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Friday Workplace Briefing

ACCC Raises Concerns Regarding Non-Compete Clauses – What does this mean?

Restraints in employment contracts are more common after COVID – but do they work and how will courts respond in the future?

In this week’s Friday Workplace Briefing, Mathew Reiman and Nina Hoang discuss the concerns raised by the ACCC regarding non-compete clauses.

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About the Hosts

Senior Associate - Workplace Relations

Episode Transcript

Mathew Reiman: So, we’re looking at post-employment restraints today and there’s been some more recent sort of attention around this which we’ll-

Nina Hoang: Big topic, yeah.

Mathew Reiman: Yeah, it’s a little bit, you know? And it’s a bit attention around this topic because we’ve got some sort of, starting to hear some noise from a couple of different stakeholders about what this might look like in terms of how post-employment restraints affect the economy in a more broader sense, in terms of productivity and competition. But to take it back to first principles, to remind everyone again what are we talking about when we talk about post-employment restraints. They’re contractual provisions in employment contracts where an employer seeks to prevent an employee, after employment, from engaging in particular activities. Common law is what mainly deals with this except if you’re in New South Wales. And the rule is, that by default these sorts of provisions are unenforceable, as an unlawful restraint to trade.

Nina Hoang: People don’t actually know.

Mathew Reiman: No, that’s right.

Nina Hoang: Yeah.

Mathew Reiman: They start on that basis.

Nina Hoang: Yeah.

Mathew Reiman: And an employer needs to demonstrate that they are reasonable by looking at two real main aspects. One is that the employer has a legitimate interest to protect in imposing that restraint and that the restraint is no wider than is reasonably necessary to protect that legitimate interest. Legitimate interests often very easy to establish, confidential, employees’ access to confidential information-

Nina Hoang: Client contacts.

Mathew Reiman: IP.

Nina Hoang: Yeah.

Mathew Reiman: Yeah, client contacts, if they’ve got strong involvement in client relationships and sort of the ability of that person to sort of influence staff with that employer.

Nina Hoang: Yeah.

Mathew Reiman: That’s very easy. More often than not, the dispute is really around the no wider than reasonably necessary. We know the classic three categories that that falls into. One, what are the activities that you’re trying to prevent? So is it that I’m trying to stop a person from soliciting their clients and employees? Is it that I’m trying to stop them from doing that and I’m trying to stop them from actually going to work for a competing employer? Second then, is what is the geographical element of that? So where, in what geographic space does the restraint apply? And the third aspect of course then is the duration of that restraint. So they’re the sort of main aspects, we often see disputes around things, the common law, but why we’re sort of talking about them today is there’s been some noise made by, you know-

Nina Hoang: ACCC.

Mathew Reiman: Yeah, that’s right, sorry. The ACCC, the productivity commission and the federal government that sort of are starting to look at, Well, these have started to really appear more so than we have really ever seen before.

Nina Hoang: Yeah, very common now.

Mathew Reiman: That’s right. That’s sort of showing that they’re in employment contracts for employees that we didn’t traditionally see them in. Shifts from sort of, you know, what was once sort of the the realm only of your senior level executives. So your sort of really senior level employees in a business, are starting to sort of appear all over the place.

Nina Hoang: Yeah.

Mathew Reiman: For sort of employees of you know, all the way down to sort of-

Nina Hoang: More junior employees.

Mathew Reiman: That’s right, you know, like-

Nina Hoang: I’ve seen it in like some admin contracts.

Nina Hoang: That’s right, yeah.

Mathew Reiman: Yeah. You know, individuals who can’t realistically actually damage or influence your business. And you know it sort of demonstrates that there’s a little bit I think a bit of a shift, Nina, in the way that these are being used because the concept of a post-employment restraint, it comes back to that legitimate interest you know.

It’s designed as a lawful mechanism for an employer to seek to protect its goodwill and its business and the aspects of its business that are susceptible to being damaged if a person was to be able to be engaging with those elements free of any restraint.

