The government is expected to issue a ban on non-compete clauses for employees making under the high-income cutoff of $175,000. This latest step is consistent with the principles outlined in the Fair Work Act. This action is a direct result of growing concerns about the enforceability of these troubling clauses and their anti-competitive economic effects. These clauses are industry-wide across multiple industries in Australia. The goal of the rule is to encourage increased workforce mobility and competition, creating a more dynamic economy and increasing productivity.
Annalisa Heger, the deputy chief advisor of Treasury’s Competition Taskforce, noted that non-compete clauses are often unenforceable. We share her concerns. Her observations have been validated by recent research, which highlights the starkly unequal negotiating leverage workers have when it comes to these clauses. Curiously, just 10 percent of workers proactively negotiate their non-compete agreements. This revelation is based on research conducted by University of Maryland Associate Professor Evan Starr. What’s more, 86 percent of employees get nothing back for signing these contractual shackles.
Internationally, other movements have followed suit. In the United States, the Federal Trade Commission (FTC) took action to eliminate non-compete clauses across the country as of April 2024. Yet, this important ruling is now under attack in multiple courts as the U.S. Non-compete clauses are bad for economies around the world. Studies have demonstrated that by removing these clauses, productivity increases and costs decrease statewide across numerous sectors of the economy.
Economic Implications of Non-Compete Clauses
Non-compete clauses have huge impact on employees and employers alike. The latest numbers from the Australian Bureau of Statistics (ABS) show a surprising twist. Large businesses, defined as those with 1,000 or more employees, use non-compete clauses at an astounding 40 percent. By comparison, small businesses with fewer than 19 employees have a significantly lower adoption rate of just 20.2 per cent.
"Large businesses (with 1,000 employees or more) had the highest use of non-compete clauses (40.0 per cent). Conversely, small businesses (0 to 19 employees) had the lowest use of non-compete clauses (20.2 per cent)," an ABS report states.
We found that non-compete clauses are most common in financial and insurance services, in which just under 40 per cent of firms use them. Yet, this pervasive implementation has contributed to reduced occupational mobility and wage growth for millions of employees.
"This effect is driven by lower-skilled workers, such as care workers and labourers, who experience slower wages growth over the first few years of their employment if they are at a firm that uses NCCs extensively," notes Jack Buckley.
Additionally, in some instances, non-compete clauses have even been deemed to dissuade prospective employees from accepting job offers. Only about 1 per cent of Australian businesses indicated that they had missed opportunities to recruit new employees because of these exclusionary contracts.
Legal Challenges and Global Trends
Regardless of their ubiquity, these non-compete clauses are increasingly coming under legal fire and challenge in jurisdictions across the country. In truth, non-competes have been illegal in California since 1872. As new research by Colvin and Shierholz shows, 29.3 percent of firms still impose them on all workers.
"Colvin and Shierholz (2019) find, for example, that 29.3 per cent of firms based in California, where non-competes have been unenforceable since 1872, still use them for all workers," says Evan Starr.
This persistence indicates that firms can or do deliberately prevent workers from understanding that these clauses are not enforceable.
"Rather than passively using unenforceable non-competes, firms actively try to keep workers misinformed when their non-competes are unenforceable," Starr adds.
In the United States, the Federal Trade Commission recently took a dramatic step of banning non-compete clauses across the country. This ruling opens the door to more competition and better workforce mobility. However, legal challenges against the ruling have stalled its implementation as multiple courts are now contesting it.
Potential Economic Benefits
The economic value of eliminating non-compete clauses in all occupations has been estimated to be as high as $100 billion. Studies indicate that lifting these limitations would help enhance the U.S.’s national economic output by $2.6 to $5.1 billion. Moreover, it would reduce inflation by up to 0.1 percentage point.
The healthcare sector has a lot to gain from enhanced competition and productivity. At the same time, estimates indicate that removing non-compete clauses might save US healthcare $US148 billion per year.
And the benefits go far beyond technology and manufacturing industries. New research from the e61 Institute underscores how non-compete clauses are hurting productivity and wage growth by locking talented workers into jobs they can’t leave.
"Job mobility matters because it is an important mechanism for productivity and wages growth," states an e61 research report.
Non-competes can also prevent optimal employer-employee matching.
"Non-competes prevent the optimal matching between employers and workers," notes Andrew J Heimert from the US Federal Trade Commission's Office of International Affairs.
