Restraint Reforms: What Employees & Employers Need to Know
Proposed restraint of trade reform in 2027 will involve lifting restraints of trade, specifically non-competes for employees who earn below the high-income threshold. The change, set to take effect in 2027, gives employees the flexibility to work for a competitor, despite any non-compete imposed by an employer.
The driver behind this change is helping employees to continue to earn a living doing similar work, perhaps for a competitor, after they finish up with an employer. The change is welcome for many employees who have found themselves waiting out restraint periods, often without an income. Employers will retain certain protections, even with the change, and we'll discuss these along with the changes below.
What are restraints?
A restraint prevents an employee from harming the business of a current or former employer. When drafted reasonably, it goes only as far as necessary to protect the employer’s legitimate business interests; when drafted too broadly, it can significantly restrict employee mobility.
Restraints generally fall into the categories of non-compete and non-solicitation.
What is the restraint reform?
From 2027, non-compete restraints will no longer apply to employees earning below the high-income threshold, which is indexed annually by the Fair Work Commission and is currently $190,100. As Senator the Hon Murray Watt, Minister for Employment and Workplace Relations, has explained, the removal of non-competes for workers below the high-income threshold is intended to encourage aspiration, unlock opportunity, lift wages, and make Australia’s economy more dynamic and competitive.
Why restraints matter to employers and employees
Employers are focused on protecting their business interests, including valuable intellectual property and commercially sensitive know‑how, and on preventing that information from reaching competitors who could use it to gain an unfair advantage. At the same time, the reform recognises that employees must be able to maintain their income and preserve their career mobility when they change employers, and seeks to strike a balance between these competing interests.
Case study: Employee "Ernie"
Perhaps the most extreme negative impact of a restraint we have seen is Ernie's, earning $68,000 per annum, well below the high‑income threshold. Following a falling‑out with his employer, he resigned and, three months later, secured new employment within a six‑month restraint period. He then received a cease‑and‑desist letter relying on the restraint in his employment contract and was forced to incur legal fees to respond. The letter was copied to his new employer, causing them to reconsider proceeding with his employment.
Case study: Employee "Brianna"
Brianna's resignation culminated in a termination after she spent three months downloading Excel forecast and budget models and statement-of-work templates in preparation for her consultancy launch. Brianna felt justified, arguing that the employer sourced the downloads from open-source platforms but tweaked them for their use, and that they were fair game for her to use privately. Her salary? $136,000 per annum. Unbeknownst to Brianna, the employer was monitoring her downloads and the Outlook emails she sent to her personal account. Displeased with the discovery, the employer terminated Brianna for serious misconduct, though she had resigned before the termination decision.
Case study lessons
Ernie wasn't earning a substantial salary. While he had access to sales information, his employment contract included protections for the employer even without the non-compete: no poaching, no use of confidential information, and common law protections. In his case, the employer was heavy-handed in its restraint; he simply wanted to move on and earn an income and did nothing to harm the employer, other than work for a direct competitor. Briana's actions to misappropriate IP were deliberate; she justified her actions based on models she downloaded that are available in a similar (but not exact form) on open-source channels. Both vignettes show both extremes - situations where noncompetes are heavy-handed for someone earning a modest salary and where they are warranted due to employee actions like Brianna's.
The common law starting position for restraints
The court's first impression of restraints is that they are void. They go against public policy unless they are reasonable and in the interests of both parties and the public. The earliest case establishing this point was that of Nordenfelt v The Maxim Nordenfelt Guns & Ammunition Co Ltd in 1894.
The problem with current restraints
The following issues commonly arise in constraints our firm's reviews:
- The kilometre restriction is too wide, the employee is unable to find employment near their home as a result.
- States are listed where the business does not operate.
- The period of the restraint is too long, harshly limiting the employee's livelihood and depriving the workforce of their skills.
- Mobility is limited. They limit the mobility of employees who are restricted from their industry or competitors, more problematic if it is a niche industry and the employee's sole background.
- Startups need talented labour, and the shortage of it can impact our Australian startup ecosystem.
Employer protection
If you have set your entrepreneurial sights on purchasing a business, the restraints covering key persons will matter to you. Key persons hold senior positions, and, with the reform, this means they earn high incomes.
The protections below remain intact, and a common one is preventing an employee from taking a positive action that harms the employer's business.
- non‑disclosure agreements to stop or restrict a worker from revealing certain information from their former employer
- client non‑solicitation clauses to stop or restrict workers from asking clients of their employer to become their clients.
- co‑worker non‑solicitation clauses to stop or restrict a worker from asking co‑workers from their former employer to work for another business
- stakeholder solicitation clauses to stop employees from poaching key contacts such as suppliers of their former employer.
- no‑poach agreements between businesses to not hire the current or former staff of their competitors.
The reforms were a long time coming, as even section 4 of the Restraint of Trade Act 1976, reproduced below, lacked the specificity to protect those employees who most need protecting. In practice, restraints were not read down, and protection for vulnerable employees was lacking; the cost of challenging an employer in court was too high for many employees, who would rather stay out of work than risk a court case.
Restraint of Trade Act 1976 NSW
4 Extent to which restraint of trade valid
(1) A restraint of trade is valid to the extent to which it is not against public policy, whether it is in severable terms or not.(2) Subsection (1) does not affect the invalidity of a restraint of trade by reason of any matter other than public policy.(3) Where, on application by a person subject to the restraint, it appears to the Supreme Court that a restraint of trade is, as regards its application to the applicant, against public policy to any extent by reason of, or partly by reason of, a manifest failure by a person who created or joined in creating the restraint to attempt to make the restraint a reasonable restraint, the Court, having regard to the circumstances in which the restraint was created, may, on such terms as the Court thinks fit, order that the restraint be, as regards its application to the applicant, altogether invalid or valid to such extent only (not exceeding the extent to which the restraint is not against public policy) as the Court thinks fit and any such order shall, notwithstanding sub-section (1), have effect on and from such date (not being a date earlier than the date on which the order was made) as is specified in the order.(4) Where, under the rules of an association, a person who is a member of the association is subject to a restraint of trade, the association shall, for the purposes of subsection (3), be deemed to have created or joined in creating the restraint.(5) An order under subsection (3) does not affect any right (including any right to damages) accrued before the date the order takes effect.
Breaking the law
Breaking the law could result in penalties for the employer but these are yet to be detailed at the time of writing.
Conclusion
Whether you are receiving or drafting a restraint, it's important to know your rights to protect your legal interests. Leave a comment if you have a query or reach out to us directly for a private discussion.
