Major shake-up to non-compete clauses: what employers need to know

Following up on its election promise, the Federal Government has now announced it is seeking feedback to support its reforms to non-compete clauses and other restraints on workers, including its proposal to abolish post-employment non-competition clauses for workers earning below the high-income threshold (currently $183,100 per annum).

Ban on non-compete clauses 

Non-competition clauses are frequently relied on by Australian employers to protect their confidential information and maintain client and supplier connections when former employees try to join their competitors. 

The Consultation Paper (25 July 2025) follows a similar Treasury Issues Paper released in April last year that informed the Competition Review Taskforce and formed the basis of the policy announced by the Government before the election. 

The proposed changes, which are intended to take effect from 2027, are expected to make contractual terms unlawful if they prevent employees who earn less than the high-income threshold, (currently $183,100 per annum), from relocating to a competitor business or setting up their own small business ventures. 

The Consultation Paper: 

1. clarifies that the Government “is not proposing changes to restraints of trade outside of employment”, including restraints which apply in the context of the sale of a business;
2. comments that the ban could also include specific statutory exemptions “where there is an overwhelming public interest in doing so”; and
3. notes that, in addition to unenforceability, civil penalties for the inclusion of such provisions “may be important” to ensure these clauses are no longer included in employment contracts. 

Other restraints of trade

The Government is also considering: 

1. anti‑competitive agreements: tightening exemptions for ‘employment conditions’ in competition laws to prevent businesses from making anti‑competitive agreements in relation to workers’ pay and conditions. The Consultation Paper considers the possibility of proscribing no-poach and wage-fixing agreements as new forms of anti-competitive conduct, potential statutory exemptions and considering whether such anti-competitive arrangements should attract both civil and criminal penalties. Types of potential exemptions under consideration include secondment arrangements, labour hire firms, professional sports league as well as existing competition law risk mitigation mechanisms such as seeking authorisation, structuring joint venture and collective bargaining arrangements.
2. non-solicitation clauses: whether complementary reforms to non-solicitation clauses are required. The Consultation Paper seeks feedback on this, noting that, if any restrictions were to be made to non-solicitation clauses, the intent would be to not affect the employee’s confidentiality obligations, including in respect of “trade secrets, business methods or processes, or client information”.

Other jurisdictions as a model

Consideration of similar restrictions have been in progress in the United States (see our previous article) and the United Kingdom. On 23 April 2024, the US Federal Trade Commission’s (FTC’s) nation-wide ‘Non-Compete Final Rule’ was passed, which prohibited new non-competes for all workers and rendered existing non-competes unenforceable, except for “senior executives”. The District Court for the Northern District of Texas issued an order preventing enforcement of the rule, a decision which is currently pending appeal. It is unclear whether the FTC will decide to continue to or abandon its appeal, which was commenced under the former Biden administration, before the court-mandated deadline of 8 September 2025. In the UK, the Government is currently consulting on measures to reform non-compete clauses in contracts of employment, proposed to impose a statutory limit of three months on non-compete clauses.

In terms of scope, the Consultation Paper suggests that the Government considers the US FTC’s definition of “non-compete” clause to be appropriate, which captures any term or condition of employment (including, but not limited to, a contractual term or workplace policy, whether written or oral) that either:    

“prohibits a worker from, penalises a worker for, or functions to prevent a worker from:

1. seeking or accepting work with a different person where such work would begin after the conclusion of the employment that includes the term or condition.
2. operating a business after the conclusion of the employment that includes the term or condition.” 

Additional reforms: exceptions, cascading restraints and New South Wales law 

The Consultation Paper also considers other issues with the current regime for post-employment restraints, in circumstances where non-compete clauses may continue to apply to high-income earners or other exempt employees. 

For instance, the Consultation Paper criticises both the concept of cascading restraint provisions and the Restraints of Trade Act 1976 (NSW) (NSW Restraints of Trade Act) itself, claiming that the latter has caused employers to intentionally include broad, untargeted restraints in employment contracts, knowing that the Courts can effectively ‘read down’ the clause, should the employee challenge its enforceability. 

When interpreting the words in a restraint clause, the common law currently permits the Court to ‘sever’ the unreasonable parts of a restraint, while allowing the remainder of the restraint to be upheld (commonly referred to as the ‘blue pencil’ doctrine). This approach has resulted in restraints commonly being drafted in a ‘cascading’ fashion, specifying multiple different applicable ‘restraint periods’ and ‘restraint areas’, with the broadest enforceable formulation of the restraint applying (providing room for any unenforceable broad formulations to be ‘severed’ from the restraint). The NSW Restraints of Trade Act partially modifies this common law approach by also permitting the Court to add ‘new words’ or rewrite the provision when interpreting a restraint clause that makes the clause reasonable and enforceable. 

To prevent this, the Consultation Paper proposes on a number of potential further reforms, including:

1. a “one-shot-rule” prohibiting cascading restraint clauses, allowing only a single formulation of the restraint clause to deter employers from including overly broad or otherwise unenforceable restraints; and
2. a legislative requirement for a restraint clause to “specify the legitimate business interest” that the employer seeks to protect. 

It is likely that, to the extent the NSW Restraints of Trade Act is inconsistent with any federal reforms once legislated, those sections of the NSW Restraints of Trade Act may not apply to constitutional corporations.

What should employers be doing now? 

The Consultation Paper states that the non-compete ban “is expected to apply prospectively from 2027 to employment contracts made or varied after the start date”, however notes that the Government is considering feedback on how the ban applies to existing employment contracts. 

The reforms are open for consultation until 5 September 2025. In the interim, employers should:

1. review non-competition and non-solicitation clauses in employment contracts now to ensure enforceability, as legislative changes may not apply retrospectively;
2. seek legal advice before relying on any narrow statutory exemptions or seeking to restructure agreements under competition law for employment arrangements to avoid risks of cartel conduct investigations and/or proceedings;
3. ensure that intellectual property and confidential information clauses are adequate in protecting the company; and
4. consider setting salaries for key employees, who can damage their business by working for a competitor, above the $183,100 per annum threshold. Although by the time the ban is enacted, the high-income threshold – adjusted annually on 1 July – may have increased.