Even to those who follow the political cycle, one of the more unexpected announcements in the Federal Budget was the news that the Albanese Labor Government plans to ban non-compete clauses in employment contracts. Between tax cuts and student debt being slashed, you could have missed this tiny detail.

What are restraints of trade?

In the context of employment, a restraint of trade usually occurs where an employment contract includes a clause that would prevent an employee from engaging in other work.

For example, a contract might restrain an employee from working for a competitor organisation for a defined period of time after resigning or prevent that worker from finding a new job in the same city or region.

Restraints can also be used to prevent a worker from inviting a colleague to join them in their new workplace, or from bringing clients with them. They can also be used to block a worker from setting up their own business.

In recent years, these clauses have become commonplace, drafted by employment lawyers and bundled into lengthy employment contracts, the terms of which are offered on a ‘take it or leave it’ basis. Workers rarely have a say in the drafting of their own employment contracts.

Workers search for new jobs for any number of reasons: better pay, better hours, or sometimes to escape a toxic work environment. A restraint can trap a worker from seeking greener pastures.

Are these clauses legal?

Yes and no.

Under current laws in Australia there is nothing to prevent an employer from including a restraint clause in an employment offer. While a prospective employee can turn down an employment offer or try to negotiate better terms that remove the restraint clause, if the employer refuses to budge, an employee is more likely to reluctantly agree to the contract than let it become an impasse to securing a new job.

However, at law, restraints on workers are presumed to be against the public interest and therefore are usually unenforceable, unless an employer can establish through court proceedings that the restraint is reasonably necessary to protect their business interests.

In other words, an employer has to sue one of their workers if they want the restraint to stick.

Whether a restraint on a worker is “reasonable” is a question of scale and degree. The broader the restraint, the less likely it is to be lawful. A narrow restraint preventing an employee from working for a competitor within a 100m radius of their old workplace is more likely to be enforceable that a ban on a worker seeking employment anywhere in their city, state or country where they live.

Most restraints would be laughed out of court.

So why do employers still use them?

Most worker restraints are presumed to be legally unenforceable, but because some are considered “reasonable” in the eyes of the law, some employers might hold out hope that the contractual restraints they have with their own employees are among the very few lawful ones.

But aside from the question of legality, what makes a restraint clause so powerful is the fear it creates amongst workers who may want to find a new job in their field. Some workers may not be aware that most restraint clauses will be struck down by the courts. But even those who are aware of this may still be frightened at the prospect of getting sued by their own workplace for daring to seek employment elsewhere. This fear can become even more heightened when the worker starts receiving threatening letters from their employer’s lawyers, or court proceedings are filed against them. The fact that the employer’s case will likely fail is cold comfort for the worker.

Why is all this changing?

Last year, the Federal Treasury held a public review into the use of non-competes and other restraints in employment. Feedback from ANMF members was that these clauses were rife and being misused, such as aged care workers who were told that they could not jump ship to another aged care provider in the same state. The ANMF provided a submission to this review, calling for a total prohibition for all worker restraints, with very narrow exceptions.

On Budget night this year, Federal Treasurer Jim Chalmers announced that the Albanese Labor Government would legislate to ban worker restraints, other than for high income earners. With the dust settled on the election, the ANMF looks forward to reviewing new laws that would consign worker restraints to the history books.