Employer non-compete clauses stifle wages says US regulator

Non-compete clauses are common in Australian employment contracts for executive and other key personnel (such as sales). But Australian restraints on competing pale in comparison with certain other countries’ use of non-compete clauses. For example, executives and board directors who have worked in the US would be familiar with the incredibly limiting non-compete clauses in US employment agreements. So the US has become, in effect, a test bed on the extent that such clauses can be economically damaging to not only to the 20% of employees subject to them, but the overall economy.

On 7 March, The U.S. Department of the Treasury released a new report (in consultation with the U.S. Department of Justice, the U.S. Department of Labor and the Federal Trade Commission) on the prevalence and effect of anti-competitive labour practices, including non-compete clauses and their propensity to stifle competitive wages.

This article provides a summary of the report, with consideration given to Australia’s own practice in restraint of trade clauses.

The report recognises that US companies tend to have wage bargaining powers (especially with jobs where an offer of employment is made prior to wage discussions, i.e., ex-ante wage posting jobs) due to restraint of trade clauses which allow employers to impose restrictions on employees during and after employment.

The report first acknowledges the disparity of power in wage-bargaining agreements and attributes this to several issues which are not easily amended.

  • Lack of resources for jobseekers – time spent directly on job-seeking and indirect costs (where jobseekers do not work during the process).
  • Racial discriminatory practices where certain races are less likely to be given offers, and those that receive offers have diminished bargaining powers.
  • An informational disadvantage where jobseekers are unaware of competitive wage rates and workplace culture, allowing companies to offer below-market wages.

An important disadvantage for jobseekers (and employees) is where companies enforce restraint of trade clauses. The report references a recent study that estimates 1 in 5 workers are currently subject to non-compete agreements. The report suggests that these clauses could be directly responsible for the insufficient labour market competition, leading to “high levels of income inequality” and reduction of productivity growth across companies and industries.

Restraint of trade clauses encapsulate a range of restrictions which tend to be increasingly included in employment contracts, such as:

  • non-compete clauses, which restrict employees from seeking employment in competing companies following the severance of an employment agreement, to protect the commercial and confidential interests of the company.
  • non-disclosure clauses, which restrict employees from misusing confidential information that they have become privy to during the time of their employment, though the terms can often be so broad as to also imply a non-compete clause.
  • non-recruitment clauses, which restrict former employees from recruiting employees within the company, and therefore compromising the commercial interests of the company.
  • and non-solicitation clauses, which restrict former employees from ‘taking’ or soliciting clients after leaving the company.

Some employment agreements within Australia also impose certain restraint of trade clauses. Based on various legal cases there are restrictions to limit the effect of unreasonable non-compete clauses:

  • restraint of trade clauses become less compelling when there are broader restrictions. A compelling clause would include reasonable bounds in which the clauses apply such as within a certain location and timeframe.
  • The location within which a company might enforce their clause should be relative to its own commercial interests, and not to protect against the normal course of competition.
  • The timeframe should be given similar consideration regarding confidential information to which the employee was privy to and at what threshold the information is no longer so compelling as to restrict a former employee’s ability to “[earn] a living in whatever lawful way he chooses” (see Buckley v Tutty [1971] HCA 71 at p 24.)

The issue raised within the U.S. report is that by imposing such clauses in their employment agreements, companies devalue an employee’s options outside of the company, leaving them at a greater disadvantage after employment. Companies may also enter no-poach agreements (i.e., restraint deeds) with competing companies, leaving employees vulnerable to lower wages due to a power imbalance in wage-setting agreements, as the companies become the monopsonist for incumbent employees within the labour market.

Australia’s own clauses face restrictions which mean such protections against the normal course of competition is unenforceable. Most commonly, such clauses are used where a business is sold, and the seller is held to a non-compete clause which can restrict their ability to open a similar business. This is a reasonable restriction in some cases, such as where there is a sale of a cafe and subsequent creation of another cafe neighbouring the original by the seller. However, a business cannot unreasonably protect itself against the normal course of a competitive market in Australia.

To see the report, click HERE.

© Guerdon Associates 2024
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