A proposed ban on non-compete clauses for most workers was one of the budget's rare surprises, which wasn't flagged until an official leak within a few hours of Jim Chalmers getting up to deliver his speech to Parliament. So, what exactly is a non-compete clause? What is the government proposing to do and why are many business groups concerned about it? And why have most economists warmly welcomed the move, along with trade unions? What is a non-compete clause? The details can vary, but a non-compete clause generally tries to impose a legal restriction on what an employee of a business can do after they leave that firm. One common example is an employee being prohibited from working for another firm in the same field for at least six months after their departure. In other cases, they may be prevented from starting their own business in that field for a specified period. Sometimes the restrictions are geographic, so that someone cannot work in the same industry within, say, a 10-kilometre radius of their previous employer. What happens if someone breaches one? In short, often nothing, but the mere presence of these clauses can have what experts describe as a "chilling effect" on employees thinking about making a move. These clauses are written into the worker's employment contract, and the employer can attempt to take out a court injunction to enforce them — that is, the court preventing someone from starting their new job or running their new business if it breaches the non-compete terms. However, as Annalisa Heger, the deputy chief advisor of Treasury's Competition Taskforce, observed in an October 2023 presentation to Treasury and economic think tank e61, non-complete clauses are frequently unenforceable. "[There is a] presumption at law in most Australian states and territories that post-employment restraints are unenforceable, unless they are reasonably necessary to protect a legitimate interest of the employer," she observed. "Courts determine on a case-by-case basis." This creates a big problem, especially for affected workers, according to research published in 2013 in the UNSW Law Journal. "Uncertainty is a greater burden for the party, without inside knowledge (of proceedings, courts and decisions), and without resources (financial, psychological, relational and reputational) to bargain hard and maintain litigation," the authors noted. "That is usually, though not always, the employee. This observation about how the clauses work in Australia is backed by empirical evidence from the United States. In the US, non-compete clauses had been just as common in states where they had long been unenforceable as in states where courts could uphold them. "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," noted Evan Starr, an associate professor of management and organisation at the Robert H. Smith School of Business at the University of Maryland, in a 2023 article. "Rather than passively using unenforceable non-competes, firms actively try to keep workers misinformed when their non-competes are unenforceable. How common are non-compete clauses in Australia? The Australian Bureau of Statistics undertook a study into various restraint clauses operating on employees in Australia, based on survey responses from around 5,000 businesses. "Non-disclosure clauses were the most common restraint clause, used by 45.3 per cent of Australian businesses in 2023," the study found. "The next most common was the non-solicitation of clients (25.4 per cent), followed by non-compete (20.8 per cent) and non-solicitation of co-workers (18.0 per cent)." However, the ABS study found big businesses were about twice as likely to use non-compete clauses as small businesses. "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)," the report noted. That over-representation of large employers means that businesses using non-compete clauses accounted for nearly a third of all Australian employee jobs. The ABS also found that a majority of the businesses that used various restraint clauses applied them to between 76-100 per cent of their employees. This tells you that, when a business adopts some kind of restraint clause, they tend to apply it to all their standard employment contracts, without regard to the specifics of each job. The ABS survey found non-compete clauses were most prevalent in financial and insurance services, where nearly 40 per cent of firms used them, followed by rental, hiring and real estate, where they were utilised by almost a third of employers. Retail trade had the lowest use of non-compete clauses, with around 13 per cent of firms in both industries making use of them. As for their actual enforcement, the ABS said approximately 1 per cent of Australian businesses said a potential employee had turned down a job offer from them due to a non-compete clause, while around 5 per cent of businesses indicated they had either threatened or taken legal action over an employee restraint clause. What is the government planning to do? Budget Paper 1 noted that the government would ban non-compete clauses that applied to workers earning less than the high-income threshold in the Fair Work Act, which is currently set at $175,000. That would make it illegal for employers to put these clauses in the employment contracts of staff earning below this amount. However, there were few further details in