But where employers are starting to sort of now use that in those sorts of employment arrangements where that person could never realistically do that, it’s starting to sort of, you know, begin to be more into that really concerning element of that anti-competitiveness.

Nina Hoang: Yeah, we are definitely seeing more employers just slap it in every contract, despite knowing it’s not enforceable.

And I think the concerning thing which I think underpins what the ACCC is saying and the government is saying, is the fact that while employers know that the clauses they’re putting in aren’t enforceable against say like, you know, a really junior receptionist who has no access to confidential information in IP, that employee has no idea it’s not enforceable. And that in itself is a deterrent from them going out to seek other work and things like that. Which is fine if say it was just a couple but it’s happening across many businesses and across many industries and there’s a real risk of it stifling competition.

Mathew Reiman: That’s right, that’s right. I mean, interesting stats, a research paper sort of recently put out here with the Australian context. There’s lots of research about this in the US in particular-

Nina Hoang: Which they are considering.

Mathew Reiman: That’s right. Well this has sort of partly driven these more recent discussions, but one in five Australian workers, they say, are captured by-

Nina Hoang: That’s so high.

Mathew Reiman: …post-employment restraint. Which is crazy ’cause obviously not one in five employees are senior level management level employees.

But you know, this deterrent point, this understanding from employees that they don’t know that it’s unenforceable or not, where it comes into is this sort of the shift now, into the sort of secondary consideration about what a post-employment restraint’s doing. And that’s really this argument that they actually stifle labour productivity and the competition for labour.

Because if employees are being subject to these clauses without the knowledge that they’re not enforceable that can deter them through fear of potential replies by their employers from actually going to seek other work as well. So what we’ve seen is the federal government, they’ve not adopted a particular position on this as yet but they have asked the ACCC and the productivity commission to look at well, are post-employment restraints actually something that are stifling competition and productivity? And if they are, then, well what is it that needs to happen to prevent that from occurring? And you know, we’ve seen that the Labour government has been willing to be proactive in the employment and industrial space.

Could we see a regime come in similar to your unfair contract terms regime that applies in your consumer law space?

Around these in relation to employment contracts. They’ve done it with the fixed term contracts.

Nina Hoang: Yeah.

Mathew Reiman: Could it be-

Nina Hoang: I think it’s very likely, yeah.

Mathew Reiman: Yeah, yeah. So it’ll be very interesting to see what the ACCC and the productivity commission say. They’ve not taken a position on it as yet, just as the government has. But I wouldn’t be surprised if what we’ve seen from this research report in that context that they might say, “Hey, this actually is stifling productivity, it is stifling labour competitiveness, especially where unemployment remains so low and that there is a need for regulation on this at a federal level, which would be huge really. And I suspect would go far beyond simply the New South Wales Restraint Trade Act, which is currently the only legislative instrument that applies to these across Australia.

Nina Hoang: But really knowing that that might come and probably is more likely to come, it’s just a reminder to go back and look at your contracts. Like if you have any kind of restraint, have a look and say is it reasonable? All those things that Mat went through, you know, the timing, the area, you know, what is legitimate interests, please make sure that they are reasonable and everything is properly defined. That’s probably the biggest issue to do with restraint.

Mathew Reiman: Yeah, absolutely, absolutely. Make sure it’s cascading in terms of the durations, of the geographic area.

Nina Hoang: And I think the biggest one I always see is when they’re talking about competitive businesses, not defining what constitutes a competitor. Like if you’re too broad, it will automatically be deemed unenforceable.

Mathew Reiman: Yeah, that’s right. You don’t want to leave it to the, you have to be giving evidence to the court about what is a competitor.

If they’re looking at just the drafting of that clause in particular. And also making sure that the competitors are legitimate.

You know, don’t just include businesses that, all of these things are relevant.

The other sort of tidbit I think, of advice to give would be, look, don’t just use a one size fits all restraint as well.

Nina Hoang: No, please don’t do that.

Mathew Reiman: You know, even if you get a really good one drafted for example by us, which is high quality and is, you know, tried and tested in the courts, it’s got to be relevant to the individual employee and contextualised always.

