Non-compete clauses in the gun as way to boost wages and economy

The federal government is considering a ban or heavy restriction on non-compete clauses by businesses to stop staff from moving to better-paying jobs or taking their skills to more innovative competitors as part of its plans to boost the economy.

Treasurer Jim Chalmers said the government was looking closely at the decision this week by the United States Federal Trade Commission to ban non-compete clauses in a move it said would raise an average worker’s earnings by $US524 ($803 a year) and increase economy-wide productivity.

The government may heavily restrict non-compete clauses after the United States this week said it would ban them over fears they hold back wage increases and productivity.Credit: afr

Non-compete clauses, which can prevent an employee setting up a new business or block them from soliciting clients, have grown sharply around the developed world over the past 15 years. Economists increasingly argue they have contributed to slowing productivity growth.

The federal government, as part of its competition taskforce, has released a discussion paper on the use of non-compete clauses that can also stop staff from working with a competitor for several years.

Data compiled by the Australian Bureau of Statistics this year revealed about 20 per cent of the nation’s workforce is affected by non-compete clauses. In the financial services and real estate sectors at least a third of employees have a non-compete provision in their contracts.

The US trade commission found that not only would a ban on non-compete clauses boost the wages of workers, but it would also increase the number of new start-up businesses by 8600 a year.

Chalmers described the move as welcome development and an important part of the government’s overall reforms to competition.

He said voters could expect the government to be “very forward-leaning” on the issue, noting there could be a total ban in line with America or a “more nuanced reform”.

“We have flagged a really strong interest in dealing with non‑competes, as they have gotten out of control,” he told the ABC.

“They do prevent workers from going to higher paid and better, more secure opportunities in our economy.

“We want to make our economy more competitive, more dynamic, and that is likely to include making it easier for workers to get and grab those better opportunities.”

In Australia, non-compete clauses operate under common law, other than in NSW, which has its own legislation.

According to Treasury’s white paper, businesses can use legal injunctions, which have a lower standard of proof to be successful, to invoke a non-compete clause against a staff member.

Employees who use the legal system to fight a non-compete clause face costs of at least $300,000 with no guarantee these will be covered, even if they are successful.

Independent think tank e61 has found non-compete clauses have expanded across Australia, from senior roles in law and finance to childcare workers, yoga instructors and IVF specialists.

Competition minister Andrew Leigh this month revealed the case of a 17-year-old who held a casual job as a dance teacher. She quit because of harassment in the workplace, taking a job at a different dance studio.

She then received a warning letter from her former employer, accusing her of breaking a restraint of trade clause that prevented her from working at a “competing business” for three years within a 15-kilometre exclusion zone.

Leigh said the Federal Trade Commission had found there were many other legal tools for businesses to protect their investments and information, such as trade secret laws, rather than broad non-compete clauses.

“The FTC decision and analysis shows that banning non-competes is good for startups and good for workers,” he said.

“The FTC estimates that this decision to ban non-competes will result in new business formation growing by 2.7 per cent a year.”

Submissions to the Treasury discussion paper close at the end of next month.

But it found there was already evidence that Australian workers, particularly those on lower wages, were adversely affected by non-compete clauses.

“Non-compete clauses also have consequential and broader impacts on economic growth, competition, wages and innovation,” it found.

Shadow treasurer Angus Taylor would not be drawn directly on the Coalition’s view of non-compete clauses, saying it was a “moot discussion” as the government had an “anti-productivity and anticompetitive workplace reform agenda”.

The Coalition would examine any proposals put before it, although Taylor signalled concern about any government intervention. “The Coalition believes issues relating to flexibility should be worked out between bosses and workers in a way to benefit everyone involved,” he said.

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