The federal government is in a consultation process to consider reform to law relating to restraints.  In April 2024, the treasury produced an issues paper “Non-competes and other restraints: understanding the impact on jobs, business and productivity” which is available at treasury.gov.au.  The issues paper identifies the typical types of restraint clauses on employees, including:

  • Non-compete clauses – which restrict former workers from working for a competitor or establishing a competing business, typically within a certain geographical area and for a certain period of time.  In practice, these sorts of clauses can be devastating on an employee if the geographical area is large, particularly given that the practical effect might be that the employee would have to move to another location to be able to work without breaching the restraint;
  • Non solicitation clauses – these clauses usually restrict the worker from taking a customer of the former employee, for themselves or for another business.  The clauses recognise that customers of a business will generally form a relationship with the workers, and the customers may wish to “follow” the worker if the worker leaves employment.  Further, the former employee (and their new employer) will benefit from the employee’s knowledge of the customer’s circumstances and the billing of the customer, which makes the customer more susceptible to being “poached” by the new employer;
  • Non disclosure clauses – these clauses attempt to restrict the former employee from disclosing confidential business information that they have gained during the course of the employment.  They apply particularly in the case of intellectual property and knowhow of the former employer, although it can be difficult to draw a line between what is proprietary information of the former employer, and what is simply experience and general knowledge.  

The discussion paper deals (at pages 12 and 13) with cascading restraints.  Cascading restraints (also called stepped restraints or ladder restraints) are a form of restraint which identifies:

  1. One or more kinds of restrained activity (eg working in an industry, working in a competing business, dealing with clients of the former employer, dealing with clients of the former employer with whom the employee dealt;
  1. Particular geographical areas, eg within a 50km radius of the former employer’s business, within a 20km radius of the former employer’s business, within a 10km radius of the former employer’s business and within a 5km radius of the former employer’s business; and
  1. Particular durations of time (eg 3 years after the termination of employment, 2 years after the termination of employment, 1 year after the termination of employment, 6 months after the termination of employment and 3 months after the termination of employment.

The clauses operate so that each separate obligation can be combined with each other so that – for example – at its widest the restraint might apply against working in the industry within Australia for 3 years, but then separately, it would apply to working for specific clients within Australia for 6 months and so on.  While the first in most cases is likely to be void, the second is potentially valid, and there are any number of other combinations which would also be valid.  A restraint with (say) 4 restrained activities, 4 geographical areas, and 4 restraint periods has over 60 combinations.  Further, a restraint with a wider area might be valid for a short time and a restraint with a smaller area might be valid for a longer time. 

This then gives rise to enormous uncertainty on the part of the employee who could be sued by the employer and would have to go through the litigation process at significant expense, and with the prospect of it being responsible for damages and costs, and in circumstances where the court is unlikely to determine the outcome until well into or after the expiry of the greatest restraint period. 

The issues paper cites the study “Employment restraints of trade: an empirical study of Australian court judgments” as reporting that out of 145 court judgments where employers attempted to enforce a restraint at an interim level (ie as an injunction pending trial), the employers were mostly (53.8%) unsuccessful.  This however does not take into account the fact that:

  1. The parties will have spent significant sums in legal expenses in having the contest;
  1. Usually final costs orders are not made at the interim application, as that is left for determination at the end of the proceedings;
  1. The interim application will not deal with the matter finally and as a result, the employee still has the risk of the proceedings continuing and not only incurring further costs, but also risking damages;
  1. Even if successful, the employee’s out of pocket expenses associated with the litigation are likely to be tens of thousands of dollars.

The issues paper does not suggest potential methods to resolve these matters.   One remedy might be to have an unfair contract terms regime in respect of employment contracts as is the case for consumer contracts, including business to business contracts.  It seems odd that an employer could include a clause in an employment contract and bind their employee to it, when the same clause in a contract between the employer and a contractor might attract penalties under the unfair contracts legislation.   This could discourage employers from including clauses that are unfair.

At this stage, the public consultation period has ended, with the competition review to advise the government on outcomes in the second half of 2024.

For advice relating to restraints in employment and other agreements, please contact Peter Muller at peterm@qbmlaw.com.au