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The Impact of Non-Compete Clauses on Employees

A recent study has provided new data regarding the use and impacts of non-compete clauses (Non-Competes) and non-disclosure agreements (NDAs) in Australian Employment Contracts (the Study). Utilising data from the Australian Bureau of Statistics (the ABS), the Study found that the increased use of Non-Competes by Australian employers has contributed to low wage growth and job mobility for employees subject to these conditions.

Non-Compete Clauses

Non-Competes in Employment Contracts impose restrictions on an employee’s ability to commence employment with a competitor of the former employer, either in the same or similar industry, for a prescribed period of time and geographical area upon termination of employment. Traditionally, justification for non-competes arose from the practical necessity of firms to protect their trade secrets and client relationships. Whilst incorporated for the benefit of the employer, employees may benefit from these clauses too, in that they encourage investment by firms in staff training, as employees are disincentivised from moving quickly between employers.

The Study also analysed the impact of NDAs. NDAs similarly prevent the disclosure of confidential information gained during the course of employment, offering an alternative for employers to protect trade secrets and confidential information without negative implications on labour mobility for workers.

Findings

It was found that employment contracts of approximately 1 in 5 Australian workers contain a Non-Compete. According to the Study, the proliferation of Non-Competes in the past five years has contributed to a fall in labour mobility, which sits at a record low level despite a strong labour market. Consequently, the Study found that employees with contracts containing a Non-Compete were earning 4% less than similar workers, who instead were subject to NDAs. Furthermore, it was found that employees with Non-Competes were subject to lower wage growth and reduced bargaining power arising from these restrictions on pursuing new employment opportunities. Whilst Non-Competes have been traditionally utilised in higher-skilled professions, the Study found that workers in lower paid and lower-skilled occupations were also subject to Non-Competes, despite the potential lack of legal enforceability of such clauses.

Implications

With the Albanese Government considering introducing legislation to mitigate the restrictions of Non-Competes on the employees, findings of the Study prove supportive of the proposed legislative restrictions.

If you have any questions about Non-Compete clauses or NDAs and how they may impact you as an employer or employee, please do not hesitate to contact Nick Stevens, Josh Hoggett, Evelyn Rivera or Ayla Hutchison.

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