Protecting your business - getting ready for significant change with post-employment restraints

Companies invest significantly in their business, clients and employees to create a prosperous sustainable enterprise. An important and valid part of business is having reasonable post-employment restraints to protect that investment from departing employees competing unfairly.

Things are about to change significantly. The Federal government has published its exposure draft of the Competition and Fair Work Legislation Amendment (Banning Unfair Non-Competes) Bill 2026. The changes directly attack the investment businesses make and represents one of the most significant workplace reforms in recent times.

The Unfair Non-Competes Bill seeks to amend the Fair Work Act 2009 (Cth) to essentially outlaw two types of common post-employment restraints, with significant consequences for employers. These consequences include business being more prone to the poaching of talent from the inside. There are other important changes, including to cascading clauses. Employers need to pivot and get ready for these changes.

In this article, we will focus on explaining the proposed amendments to the Fair Work Act. In our next bulletin, following our seminar in early November 2026, we will look at the gaps and opportunities with the Unfair Non-Competes Bill.

Typical restraint of trade clauses

It is not uncommon for an employment contract to contain restraint of trade clauses. Such clauses are important employment conditions for senior staff and employees that have dealings with customers and supervise workers. The law has long recognised that business has a legitimate business interest in protecting its confidential information, customer and employee connection.

There are three common types of restraint seen in an employment contract:

• a clause prohibiting an employee from setting up a competing business (non-compete clause);

• a clause restraining an employee from soliciting a client/customer away from the business (client non-solicitation clause); and

• a clause restraining an employee from poaching colleagues (co-worker non-solicitation clause).

The Unfair Non-Competes Bill seeks to limit and outlaw non-compete and co-worker non-solicitation clauses in employment contracts.

Proposed changes

The Unfair Non-Competes Bill is described as being part of “broader competition policy reforms to boost wages, job mobility and productivity…”.  It will certainly have a significant impact on business with departing employees free to compete and poach staff that business have invested in and trained.

Non-compete clauses

Continuing the unhelpful language of “rights”, proposed s 333Z (1) of the Unfair Non-Competes Bill says:

… an employee has a right to be free of a non-compete term

That right is given to all employees whose annualised full-time equivalent earnings are equal to or less than the high-income threshold. If, at a particular time, the employee’s earnings exceed the high-income threshold, the employee does not have the right to be free of a non-compete term. The high-income threshold is currently $190,100 and is indexed annually. Casual employees and pieceworkers have the right.

The Bill as currently drafted proposes to include a definition of a ‘non-compete term’ as:

a term or condition of employment which restricts, prohibits or prevents an employee from, or adversely affects the employee for, seeking to:

(a) be involved in any business or undertaking subsequent to the employee’s employment; or

(b) commence subsequent employment.

The definition will capture terms in employment contracts that:

• prevent an employee from starting a competing business;

• prohibit an employee from seeking employment with a competing business; and

• restrain an employee from seeking any employment, including in a similar or equivalent role with a competitor, client or other business.

The right is given effect by a prohibition on the inclusion of non-compete terms in an employment arrangement: proposed s 333ZA. Employers will contravene s 333ZA if the employer enters into or establishes an employment arrangement with an employee (that earns equal to or less than the high-income threshold) that includes a non-compete term. Contravening this provision can result in significant civil penalties being imposed.

Non-compete clauses included in an employment arrangement entered in contravention of these provisions will be taken to have no effect: proposed s 333ZB.

What happens if an employee’s annualised full-time equivalent earnings reduce during the employment? Any valid non-compete term then ceases to have effect.

Employers may also be subject to civil penalties if they seek to, or threaten to, enforce a non-compete term that has no effect: proposed s 333ZC. Employers will need to be certain about the validity of a non-compete term before sending any letter of demand to a former employee and their new employer.

What is an employment arrangement is broadly defined. An employment arrangement won’t just be limited to an employment contract. It will also include deeds, workplace policies and other arrangements (written or unwritten) that may govern the employment relationship.

Co-worker non-solicitation clauses

The Unfair Non-Competes Bill is also proposing to ban co-worker non-solicitation clauses entirely for all workers regardless of high-income earnings.