the budget about implementation. In fact, the government will embark on discussions with interested groups — such as businesses, unions, economists, lawyers and other experts — to determine the final details, which may include extending the ban to higher-income workers. "The government will consult on policy details, including exemptions, penalties and transition arrangements and will also consider and consult further on non-solicitation clauses for clients and co-workers and non-compete clauses for high-income workers," Budget Paper 1 noted. What do employers think about the change? Employers have expressed concern that banning non-compete clauses for most employees will remove a key protection for their intellectual property and investment in staff training, and could result in the poaching of customers. One of these key concerns about unintended consequences is summarised well by Peter Strong, who used to head the Council of Small Business Organisations of Australia (COSBOA). "There are employers out there who value their employees and customers — they provide quality training to their workforce. Other employers couldn't be bothered to do that as it is too time-consuming, expensive and complicated," he wrote in an email to the ABC News Business Reporting Team. "So, the lazy employer waits until a good employer finishes training and then they offer that highly trained employee more money and as a result, have an instant skilled worker with no effort. "That may be fine and good — competition in action. There are two winners — the lazy 'clever' employer and the lucky worker. There is one loser, being the good, worthy, responsible employer. "If the policy had been developed with a proper review of 'other consequences', then that would have been identified and incentives created to keep the good employer in the training business." What are the expected benefits from the change? Australian economic think tank the e61 Institute, which is largely staffed by ex-Treasury and Reserve Bank economists and whose current CEO is a former Productivity Commission chair, has been a strong advocate for abolishing non-compete clauses and other restraints on employee movement between firms. Research by the think tank, summarised in a note published earlier this year by e61's Jack Buckley and cited by the treasurer in his budget speech, found non-compete clauses (NCCs) were weighing on productivity and wages growth. "NCCs appear to restrict the mobility of most workers, including many lower-skill workers in occupations where NCCs would generally not be legally enforceable but nonetheless appear to have a 'chilling effect,'" he wrote. "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." ABS statistics show job mobility has fallen back to record lows, despite what most economists consider to be a very tight labour market. "Job mobility matters because it is an important mechanism for productivity and wages growth," e61 research argued. So how big could the benefit be if these non-compete clauses were generally abolished? In a report released late last year, the Productivity Commission estimated an increase of $2.6–$5.1 billion to economic output (GDP) and inflation that would be lower by as much as 0.1 of a percentage point. What happens in other countries? An OECD presentation to Treasury and e61 suggested that the percentage of workers covered by non-compete clauses in other advanced economies ranged roughly from about 15 per cent to around a third, so Australia's level of around one in five employees being covered is not an outlier. Associate professor Evan Starr from the University of Maryland says US research found only 10 per cent of employees actually negotiated over their non-compete clause, with 86 per cent offered nothing in exchange for the contractual restraint, with similar findings globally. As with e61's research, a paper he wrote for the Economic Innovation Group in October 2023 found "banning non-competes increases wages by 3-4 per cent, both for low-wage workers and high-tech workers, and increases their mobility 11-17 per cent." That same paper argued that the weight of economic research suggested that non-competes favoured large incumbent businesses over small firms and harmed consumers by reducing innovation, lowering output and potentially increasing prices. A presentation by Andrew J Heimert from the US Federal Trade Commission's Office of International Affairs to an Australian Treasury and e61 Institute webinar found that non-compete clauses were prevalent among lower-income workers. "One survey found that 35 per cent of workers without a bachelor's degree and 33 per cent of workers earning less than $US40,000 [$63,400] per year have worked under a non-compete clause at some point in their lives," he noted. In April 2024, the US FTC moved to ban non-compete clauses across the country, however, its ruling faces challenges in several courts around the country, leaving the ban's effectiveness as uncertain. Mr Heimart told the webinar that "non-competes prevent the optimal matching between employers and workers" and "removing/prohibiting non-competes would require employers to compete more vigorously for workers." He also cited research that found that removing non-competes could reduce US healthcare costs alone by $US148 billion annually, due to greater competition and productivity.