Unenforceable and unnecessary non-competes hold us back
Seventeen-year-old Charlotte landed her first casual job as a dance teacher. It was her dream job, but she was forced to quit after experiencing harassment.
So she took a job at a different dance studio. Suddenly, a letter arrived in the mail. Charlotte’s contract with the first employer had a non-compete clause, which prevented her from working at a competing dance studio within 15km for three years after her employment stopped. The old employer told her she had to quit her new job.
One in five Australian workers now has a non-compete clause in their employment contract. We’re not just talking about senior managers. Non-competes are showing up in the employment agreements of boilermakers and disability support workers. When chief executives are forced to take a break between jobs, we call it gardening leave. Now, even gardeners are being compelled to take gardening leave.
Businesses legitimately want to protect their trade secrets and confidential information, as well as their customer lists. But doing so with a non-compete clause is deploying the bluntest tool in the shed.
It stops a worker from moving to any competing business, or from starting a new one. A growing body of evidence suggests the use of non-compete clauses is harming job mobility, innovation and wage growth.
Job-switching is a sign of a dynamic and healthy economy.
For businesses, it means improved productivity as they can attract the talent and skills they need. This is especially important for startups and firms looking to expand.
For workers, it means job satisfaction and higher wages as they move to more productive firms. Research from the e61 Institute finds that younger job switchers can earn on average $7500 more per year than job stayers. Yet despite these benefits, Australia has seen a general decline in job mobility during the past 30 years, part of a broader fall in dynamism since the early 2000s.
Given that, it makes sense to carefully assess any barriers that may be limiting people from moving jobs, limiting businesses from expanding and limiting the flow of innovation in the economy.
Under common law, many non-compete clauses are probably unenforceable. But that’s not much help to the typical employee.
Workers may be too afraid to face the risk of a bout of unemployment or a court dispute, so don’t move to a better-paying job or start a new business.
It’s not as though employers are powerless to prevent their secrets walking out the door. Businesses can use the Corporations Act, which bans employees during or after employment from improperly using a company’s information for personal gain, third-party gain, or to cause detriment to the company.
Around the world, many jurisdictions have either banned or restricted the use of non-compete clauses. In the US, five States have bans in place, including California, the home of Silicon Valley. The Albanese Government established the competition task force last year to examine whether Australia’s competition laws, policies and institutions remain fit for purpose.
Now, the task force has launched its issues paper Non-Competes and Other Restraints: Understanding the Impacts on Jobs, Business, and Productivity. The issues paper is an open invitation for everyone – businesses, employees, academics, think-tanks – to provide their views.
Already, we know that millions of Australian workers don’t have the freedom to quit their jobs and immediately move to a better job.
We know that these restraint clauses don’t just apply to the boardroom. They apply to workers in the mail room too.
They are just as likely to apply to the person guarding the carpark as they are to the person guarding trade secrets.
Taking a hard look at non-compete clauses is just one step in our efforts to build a more competitive and dynamic economy.
Originally published in the West Australian on 16 April 2024.