Time of Reck­on­ing for Non-Com­pete Clauses


Non-Com­pete claus­es are under attack from var­i­ous quarters.

Broad­ly speak­ing, non-com­pete claus­es are a form of post-employ­ment restraint that pro­hib­it an employ­ee from work­ing for a com­peti­tor of their pre­vi­ous employ­er for a spec­i­fied peri­od in a defined geo­graph­ic area.

The ratio­nale for non-com­pete claus­es being imposed on depart­ing employ­ees is to pro­tect the legit­i­mate busi­ness inter­ests of the for­mer employ­er, usu­al­ly con­fi­den­tial infor­ma­tion and cus­tomer rela­tion­ships. This pro­tec­tion of the for­mer employ­er, how­ev­er, needs to be bal­anced against the right and need of the for­mer employ­ee to ply their trade or pro­fes­sion and earn a liv­ing. This bal­ance is why there is a ques­tion as to the enforce­abil­i­ty of non-com­pete restraints, with courts called upon to adju­di­cate as to whether a non-com­pete restraint should be enforced against a for­mer employ­ee and, if so, to what extent (in terms of time peri­od and geo­graph­ic scope). A court will not enforce the restraint beyond what is rea­son­ably nec­es­sary to pro­tect the legit­i­mate busi­ness inter­ests of the for­mer employ­er seek­ing to rely upon it.

As a rule of thumb, it is senior employ­ees who have sig­nif­i­cant access to con­fi­den­tial infor­ma­tion and cus­tomer rela­tion­ships. As such, there can be a prop­er basis for impos­ing a non-com­pete restraint against such employ­ees as they can dam­age the busi­ness inter­ests of the for­mer employ­er by mov­ing to a com­peti­tor. There is a real prospect a court will enforce a non-com­pete in such circumstances.

There is an increas­ing­ly influ­en­tial view that employ­ers are unfair­ly impos­ing restraints on rel­a­tive­ly junior or low­er-lev­el employ­ees who have not had access to con­fi­den­tial infor­ma­tion or cus­tomer rela­tion­ships, unjus­ti­fi­ably fet­ter­ing those employ­ees from avail­ing them­selves of oppor­tu­ni­ties with oth­er employ­ers and imped­ing labour mar­ket mobil­i­ty over­all. In these cir­cum­stances a court would like­ly give any attempt by an employ­er to enforce such a restraint against a for­mer employ­ee short shrift.

The God­dard Decision

In a recent Fair Work Com­mis­sion unfair dis­missal deci­sion, Andrew God­dard v Richtek Mel­bourne Pty Ltd [2024] FWC 979 (16 April 2024) (God­dard), Deputy Pres­i­dent Col­man con­sid­ered the impact of a non-com­pete clause imposed on the appli­cant on his oblig­a­tion to mit­i­gate the loss from his dismissal. 

In God­dard the appli­cant was a sales­per­son sell­ing grout­ing and grout­ing ser­vices. Deputy Pres­i­dent Col­man addressed the issue of the non-com­pete clause and its rel­e­vance to mit­i­ga­tion of loss at para­graph 27 of the decision. 

Deputy Pres­i­dent Col­man, by way of back­ground, observed:

Sec­tion 392(2)(d) requires the Com­mis­sion to con­sid­er the efforts of the per­son to mit­i­gate the loss suf­fered as a result of the dis­missal. Mr God­dard said that he had applied for hun­dreds of jobs on Seek’, includ­ing sales jobs, in which he had a lot of expe­ri­ence. How­ev­er, he said that he had not applied for jobs in the same sec­tor as his pre­vi­ous work, because of the pres­ence of a post-employ­ment restraint pro­vi­sion in his con­tract of employ­ment (clause 10.1). This stat­ed that for a peri­od of 12 months after the ter­mi­na­tion of his con­tract of employ­ment, Mr God­dard 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.’”

Deputy Pres­i­dent Col­man then pro­vid­ed com­men­tary on the restraint, rel­e­vant to the appli­cant but also of inter­est more broad­ly on the issue of post-employ­ment restraints imposed on ordi­nary’ workers:

One won­ders why such restraint of trade pro­vi­sions 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. Ordi­nar­i­ly, one would expect a per­son to have applied for jobs in the sec­tor of their exper­tise as a rea­son­able step in mit­i­gat­ing loss. How­ev­er the pres­ence of a non-com­pete pro­vi­sion in his con­tract explains Mr Goddard’s deci­sion not to do so. Although the pro­vi­sion is most like­ly unen­force­able on the basis that its scope is unrea­son­able, an ordi­nary work­er can­not be expect­ed to know this, and it is under­stand­able that Mr God­dard would not want to risk embroil­ing him­self in a legal con­tro­ver­sy by act­ing con­trary to an express pro­vi­sion in his con­tract. I there­fore make no deduc­tion in respect of Mr Goddard’s deci­sion not to apply for jobs that might have involved a pri­ma facie con­tra­ven­tion of the restraint of trade pro­vi­sion in his con­tract of employment.”

