Restraint clauses in the spotlight

The Federal Treasury is engaging in consultation as part of a review into worker non-compete clauses and other related restraints (the Competition Review).

Concerns have been identified by stakeholders and through recent court decisions about the widespread use of restraints clauses including in contracts for low paid workers (who are not compensated for the restraint), and about the impact that restraints have on worker mobility (and thus the availability of skilled labour).

It is expected the Competition Review will report to the Federal Government in June to December 2024. The Federal Government has indicated the Review may lead to further industrial relations reforms.

What are restraint clauses?

Restraint clauses restrict the actions of workers during or after their employment ends. Common restraint clauses are non-compete (restricting employees and independent contractors from working for a competitor or establishing a competing business), non-solicitation (restricting former workers from soliciting former clients, customers or co-workers) and non-disclosure (restricting the disclosure of confidential information).

Disputes about clauses

Where there are disputes regarding these clauses, courts will consider the nature and extent of the business interest to be protected and whether the restraint imposed is reasonable to protect that interest.  While employment contracts may have cascading restraint clauses, such that an offending part of a restraint can be severed and leave the rest of the restraint enforceable, they can still be unenforceable because they are uncertain.

A recent decision of the Fair Work Commission considered the issue of restraint in an unfair dismissal application. The applicant was a salesperson, selling grouting and grouting services, and his contract of employment contained a 12 month restraint period in which he ‘was not to work as an employee or contractor or advisor or in any other capacity in any business which was ‘engaged in activities substantially similar or identical to the Company and provides services substantially similar or services offered by the Company.’’[1]

The termination of his employment was found to be unfair. In determining remedy, the Commission was required to consider the efforts of the applicant to mitigate the loss suffered as a result of the dismissal. The applicant stated that he had applied for work but not in the same sector as his previous work because of the presence of the post-employment restraint. The employment he had gained was at a substantially lower rate of pay.

The Commission questioned why restraint clauses are ‘so commonly found in the contracts of ordinary workers and whether they really protect any legitimate business interest of the employer, or merely serve to fetter the ability of workers to ply their trade, and to reduce competition for labour and services.’ [2] Further, the Commission noted that while ‘the provision is most likely unenforceable on the basis that its scope is unreasonable, an ordinary worker cannot be expected to know this’.[3] The Commission made no deduction from the remedy payable in respect of the applicant’s decision to not apply for jobs that might have contravened the restraint.

Message for employers

This recent decision and the Competition Review serve as timely reminders for employers to consider the scope of their restraint clauses and whether they are reasonable to protect the legitimate interests of the employer (or act as an unreasonable fetter on an employee seeking further employment).

EMA Legal can assist employers with the review of employment contracts.

[1] Andrew Goddard v Richtek Melbourne Pty Ltd [2024] FWC 979 at [27].

[2] Ibid.

[3] Ibid.