Snapshot
On 25 March 2025, the Australian Government announced that it would introduce legislation banning restraint of trade clauses for around 3 million workers who earn less than the high-income threshold (currently $175,000 per annum).
Following Labor’s re-election in May, it is expected the ban on restraints will now become a reality potentially by this time in 2026.
While, in the past, restraints were typically only used for senior managers and highly specialised employees, they have in more recent years been used on a much broader basis, with the Australian Bureau of Statistics recently finding that 46.9% of Australian businesses use restraints of trade as standard practice in their employment contracts.
In this article, we explore what the ban covers, and what it will mean for businesses and employees.
What are restraint of trade clauses?
There are three restraint of trade clauses commonly found in employment contracts:
- Non-compete clauses, which prevent employees from joining a competitor.
- Non-solicitation clauses, which prevent employees from contacting a customer or another employee and encouraging them to leave the employer for a competitor.
- Non-disclosure clauses, which prevent employees from using or releasing the confidential information of their former employer for the benefit of a competitor.
Restraints operate for a set period nominated in the employment contracts, which can range from months to several years. They are also deemed in the contract to operate over a particular geographic area, such as a particular city, a state, a country or even the world.
It is common for restraints to be drafted in a “cascading” manner with various alternative time periods and geographic locations, so that if one of the alternatives is found to be unreasonable (and unenforceable), the other alternatives can still be enforced.
The existing position – are restraints enforceable?
At common law, the default position is that a restraint of trade is void and unenforceable, unless it goes no further than is “reasonably necessary” to protect the “legitimate business interests” of the employer, such as confidential information and client and employee relationships.
Factors including the duration and geographic scope of the restraint, the role of the employee (such as the level of contact the employee had with key clients and the degree of access to sensitive business information) and the particular industry and business of the employer, are taken into account in applying this test.
For example, a 2 year restraint on working for any employer within a whole state (especially for a more junior employee) is far less likely to be enforceable than a 6 month restraint that has a more limited geographic scope, on the basis it is too restrictive on the ability of the employee to continue to earn a reason livelihood in comparable similar employment.
The impact of restraints
As part of its Competition Review, the Australian Treasury released an Issues Paper on restraints in April 2024. In the Issues Paper, concerns were raised that restraints can restrict worker mobility, especially for young and low-paid workers with limited bargaining power. This can have a “chilling effect” on entrepreneurialism and career progression. It can also hamper growth, innovation and healthy market competition, because workers are unable to take fresh ideas and experience to new roles. The cost of litigation for businesses and individuals relating to the enforcement of restraints can also be prohibitive.
Restraint of trade clauses have already been banned in many other jurisdictions (with some exceptions for senior executives), including in the United States, Canada, and many European Union countries.
Intended next steps
The Government will launch an initial consultation process (with details yet to be announced) before formally introducing legislation to implement the ban on restraints.
This process will clarify the scope of the ban, including penalties and any exemptions.
There is also the prospect the ban may be widened to also cover nonsolicitation clauses for clients and coworkers (not just employees).
While yet to be determined, it is likely the ban would need to be implemented through amendments to the Fair Work Act, and potentially the introduction of bespoke new legislation if the scope of the ban is broadened.
Following the consultation and legislative process, the ban on restraints could take effect as early as the next 12 months.
What does it mean for you?
Once further details of the impending ban become clearer, all businesses should review their existing standard-form employment contracts to assess whether they include restraints of trade.
Notably, a ban would only cover employees below the minimum wage threshold, so it would remain possible to use a restraint for more senior employees. However, it would be important for all businesses to implement robust compliance processes, so that they can stay on top of changes to the high-income threshold, and any refinements to exclusion criteria for restraints.
Importantly, the ban, at this stage, is not intended to impact on non-disclosure clauses that protect employers from their confidential information being used by a former employee. Such information is an important asset for businesses, and the exclusion from the scope of the ban is a valuable concession which also presents an opportunity for businesses to review the scope of their existing confidentiality provisions in their standard employment contracts, to ensure they are sufficiently broad and protect the scope of the business, its operational purview and its customer and client base.
Once the ban comes into effect, employers would also need to, for employees covered by the ban, consider alternative methods of employee retention, such as offering additional perks and enhancing workplace culture.
Employees would also be advised to review their contracts when the ban becomes effective, as those below the high-income threshold would have greater workplace mobility and an opportunity to potentially bargain for better conditions in alternative jobs in future.
The K2 Law difference
At K2 Law, we have a dedicated team of experts who are highly skilled in commercial and contract law, and have a comprehensive knowledge of, and extensive experience in, employment and restraint matters.
We would be happy to discuss the implications of the ban, and to assist you in the upcoming transitional period, as the legislative process continues over the next 12 months.
For a further discussion, please get in touch with James Barritt or Alyce Corbutt.
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