So I think our real main takeaway is, look, watch this space, because I think we’re going to increasingly see that there’s going to be some more regulation about this as these reports come out.

Nina Hoang: I reckon it’s high chances because this government has shown that they’re all about prioritising the employee. Like with all the anti-pay secrecy, all the stuff with the independent contractors and stuff like that. They want to put things in place where no one’s being taken advantage of.

Mathew Reiman: Yeah, that’s right, that’s right.

Nina Hoang: And I think more than likely, we are going to see these changes come through.

Mathew Reiman: Yeah, yeah, could we see an exclusion for particular people above for example, the high income threshold?

Nina Hoang: I think that’s probably going to be the only way they can do it.

Mathew Reiman: Yes, the easiest mechanism I think that would then really go back to what we talked about, that traditional conception of this which is, kkay, well restraints are for actually individuals who have a capacity to, without restraint, negatively impact your business, not your admin staff. And your sort of more junior staff, yeah.

Nina Hoang: You should just do the submissions for the government, Mat.

Mathew Reiman: Oh there you go, all right. Well I’d like that government contract money so send it my way at elbow. All right, onto the case study. I think it’s your turn.

Nina Hoang: Joe was the GM of Talk to Us Call Centres Pty Ltd (TTUCC). He earned $125,000 per annum plus super. TTUCC was taken over by King Call Centres (KCC). KCC made it known to Joe that his role was required, and his contract would continue to apply. However, Joe was part of the executive group in TTUCC and was subject to a REM policy that incentivized the executive team of TTUCC. It delivered a discretionary bonus to Joe each year of around $30,000 after tax.

When KCC took over, the executive was abandoned. Joe was offered a job with Cool Call Centres Pty Ltd (CCC) for $160,000 per annum plus super and a role on the executive with a potential executive bonus. In the week he was advised by the HR manager of KCC that the executive part of his role and benefits would be removed. He sent a letter saying he accepted their repudiation and would be leaving within the notice period.

Between the time of him becoming aware and notifying acceptance of repudiation, he received his monthly pay. KCC pointed out he was restrained from working for any other competitor, all listed and were genuine competitors, including CCC for a period of 12 months. The lawyers for KCC sought undertakings and threatened an injunction.

The lawyers for Joe responded. A, they had repudiated his contract, he had accepted it and therefore the restraints were not enforceable. B, his role at TTUCC was entirely administrative, he had no knowledge of how the business made money, no client list or other confidential information. It was not a reasonable restraint. C, the period was not a cascading provision and 12 months for such a low paid employee with limited responsibilities was unreasonable. D, they would give undertakings only about confidential information if they could identify what it was.

Okay, so was it reasonable to restrain Joe in any way?

Mathew Reiman: Yeah, well look, I mean, a broad question. Yes, it is reasonable to seek to impose a post-employment restraint on, especially someone the level of seniority of a, you know, of a general manager.

Nina Hoang: Yeah, he definitely had access to confidential information.

Mathew Reiman: Yeah, yeah, yeah, I mean, you know, this is a, and we’re told that obviously there is, he’s a part of it.

Nina Hoang: Executive, yeah.

Mathew Reiman: You know, someone who is the general manager very clearly is going to have, yeah, as you’ve said, Nina, exposure to the confidential information, the operational know-how, the intellectual property, all of that, you know, is going to be within the remit of the general manager.

So to seek to impose the restraint, you know? Yes, absolutely. Now, breaking it down into its composite parts. That’s the question of the argument about the reasonableness.

Nina Hoang: Yep, so then we go into, “Was the period reasonable?” which was 12 months? They had no cascading, it was just 12 months.

Mathew Reiman: That’s right, that’s right. So look, 12 months when we look at the sort of history of when these have been found to be enforceable is on the longer end of what is considered to be reasonable. And there’s lots of factors here that we don’t know which would be relevant to this consideration.

One is how long was Joe employed for, across the period of both employers? If it was a short period, is 12 months too long?

