Non-compete clauses in employment contracts: The case for regulatory response

Abstract

In the employment context non-competes are contractual terms which provide that once the employment ends the employee cannot work for another employer in the same industry or field (ie a competitor), within a specified geographic area, for a specified time. The use of non-competes by Australian business has increased over the past 5 years and this trend is likely to continue. Non-competes are no longer limited to highly paid executives but now apply to about 1 in 5 Australian workers, across income, age, O.ccupational and education groups. The existing law and practice regarding non-competes in Australia is plagued with confusion and uncertainty. Non-competes also have adverse economic consequences they are associated with reduced employee mobility and consequent negative impacts on wages and productivity. The distribution and prevalence of non-competes in Australia are broadly consistent with data in other developed economies. A number of jurisdictions within the OECD have imposed restrictions on the use of non-competes. The US Federal Trade Commission is considering a ban on the use of non-competes and in the UK the government has announced its intention to limit the term of non-competes to 3 months. In Australia the Competition Minister has recently asked the ACCC and Treasury for advice on the competitive aspect of non-competes. After reviewing the arguments for and against restricting the "reach' of non-competes I conclude that the weight of the evidence favours a regulatory response to ameliorate the unfairness inherent in the existing law and practice. A number of possible regulatory responses are considered.