Government set to ban non-compete clauses for workers earning under $190,100

Australia is set to ban non-compete clauses for workers earning under $190,100, with the government eager to do away with what it describes as “massive productivity and wage killers”.

Once largely restricted to high-income earners, non-compete clauses now cover more than three million Australian workers, including those in childcare, construction, administration and hairdressing.

“Job switching is so fundamental and important to the economy and workers themselves,” said Assistant Minister for Productivity Dr Andrew Leigh.

“You can frame it as egalitarianism, you can frame it as freedom, or you can just frame it as the Aussie fair go.”

One in five Australian workers are now constrained by a non-compete clause – which may be unenforceable.

Speaking on the Australia Institute’s podcast Follow The Money, Dr Leigh said workers shouldn’t have to pay a lawyer to find out.

“Who’s got $100,000 to hire a lawyer and challenge it?” he asked.

He said workers were also unlikely to question a non-compete clause when starting a new job for fear of appearing disloyal.

“It’s a bit like when you’re sitting down to plan a wedding, if one partner says, ‘Well, let’s talk about what the terms of our divorce will be like.’ No one wants to go into that space,” he said.

“Even a non-enforceable non-compete can be useful because it has that chilling effect, effectively holds onto your workers by making it harder for them to switch to a competitor.”

The Australia Institute’s Deputy Director Ebony Bennett described them as “a nasty secret buried in the fine print” that restrict a growing number of Australians from competing against their employer once they leave.

They’re also hurting productivity, with the decline in job switching contributing to Australia’s productivity slowdown over the last decade.

“What happens is you don’t get the dynamism, you don’t get the job switching, which is actually really fundamental to a successful company,” said the assistant minister.

With sluggish wage growth, changing jobs can pay off, while also allowing workers to move into roles that better use their skills.

“Our biggest pay rises come not from sticking with the same employer, but from moving to another employer,” he said.

Economic research institute e61 estimates abolishing the clauses could lift the wages of affected workers by up to four per cent, or about $2,500 a year for a typical worker.

Australia is part of a broader international move to ban or significantly restrict non-compete clauses.

There are outright bans in Colombia and Mexico, while Austria and Belgium have taken a similar approach to Australia.

France, Germany and Italy require employers to compensate workers during some or all of the restricted period.

Laws vary by state in the US, but in California, non-compete clauses have generally been banned since 1872, which Dr Leigh argued challenged the idea that they were necessary to drive innovation.

“Some of the most innovative places on the planet have had more than a century-long ban on non-compete clauses,” said Dr Leigh, referring to Silicon Valley – a global hub for Big Tech.

“It is that total hub of innovation, one of the biggest economies in the world if it was a country, clearly hasn’t held them back at all,” said Ms Bennett.

“But we do have the wage fixing story,” Dr Leigh added.

Companies such as Adobe, Apple, Google and Pixar were accused of conspiring not to recruit each other’s employees to suppress competition and keep wages low.

It ended with an AU$610 million settlement.

Dr Leigh said the new laws would also close a loophole that meant Australia’s competition watchdog would have been unable to act had similar conduct occurred here.

“When employers have too much power, then they’re more likely to be able to get away with non-competes and potentially could engage in these sort of wage fixing cartels,” he said.

“Right now, Coles and Woollies are breaking the law if they get together to keep prices high, but they’re not breaking the law if they get together to keep wages low.”

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