes, it’s the economy, stupid.

Victoria Devine is an award-winning retired financial adviser, bestselling author and host of Australia’s No.1 finance podcast, She’s on the Money. She is also the founder and director of Zella Money.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.