The God­dard deci­sion adverts to a dis­con­nect between the legal prin­ci­ples relat­ing to non-com­pete claus­es (and oth­er forms of post-employ­ment restraint, such as non-solic­it claus­es) as applied by the courts and the way in which many employ­ers seek to impose such restraints on employ­ees, irre­spec­tive of whether those employ­ees had suf­fi­cient access to con­fi­den­tial infor­ma­tion and/​or cus­tomer rela­tion­ships to pro­vide a sound basis for the restraints to be enforceable.

This sit­u­a­tion often aris­es from employ­ers using pro for­ma employ­ment agree­ments which con­tain, as part of their stan­dard terms, post-employ­ment restraints such as non-com­pete and non-solic­it claus­es. Often lit­tle thought or con­sid­er­a­tion is giv­en to whether to include the post-employ­ment restraints or to their ulti­mate enforce­abil­i­ty if test­ed. Indeed, there may be no inten­tion on the part of the employ­er to ever enforce the restraints. Of course, employ­ees are not to know this — as far as they are con­cerned there is a post-employ­ment restraint in their con­tract and, as Deputy Pres­i­dent Col­man observed in God­dard, they may not want to be poten­tial­ly drawn into a legal dis­pute with a for­mer employ­er and so com­ply with the restraint, even if the employ­er had no inten­tion of enforc­ing it. 

Reviews in the USA and Australia

The deci­sion in God­dard comes at a time when post-employ­ment restraints are under review, both in Aus­tralia and the USA

In the USA the Fed­er­al Trade Com­mis­sion (FTC) has tak­en the dras­tic step of ban­ning non-com­pete claus­es in employ­ment con­tracts com­plete­ly. The release from the FTC high­lights the extent of the ban:

Under the FTC’s new rule, exist­ing non­com­petes for the vast major­i­ty of work­ers will no longer be enforce­able after the rule’s effec­tive date. Exist­ing non­com­petes for senior exec­u­tives — who rep­re­sent less than 0.75% of work­ers — can remain in force under the FTC’s final rule, but employ­ers are banned from enter­ing into or attempt­ing to enforce any new non­com­petes, even if they involve senior exec­u­tives. Employ­ers will be required to pro­vide notice to work­ers oth­er than senior exec­u­tives who are bound by an exist­ing non­com­pete that they will not be enforc­ing any non­com­petes against them.”

As such, only exist­ing non-com­pete claus­es for senior exec­u­tives (a cohort of less than 0.75% of work­ers) will con­tin­ue to be enforce­able. There can be no new non-com­pete restraints for any employ­ees, includ­ing senior executives. 

In Aus­tralia, the Com­pe­ti­tion Review Task­force is present­ly exam­in­ing non-com­pete claus­es and var­i­ous oth­er form of employ­ment restraints, with sub­mis­sions being sought. 

The Issues Paper released by the Com­pe­ti­tion Review Task­force pro­vides this summary:

Sev­er­al issues have been iden­ti­fied relat­ing to the use and impact of non-com­pete claus­es. Many issues iden­ti­fied in empir­i­cal analy­sis have been affirmed as prac­ti­cal issues affect­ing Aus­tralia today through the Com­pe­ti­tion Review Taskforce’s ear­ly engage­ment, and include con­cerns about:

  • the chill­ing effect” of restraint claus­es on work­er mobil­i­ty, par­tic­u­lar­ly among low­er-income work­ers, to choose bet­ter-pay­ing jobs, and the abil­i­ty for busi­ness­es to start up, recruit tal­ent and grow;
  • the high cost of lit­i­ga­tion, the lack of clear guid­ance and bright line’ rules, and the use of cas­cad­ing claus­es or the blue pen­cil test’, which can leave both work­ers and busi­ness­es with an unclear under­stand­ing whether an agreed restraint will be upheld as rea­son­able and enforce­able; and
  • the eco­nom­ic con­se­quences of poten­tial­ly inef­fi­cient allo­ca­tion of labour and infor­ma­tion, which may be ham­per­ing pro­duc­tiv­i­ty growth and innovation.”

These are rea­son­able con­cerns but can be addressed with­out ban­ning non-com­pete claus­es alto­geth­er. In deter­min­ing the enforce­abil­i­ty of such restraints the courts, through prin­ci­ples devel­oped over decades of judi­cial con­sid­er­a­tion, care­ful­ly endeav­our to ensure an appro­pri­ate bal­ance is struck between the right of employ­ers to pro­tect their legit­i­mate busi­ness inter­ests and the right of employ­ees to change posi­tions and earn a liv­ing. The Issues Paper and relat­ed mate­ri­als put much reliance on anec­dotes of employ­ers try­ing it on by send­ing threat­en­ing let­ters to vul­ner­a­ble employ­ees, rely­ing on restraints that are patent­ly unrea­son­able in the cir­cum­stances. It is instruc­tive that there are no court deci­sions cit­ed show­ing how a restraint has actu­al­ly been enforced against such employ­ees. Unfor­tu­nate­ly, the bluff tac­tics of a few rogue employ­ers seem to be giv­en greater weight than the sig­nif­i­cant and nuanced body of law that is applied by the courts.


