The Australian Labor Government has recently released draft legislation that would restrict the use of non-compete clauses in contracts of employment. If the proposal is passed in its current form, it would be a first for two reasons: (1) it would be the first time the Federal Government has intervened in the post-employment restraint space; and (2) it would be the first time Australian legislation would operate to penalise an employer for merely including them in a contract of employment (even if the restraint was never enforced). More broadly, the proposals signal the increasing willingness of the Government not just to legislate directly to set minimum entitlements for workers (such as rates of pay and entitlements to leave), but to legislate about the terms that can – and can’t – be included in individual contracts of employment.

Unsurprisingly, the proposals have attracted significant attention. The proposals arguably represent one of the most significant recalibrations of Australian post-employment restraint of trade law in a generation. Australian employers have come to rely on post-employment restraints as an important line of defence for protecting their confidential information, client connections and workforce stability. It looks like we are in for a change, because under the proposals:

1. an employer cannot ask a new employee sign a contract which contains a prohibition on working with another business after the employment ends (even if that business is a direct competitor of the employer) if the employee has a salary of less than the high income threshold (currently $190,100). Importantly commissions and incentives will not be considered when determining salary;
2. for all employees (regardless of their salary), there would be limits on the reasons that can be used to support non-compete restraints;
3. “cascading” post-employment restraints (that is, restraints that operate on the basis of “12 months, or failing that, 9 months or failing that, 6 months, etc”) are prohibited.

While there are grandfathering arrangements for existing employees with non-compete terms in their contract, the grandfathering would cease if the contract of employment is varied in any way. That might include something as simple as increasing the employee’s salary in their annual review or a new job title or promotion.

So what does this mean for employers who want to protect their valuable confidential information, customer connections and workforce stability? Given the proposals are just proposal at this stage, nothing can be said for sure just yet. But there are several points to be thinking about:

1. on a narrow reading of the draft legislation, a “customer non-solicit term” is not necessarily prohibited. These types of clause have been common backstops for employers because, even if an employee is allowed to commence employment with a new employer, they can be prevented from trying to “poach” clients from their old employer. We’ll need to wait and see the final terms of the legislation – and any subsequent court cases – to know whether this type of restraint will also be prohibited;
2. the prohibition on cascading restraints, together with the absence of any ability for a court to “read down” a restraint clause that is too broad, means that employers will need to be much more careful when drafting post-employment restraints. The restraints will need be tailored to the particular circumstances of the employee. Employers will need to do much more work to justify why the particular restraint chosen is reasonable;
3. there is a great deal of uncertainty about whether the prohibition on non-compete terms would extend to prevent forfeiture clauses in employee share and incentive plans. The proposed legislation makes clear that non-compete clauses don’t include arrangements that “provide for additional remuneration, or other employment benefit, to encourage retention”. But it’s very unclear where the line will be drawn between arrangements that penalise an employee for leaving to join a competitor and arrangements that are intended to “encourage retention”. Work is likely to be needed to tailor the language in these types of plans to ensure that they are enforceable;
4. the proposed legislation does at least make clear that contractual provisions that require an employee not to use or disclose the employer’s confidential information are acceptable. But the inadequacy of those provisions to deal with the “unintentional” or “unknowing” use of information in an employee’s head (and the difficulty of policing the use or disclosure of such information) is the very reason that many employers consider it necessary for an employee to be held of out from working with a competitor for a period of time;
5. employers will want to look at how notice periods and gardening leave can be used as potential alternative potential avenues protecting their interests.

The draft legislation is currently subject to a period of public consultation, expected to continue until 2 October 2026 – much will depend on that process, as well as whether deals need to be done with minor parties.

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