The landscape of restraint of trade law in Australia is experiencing significant scrutiny and potential reform. With 46.9% of Australian businesses including some type of restraint clause in their employment contracts, understanding the current legal framework and emerging changes is crucial for legal practitioners and businesses alike.
Current Legal Framework
In Australia, the general rule is that a restraint of trade clause in an employment contract is prima facie void, unless the employer has a legitimate interest it is protecting, and the scope of the restraint is not wider than is reasonably necessary to protect that interest. This fundamental principle ensures that restraints are not used merely to stifle competition but to protect genuine business interests.
Common Law Position
At common law, a restraint of trade provision is prima facie invalid unless the party seeking to enforce the restraint (typically the former employer) demonstrates that, at the time of entering into the contract, there were circumstances justifying the restraint and it is reasonable in the circumstances of the particular case. The enforceability assessment considers several factors:
- Legitimate Interest:
Does the clause protect a genuine business interest? - Reasonableness:
Is the scope, duration, and geographical area of the restraint reasonable? - Public Interest:
Does the clause negatively impact the public or competition?
NSW Position
In New South Wales this presumption is reversed – instead, a restraint of trade is presumed to be valid but only to the extent that it is not against public policy. A restraint will be considered against public policy if it is found that there has been a ‘manifest failure’ by the employer to attempt to keep it within reasonable bounds
Historic Government Reforms – The 2025-26 Budget Announcement
The most significant development in Australian restraint of trade law occurred on 25 March 2025.
As part of what it describes as the ‘second tranche of reforms under the Government’s revitalised National Competition Policy’, on 25 March 2025, the Government announced that as part of the upcoming Budget, it proposes to ban non-compete clauses from being included in the employment contracts of workers making less than the high-income threshold (currently $175,000 per annum, excluding any compulsory superannuation contributions).
Key Features of the Reforms
Income Threshold:
The ban on non-compete clauses will apply to workers earning less than the high-income threshold in the Fair Work Act 2009 (Cth) (as at 27 March 2025 – $175,000).
Implementation Timeline:
The Government noted in its media release that any amendment to the Fair Work Act 2009 (Cth) would not come into force until 2027 and only apply prospectively, in order to give businesses and workers appropriate time to adjust.
Consultation Process:
In the interim, the Government is consulting with regard to precisely what implementation of this policy shift would involve (for example, the applicability of any exemptions, penalties, and/or transition arrangements).
Scope of Changes:
It is the first category (non-compete clauses) that have been marked for reform initially, although the Albanese government has foreshadowed reform to the second category down the track.
Impact on Different Types of Restraints
As flagged above, at this stage, other categories of restraint of trade clauses are not proposed to be banned and will remain valid, for the time being. The reforms specifically target:
· Non-compete clauses:
Which prevent the employee from working for a competing business for a particular period of time.
· Non-solicitation clauses:
Which prevent the employee from targeting their former employer’s clients and/or staff for a particular period of time (not currently targeted for reform).
Current Prevalence and Usage Statistics
Recent data demonstrates the widespread use of restraint clauses across Australian businesses.
According to recent data from the ABS, approximately 46.9% of all Australian businesses use at least one type of restraint of trade clause with 25.4% of businesses using non-solicitation clauses for some employees, and 20.8% of businesses used non-compete clauses for some of their workers.
An e61 survey reported 1 in 5 Australian workers have a non-compete clause. These include lower‑wage workers in childcare, labouring or clerical roles. 1 in 5 Australian businesses use non‑compete clauses (Australian Bureau of Statistics 2023).
Recent Court Decisions
McMurchy v Employsure Pty Ltd (2022)
In McMurchy v Employsure, the NSW Court of Appeal upheld a non-compete clause where an employee joined a competitor during his notice period and solicited another employee. The enforcement turned on misconduct, not merely the clause’s text.
Shire Real Estate Pty Ltd v Kersten (2021)
In Shire Real Estate Pty Ltd v Kersten, however, the NSW Supreme Court refused to enforce a restraint against an employee made redundant after a short tenure, finding the restraint unjustified.