A few obser­va­tions on the issue:

  1. The inap­pro­pri­ate impo­si­tion of post-employ­ment restraints on low­er-lev­el employ­ees could be par­tial­ly coun­tered by edu­ca­tion or infor­ma­tion on the way such restraints oper­ate, reas­sur­ing such employ­ees that they are high­ly unlike­ly to be enforce­able against them. The real­i­ty is that non-com­pete claus­es can only be effec­tive­ly enforced against a rel­a­tive­ly small cohort of employ­ees. It is impor­tant to nar­row the gap between per­cep­tion and real­i­ty to min­imise abuse of restraints by employ­ers and embold­en employ­ees to call out bla­tant bluff tactics.
  2. One pos­si­ble option for deal­ing with this prob­lem is to pro­hib­it non-com­pete claus­es for those earn­ing less than the high income thresh­old under the Fair Work Act ($167,500 per annum exclu­sive of com­pul­so­ry super­an­nu­a­tion) although this is still a blunt approach that does not take account of the nature of the posi­tion sub­ject to the restraint. Remu­ner­a­tion alone is not always deter­mi­na­tive of access to con­fi­den­tial infor­ma­tion and cus­tomer relationships. 
  3. While the Issues Paper refers to the chill­ing effect” of restraint claus­es, many employ­ees hold the view that such restraints aren’t worth the paper they’re writ­ten on”, ignore the restraints and start with the new employ­er. While this can be a some­what sim­plis­tic approach on the part of such employ­ees, any assump­tion that all employ­ees sub­ject to non-com­pete claus­es act is if they are con­strained by them is flawed. 
  4. Is it seri­ous­ly sug­gest­ed, to take an obvi­ous exam­ple, that the CEO of a major com­pa­ny could fin­ish employ­ment and start as the CEO of its direct com­peti­tor the next day? This is the corol­lary of a com­plete ban on non-com­pete claus­es. It is undu­ly dis­mis­sive of the need for employ­ers to pro­tect legit­i­mate busi­ness inter­ests, mak­ing no sub­stan­tive dif­fer­ence to ordi­nary employ­ees while lib­er­at­ing senior executives.
  5. If non-com­pete claus­es are banned then it is like­ly employ­ers will look to longer notice peri­ods and lock employ­ees into extend­ed peri­ods of gar­den leave to give the employ­er an oppor­tu­ni­ty to pro­tect con­fi­den­tial infor­ma­tion and cus­tomer rela­tion­ships. Extend­ed notice peri­ods can have a sim­i­lar neg­a­tive impact on job mobil­i­ty yet are not, as a gen­er­al propo­si­tion, sub­ject to the same issues of enforce­abil­i­ty as non-com­pete claus­es. If non-com­pete claus­es are banned then extend­ed notice peri­ods (with a right to put the employ­ee on gar­den leave) will like­ly become an even more impor­tant busi­ness pro­tec­tion mech­a­nism than it is presently.
  6. The Issues Paper is right­ly crit­i­cal of the uncer­tain­ty for employ­ees cre­at­ed by cas­cad­ing restraint claus­es, which can cre­ate a bewil­der­ing array of poten­tial com­bi­na­tions. From a legal per­spec­tive, it is a clever draft­ing device for employ­ers to hedge bets and over­come the all or noth­ing” test apply­ing to enforce­abil­i­ty at com­mon law. From a com­mer­cial per­spec­tive it is a bizarre, con­fus­ing con­trivance, espe­cial­ly for employ­ees unfa­mil­iar with it. It is a con­trac­tu­al form of the Choose Your Own Adven­ture” books from child­hood. If there is any reform need­ed, con­sid­er­a­tion should be giv­en to the adop­tion of leg­is­la­tion sim­i­lar to the Restraints of Trade Act (NSW) in all juris­dic­tions, to hope­ful­ly obvi­ate or at least min­imise the need for cas­cad­ing clauses.

Pro­pos­als to ban non-com­pete claus­es are large­ly pred­i­cat­ed upon spec­u­la­tive eco­nom­ic the­o­ry and are being sold by a few anec­dotes about employ­ers mak­ing base­less threats to employ­ees who it seems, unfor­tu­nate­ly, did not seek any advice or guid­ance as to what their rights actu­al­ly were (which could have been quick­ly and eas­i­ly ren­dered by an appro­pri­ate­ly qual­i­fied per­son). It is a clas­sic case of throw­ing the baby out with the bathwater.