We don’t know. We don’t have any evidence here about what KCC would lead, about how long they might need, actually to legitimately protect those interests, so, for example, you know if it’s that we need three months so that’s as much as we can show to, you know, reestablish those client relationships. With the extra nine months, that’s a problem. And so look, I think-

Nina Hoang: I think an incentive is not the information here.

Mathew Reiman: That’s right, yes, exactly, exactly. So 12 months, I think it’s probably likely to challenge. And again, because it’s not cascading, they’ve gone all in on that 12 months. So there’s a real chance that this could be found to be unreasonable.

Nina Hoang: Because without the cascading clause in there and you’re not in New South Wales, then it can’t be read down.

Mathew Reiman: That’s right. That’s right.

Nina Hoang: So, did KCC repudiate Joe’s contract?

Mathew Reiman: I mean yes, absolutely, absolutely.

Nina Hoang: Yeah, they changed the terms and conditions of his employment unilaterally.

Mathew Reiman: Yeah, that’s right. I mean they demonstrated, they’ve evinced an unwillingness to be bound by the terms and conditions of the contract as agreed. You know, I mean it’s sort of one of the more clear examples of a repudiation that we deal with really. Don’t ever unilaterally change things like that. And that’s the real simple, simple solution to this. So yes, yes is the short answer.

Nina Hoang: Could Joe accept the repudiation? And did that mean the restraint was void as a matter of law? Yes. Well, he did accept the repudiation.

So remember with repudiation, once someone has repudiated you need to accept it straight away. If you do anything to show that you’re allowing or condoning the repudiation to stand then you cannot accept it. And it’s got to be, you’ve got to act fast. But if you do accept the repudiation then the restraints are void.

Mathew Reiman: That’s right, yeah. We’ve got lots of case law that talks about, you know, that gives examples of almost similar situations to this where employers repudiated the contract because it’s unilaterally changed the terms and conditions, normally of senior level and executive level and employees, and then turns around and tries to enforce the restraint. And the court simply said, “You have, you voided this contract. So you can’t expect to have the benefits of it in those circumstances.”

Nina Hoang: Yep, and was the acceptance of this monthly pay a waiver of his entitlement to accept the repudiation?

This one was tricky.

Mathew Reiman: Yeah, this one’s a real classic Andrew special. So Nina and I did spend some time having a chat about this one beforehand. It, look, it comes to the question of the repudiation. So when the repudiatory act occurs, the other party, the repudiatee, has to make it a decision about what happens, as Nina has alluded to.

You can elect to keep the employment contract on foot and reserve rights in respect of the repudiation, potentially to bring a claim for a breach of contract. Or you can elect to bring it to an end. Now the monthly pay, it is part of the terms and conditions of the contract at the time that it was on foot. Before-

Nina Hoang: They haven’t added more money.

Mathew Reiman: That’s right. The repudiation, the repudiatory conduct has occurred, then the payment’s been made, then the employee’s brought it to an end. When you think that that timing, it’s not necessarily an overt act that suggests that they’ve made an election about the repudiation because it’s just a continuation of the terms. So our view is, no.

Nina Hoang: Yeah, and I think it also depends on like the timing. So if they made the offer and the pay came back later that day, because it’s just how it comes, I think the court would be like, the fact, that he’s, the next day said, “I accept repudiation,” that’s not going to change. But if he’d, say they’ve told him and then he’s waited several days and then he’s got his pay and then he does it, then I think that would change the-

Mathew Reiman: Yeah, absolutely, absolutely. So more specifics would be needed-

Nina Hoang: Yeah.

Mathew Reiman: …if we were to really make a call on this. But again, time is of the essence, when it comes to repudiation.

Oh well, thanks so much everyone again this week.

Nina Hoang: Yeah.

Mathew Reiman: We’ve got the hat trick, three weeks in a row, for Nina and I next week as well, I’m pretty sure.

Nina Hoang: Yep, join us next week.

Mathew Reiman: That’s right, excellent. So please yeah, drop us a line, follow, all those things.

Nina Hoang: Thumbs up.

Mathew Reiman: Yeah, there you go. And we’ll see you next week.

Nina Hoang: Bye.

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