Poaching restraints and non-competes need reforming: ex-FWC president
A working paper from RBA board member Dr Iain Ross has argued that non-compete clauses hamper productivity, wages, and labour mobility.
Non-compete clauses, specifically the kind that limit what an employee can do after leaving an employer, negatively affect wages, productivity, and employee mobility.
That the clauses are often legally unenforceable matters little when employees are intimidated into compliance for fear of backlash.
This was the case made by RBA board member and former president of the Fair Work Commission, Dr Iain Ross, in a recent working paper for ANU’s Tax and Transfer Policy Institute.
Australia’s approach to non-compete clauses is “manifestly unfair and contrary to the public interest,” Ross said, adding that without a policy response, the increasing use of the clauses witnessed over the past five years is likely to continue.
As it stands, one in five Australian workers are covered by a non-compete clause. Where previously they were reserved for “highly paid executives,” their use now cuts across industries, levels of seniority, age, educational backgrounds, and income levels.
Calls for reform
Non-compete clauses have long been criticised for their anti-competitive, unproductive potential, yet the temperature has been rising over the past year.
Last year, the US Federal Trade Commission – the nation’s antitrust and consumer protection agency – proposed that non-compete clauses should be banned across the country.
By boosting competition and labour mobility, the FTC estimated workers would earn $300 billion more, and that racial and gender pay gaps could be closed by up to 9 per cent.
Following those calls and troubled by stagnant wages, Assistant Minister for Competition, Andrew Leigh, called upon the ACCC and Treasury to interrogate the non-compete question.
Immediately, he found the topic to be an under-researched one in the Australian context.
Leigh noted that he had been “unable to find any surveys of the prevalence” of the clauses, though he has since invoked the e61 Institute’s estimate of one in five workers being bound by them (or 22 per cent).
While Ross’s paper did not add any new insights into the prevalence of the clauses, it did clarify the positions of their detractors and defenders. It also considered possible policy solutions.
The problem with non-competes
Apart from the economic consequences of the clauses – including their capacity to tamp down wages and productivity – Ross pointed to the following three drawbacks:
- The confusion and uncertainty of “overly broad” non-compete clauses
- Ready access to injunctive relief for employers
- The broad proliferation of non-competes
Concerning the first, Ross said the clauses have an ‘in terrorem’ effect. In other words, they intimidate employees into compliance for fear of legal action.
This means that they can have a restricting effect in the absence of any legal enforceability. Fear is enough.
That said, the courts side with the employer in upholding the clauses more often than not, despite the clauses being presumed to be non-binding.
To counter the presumption, an employer must prove the restraint is necessary to protect a “legitimate interest.” According to Ross, in deciding whether the clause is protecting a legitimate interest, the interests of the employee are “generally not a significant consideration.”
Concerning the second, few cases tend to go beyond the interlocutory stage, meaning injunctive relief is the extent of the legal test of the clauses.
At this early stage of litigation, the employer has only to prove they have an “arguable” case and that the “balance of convenience” favours the injunction. In other words, employers find little trouble in obtaining an injunction restraining the former employee from breaching the non-complete and the matter most commonly ends there, stopping short of a trial.
Third, non-competes are too broad in their application and substance. Not only do they apply to a wide range of employees, they also protect an unjustifiably broad range of employer interests, said Ross.
Historically, they protected employer interests such as trade secrets, confidential information, and customer connections.
Now, the courts tend to accept the employer has an interest in having a “stable workforce,” and that it can justify the use of a non-compete.
This interest is commonly relied upon by employers looking to enforce non-solicitation clauses, preventing departing employees from poaching former colleagues.
According to UTS professor of law, Joellen Riley, this is misconceived.
“These cases focus – illegitimately – on the value of a stable and trained workforce as some kind of business ‘asset’ but forget that a workforce is not a thing of property,” said Riley.
Employees are legal persons with the liberty to offer or revoke their employment how they wish, and to allow otherwise would be to violate the privity of contract, she added.
Arriving at a solution
Academics have called for a range of reforms to address the situation, including introducing an upper limit on the duration of non-competes and requiring compensation during the period of its effect.
Others, like the FTC, have called for an outright ban on the clauses.
Ross did not commit to any one policy solution but said there was a “strong case” for prohibiting the use of non-compete clauses among low-paid workers by instituting an indexed monetary threshold on their viability.
He also said consideration should be given to the possible introduction of a six-month maximum term limit on employees above the monetary threshold and a ban on the prevention of solicitation of former colleagues.
On this last point, Riley said contractual terms that serve to prevent the solicitation of former colleagues ought to be “entirely unenforceable,” a position which Ross said was argued convincingly.