2nd Chapter Pty Ltd v Sealey & Ors (No 2) [2024]
However, 2nd Chapter Pty Ltd v Sealey & Ors (No 2) [2024] VSC 672 shows this is no longer guaranteed. The restraint scope extended to all clients of the business, not just those of the former employees—this was held to be excessive. The restraint duration (up to five years) was also found unreasonable, especially given the restrained employees’ minimal equity stakes
Current Judicial Trends
These decisions underscore the court’s reluctance to uphold restraints in standard employment unless the conduct is egregious or the employee held a particularly strategic role.
Practical Implications of the Reforms
For Employers
It is prudent that employers consider drafting non-compete clauses in contracts prior to implementation of the ban to be separate from any other restraint of trade clauses, or clauses addressing for example, the matters referred to in the paragraph above. If, for example, a contractual provision addresses both non-compete and non-solicitation matters, there is the possibility that the reforms could render that provision unenforceable in its entirety, not only the proportion of.
Businesses should be particularly mindful of workers whose remuneration consists of a low base salary combined with incentive-based payments and bonuses which are excluded from ‘earnings’ for the purpose of the high-income threshold. Businesses should also consider reviewing their use of non-compete restraints regularly to ensure that they remain compliant, given the high-income threshold is adjusted annually from 1 July each year.
Although non-competes are being phased out for most workers, employers still have several tools to safeguard their interests. Here are five quick, practical tips to adapt your contracts and strategy:
- Include longer notice periods and reserve the right to place employees on garden leave, keeping them out of the market while still bound by contractual duties.
- Ensure confidentiality clauses are clearly worded, comprehensive, and survive termination. Define confidential information broadly to capture key business data, pricing, processes, and client intel.
- Tie post-employment restraints to equity payouts or termination payments, especially for senior staff or vendors. This can give you additional leverage where standard employment law is tightening.
- Use tiered or cascading clauses that scale back the time or geographical scope of a restraint. This maximises the chance that at least part of the clause will be upheld.
- Shift from trying to “lock out” former employees, and instead double down on internal safeguards.
For Employees
Aside from the question of legality, what makes a restraint clause so powerful is the fear it creates amongst workers who may want to find a new job in their field. Some workers may not be aware that most restraint clauses will be struck down by the courts. But even those who are aware of this may still be frightened at the prospect of getting sued by their own workplace for daring to seek employment elsewhere.
Employees should also have their contracts reviewed by a lawyer, whether to simply better understand the obligations they and their employer have under their contract, or where there is concern their employer could be seeking to illegally enforce a restraint clause against them.
Future Uncertainty and Transition Considerations
While the Government has stated that the reforms will not apply retroactively, it is not completely clear whether that statement is in reference to simply the ban only being effective from a given date, or whether that might refer to the enforcement of possible civil penalties. The reforms could well render void existing non-compete clauses in employment contracts.
Recommendations for Business
Immediate Actions for Employers
1. Contract Review:
In light of these impending reforms, now is the time for employers to have their employment contracts reviewed by their lawyers for proper drafting.
2. Alternative Protections:
Alternative means of protecting legitimate business interests might warrant exploration.
3. Separation of Clauses:
Ensure non-compete clauses are drafted separately from other restraint provisions to prevent total invalidity.
Conclusion
The Australian restraint of trade landscape stands at a historic crossroads. The 2025-26 Budget reforms represent the most significant legislative intervention in this area in decades, with implications that extend far beyond simple employment contracts.
For commercial employers, the changes create a narrower window in which post-employment restraints can be used effectively and a greater likelihood of restraint clauses being deemed unlawful or unenforceable.
As the legal framework evolves toward 2027, employers must proactively adapt their employment practices, while employees can expect greater protection from potentially oppressive restraint clauses.
The balance between protecting legitimate business interests and preserving employee mobility rights continues to evolve, with the upcoming reforms marking a decisive shift toward worker protection in the modern Australian economy.