Government takes aim at non-compete clauses that harm job mobility, innovation and wages growth

Non-compete clauses in employment contracts are now squarely in Labor’s sights, with the Federal Government insisting that such business methods are thwarting competition and holding back economic growth.

Assistant Minister for Competition Andrew Leigh delivered a major speech to the McKell Institute accusing franchise businesses of acting like cartels in employing anti-competitive labour market practices to lock in employees.

He said non-compete clauses were now being applied to far more jobs than ever used to be the case.

“Once upon a time, only the best-paid corporate executives were required to spend a period of gardening leave between jobs,” Dr Leigh said.

“Now, gardeners are being forced to take gardening leave.

“A growing body of domestic and international evidence suggests the increasing use of non-compete clauses is harming job mobility, innovation and wages growth.”

The Competition Review is now inviting public submissions to its issues paper covering what the Minister says are emerging concerns relating to non-competes and other restraint of trade agreements between businesses and workers, and no-poach and wage-fixing agreements between businesses.

While the measure is targeted at the business sector, government agencies are also taking note.

Getting rid of corporate lock-in clauses could open the way for greater movement between the private and public sectors.

It has significant implications for contracts and labour hire in the Australian Public Service.

Dr Leigh said when businesses try to prevent workers from changing jobs, it not only limits the employee’s earning potential, but also has roll-on effects for the wider economy.

“The simplest and broadest restraint that businesses can use to protect this information is a non-compete clause,” he said.

“This is the bluntest tool in the shed. It stops a worker from moving to any competing business or from starting a new one.”

The Minister described the impact as having a “chilling effect” as it was no longer limited to senior executives but was being applied to employees across most levels.

With data and IT jobs in great demand across sectors, non-compete clauses have an even greater impact.

“Businesses with more than 1000 employees were twice as likely to have employees with non-compete clauses than those with fewer than 20 employees,” he said.

“Big, incumbent businesses can use non-compete clauses and other tools to maintain their market power and prevent their competitors from growing or new startups emerging.”

No-poach agreements between businesses are also being targeted. These agreements are often made without employees’ knowledge, yet they have the potential to stunt wage growth.

“In a no-poach scenario, two or more businesses agree to not solicit or hire each other’s current or former workers,” Dr Leigh said.

“Major franchises such as McDonald’s, Bakers Delight and Domino’s have standard clauses that prevent franchisees from hiring workers in other stores.

“Exemptions for certain anti-competitive agreements may mean these no-poach agreements don’t fall foul of competition laws.”

However, such exemptions are also what the government is scrutinising.

Dr Leigh said pay increases from job switching are worth $5700 a year for typical workers.

“It is worth even more for younger job switchers who can earn on average $7500 more a year than job stayers,” he said.

In the introduction to its issues paper, the Competition Review makes it clear where the government’s priorities lie in relation to non-compete clauses.

“The government’s Employment White Paper Roadmap, released in September 2023, reiterated the government’s intent to investigate non-compete clauses and noted emerging research that non-compete clauses may be restricting workers from switching to better-paying jobs and hampering job mobility and innovation,” the paper states.

“There is empirical evidence linking lower rates of job mobility with reduced productivity growth, both in Australia and across the OECD.

“Labour mobility is also particularly important for managing structural changes in our economy, including the transformation to net zero and the shift to the care economy.

“There is growing international evidence that restraints of trade – and particularly non-compete clauses – are becoming increasingly prevalent.

“This evidence also suggests that despite benefiting some businesses, restraint of trade clauses are adversely impacting workers, other businesses and broader economic outcomes through reduced wages growth, job mobility and access to skilled workers.

“Some countries already regulate non-compete clauses (eg Austria, Finland and Germany), while others, including the United States and United Kingdom are proposing reforms that would restrict or ban their use.”