My contract says I can't work in the same industry for 12 months. What's with that?

Apart from reports of a blossoming romance at the work Christmas party, probably nothing terrifies organisations more than when an employee, furnished with company insights and cosy stakeholder relationships, jumps ship to a competitor – exactly what a restraint clause in a contract is meant to stop.

But hang on. Isn’t an employee allowed to jump to a better job offer and incrementally increase their skills?

Not as often as they used to due to restraint clauses.

Dan Andrews from the Crawford School of Public Policy at the Australian National University estimated that about 1 in 5 Australian workers are subject to some sort of ‘non-compete’ clause and suggested they are increasingly being used to “stifle job mobility”.

“While good for employers, as they face less wage pressure, it is bad for workers and Australia’s productivity,” Mr Andrews wrote.

“Workers who switch jobs get 8 per cent more pay on average (and better mental health), yet the probability that the average Australian worker switches jobs has fallen from 12.8 per cent in the mid-1990s to 9.5 per cent in 2022.”

The productivity cost economy-wide is so great that the Albanese government is reportedly planning to restrict their use.

But currently, where’s the balance?

We asked a local expert from the law firm BDN Lawyers, Allen Guo.

He said that restraint clauses generally come in two forms: ‘non-disclosure’ and ‘non-compete’. Non-disclosure, which prohibits sharing an employer’s information in a new workplace, is implied. That is, even if you don’t include it in the contract, it will be presumed. You can’t just go spilling your employer’s commercial secrets.

‘Non-compete’ clauses cover a far broader field, ranging from prohibiting the solicitation of clients, poaching other employees, and working for a competitor within a certain period. Mr Guo said these clauses have to be expressly in the contract, and they have to be reasonable.

“The general principle is that the employer has the right to protect his legitimate interests and commercial information but that the employee is allowed to make full use of their skills and knowledge for living,” Mr Guo said.

“The employer needs to show that the clause protects their legitimate interest and isn’t just for the purpose of stopping the employee from working in the same industry.”

It’s a case-by-case basis, but in determining this, there’s a cluster of things the courts look at.

The first is the position of the employee: the more senior, the more reasonable the restraint.

“For example, if someone has been in the executive level of a previous employer, the restraint clauses may say you cannot work in the same industry and provide the same services for six months or 12 months in the ACT. That may be reasonable.”

If a contract tries applying it to a base-level employee, “it’s less likely to be enforceable”, Mr Guo said.

Another consideration is geography.

“If the employee works in the ACT area only, the restraint clauses may seek to prevent them from working in the same industry in other states. Again, the reasonableness and enforceability of this restraint will be significantly impacted by the seniority of the employee and also the nature of the business.”

How many potentially unenforceable restraint clauses does Mr Guo see come across his desk? More than you’d think.

He said it’s important that employers not be too bold: the court will not insert a more reasonable restraint clause into the contract in place of an unreasonable one. The whole thing may be unenforceable. In other words, being greedy may backfire, “so employers need to draft it very carefully”.

There’s a lesson for employees as well.

First, don’t be cowed by extreme terms that wouldn’t hold up in court.

Second, recognise that a contract is a two-way street.

“An employee may want to negotiate with an employer and go, ‘I only work in one area but why should I be restrained from the whole industry?’

“Or, if you’re signing the contract and you see the restraint period is 12 months, but you don’t know how long you are going to work with the employer (it may be less than 12 months), you may want to say, ‘can we draft a progressive restraint clause? If I work for one year with you, I want the restraint clause to be two months. If I work more than one year, it can be three to six months’.

“That is what we can see in a well-drafted employment contract.”

If in doubt, get legal advice.

For more information, contact BDN Lawyers.

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