Like with the non-compete provisions, “an employee has a right to be free of a co-worker non-solicitation term”: proposed s 333ZF.

The Bill as currently drafted proposes to include a definition of a co-worker non-solicitation term as:

a term or condition of employment that restricts or prohibits an employee from recruiting, or attempting to recruit, a person [namely a co-worker or former co-worker] to:

(a) be involved in any business or undertaking subsequent to the co-worker’s employment, or

(b) commence subsequent employment.

Who is a co-worker takes a broad approach like workplace safety legislation. A co-worker includes the following persons:

• employees;

• contractors or subcontractors;

• employees of a contractor or subcontractor;

• employees of a labour hire employer who have been assigned to work in the host’s business or undertaking;

• outworkers ;

• apprentices or trainees;

• work-experience students; or

• volunteers.

Co-worker non-solicitation clauses will be prohibited from being included in any employment arrangement: proposed s 333ZG. Like with non-compete terms, it will be a civil remedy provision if employers include such clauses in their employment contracts. Co-worker non-compete clauses entered in contravention of these provisions will be taken to have no effect: proposed s 333ZH.

Transitional arrangements

There will be important transitional provisions. As currently drafted, the civil penalty provisions will apply six (6) months after the new laws commence, giving employers time to be compliant.

The right to be free of non-compete and co-worker non-solicitation terms, and such terms having no effect, will apply on commencement to all new employment arrangements. Existing arrangements continue until “the employment arrangement is varied”. Once varied, the new laws apply. A variation could include a change in job or an increase in pay.

Regulating restraint of trade terms

The common law principles regarding the enforcement of restraints are well established. Whether a restraint of trade clause is enforceable depends on whether it is reasonable and against the public interest. The Courts will consider to what extent the clause is reasonable to protect the employer’s legitimate business interests.

The Unfair Non-Competes Bill seeks to now regulate the enforcement of post-employment restraint of trade terms by imposing requirements on those terms. It is important to note that a post-employment restraint of trade term includes non-compete and co-worker non-solicitation terms and “any other restraint of trade term that applies, or purports to apply, to an employee after the termination of the employee’s employment”. This would include a client non-solicitation clause.

The Unfair Non-Competes Bill says a post-employment restraint of trade term must:

(a) be necessary for one or more of the following reasons:

(i) to protect against the use or disclosure of confidential information that has come to the knowledge or into the possession of the employee by reason of their employment; or

(ii) to protect against the use of, or disclosure of the existence of, professional or personal relationship with customers, clients or professional networks that the employee has gained by reason of the employee being, or having been, an employee of the employer; and

(b) be reasonable.

What is considered when determining reasonableness in the proposed Bill largely reflects the common law position of ensuring the term goes no further than is necessary for the above legitimate reasons.

The Bill will also prohibit the use of cascading terms, like restraint areas and periods: proposed s 333ZJ (5). Ordinarily contracts that contain restraint clauses will contain cascading clauses which allow the contractual clause to continue to operate if parts of it are rendered unreasonable by the Court. The Bill is proposing to outlaw this approach. Employers will need to define the exact area, scope and time of a restraint.

What this all means for businesses

The Unfair Non-Competes Bill does not prevent client non-solicitation clauses. However, the inclusion of such a clause must be “necessary” and “reasonable” and not contain cascading terms. However, the Bill as currently drafted, will impact businesses’ ability to protect against unfair competition and retaining its talented staff.

The proposed changes are likely to impact smaller businesses more significantly who rely on customer connections and workforce stability more acutely. These businesses cannot afford to pay above the high-income threshold but are particularly vulnerable to an employee setting up across the road in a co-ordinate attack with their co-workers.

Should the Unfair Non-Competes Bill become law, employers will need to at least:

• review their employment contracts carefully to ensure they are not breaching any of the new provisions;

• consider whether the confidentiality clauses in employment contracts are adequate to protect the business; and

• develop an encompassing plan to protect the business from unfair competition that extends to technological and other strategies than just contractual restraints.

In our next bulletin, following our seminar in November 2026, we will look at the gaps and opportunities with the Unfair Non-Competes Bill to explore strategies to respond.

Author: James Mattson

 

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.