How Australia Banned Non-Competes
There are many ingredients to reform. The story of banning non-competes offers lessons for future efforts.
By Michael Brennan & Dan Andrews
In recent times in Australia, much has been written about why economic reform does not happen. This is a story about when, and how, it did. Moreover, it is not a story from the 1980s or 90s, a period now seen as the heyday of successful micro-economic reform in the national interest. It concerns a reform process over the last three years aimed at improving labour market flexibility to boost productivity and wages.
The reform in question centres on the use of non-compete clauses, and other post-employment restraints, in work contracts in Australia.
As part of the 2025-26 Budget, the Federal Government announced it would ban the use of non-compete clauses (NCCs) for workers earning less than $175,000.
In one sense, this announcement is just the beginning. It sets off a process of detailed policy and legislative implementation. But in another important sense, it is the culmination of an equally painstaking journey: of detailed research and evidence gathering, public advocacy and coalition building. It is a journey involving Government Ministers, public servants, global experts, policy commentators, the Bureau of Statistics, and a relatively new economic think tank, the e61 Institute.
This essay describes how these players and forces combined to bring about what we at the e61 Institute believe is a positive change.
Restricting NCCs is an important policy. It is by no means simple, and it has its opponents. That is not to overstate its macro-economic significance. NCCs are one part of a broader labour market mosaic. The intent of this essay is not to equate NCCs with other major large scale reforms of the last forty years. Rather it is to showcase a prototype for successful policy change. In a time when reform seems hard to do, what was the combination of factors that made this one possible? Can it be replicated in other areas? Can it be done on a larger scale?
We believe it can. So the story is worth telling. And it’s a fitting feature for this exciting new policy publication Inflection Points, because it supports what is a pro-growth and pro-abundance measure. Also because, if there is a consistent tone or dominant sentiment that runs through this story, it is optimism about our ability to make change.
Post employment restrictions in Australia
Post employment restrictions are elements in a contract between firm and worker that purport to limit what a worker can do once they leave the firm. They can take many forms, but our research suggests four prevalent ones:
Non-compete clauses: restricting the ability of an employee to work for other firms of a defined nature (those within a geographic area, those within the same industry, etc.)
Non-solicitation of clients: restricting the ability of an employee to leave and take the firm’s client business with them
Non-solicitation of co-workers: restricting the ability of an employee to leave and encourage other of the firm’s workers to join them
Non-disclosure agreements: restricting the ability of an employee to disclose details about the workings of the firm to others
Until recently, little has been known about the prevalence of these restrictions in the Australian labour market. By contrast, a recent OECD paper by Dan Andrews and Andrea Garnero shows that NCCs and other post-employment restrictions have been a significant policy issue in the United States and a few European countries, with considerable debate about the appropriate regulatory response (if any).
One challenge regarding NCCs is that, at a conceptual level, the issue is not clear cut. In principle, economic arguments can be mustered to justify or negate the legitimacy of NCCs. As is often the case, detailed empirical work is needed to shine light on which conceptual argument is stronger or more relevant to the facts.
The traditional, more benign view argues that NCCs are justified to protect legitimate business interests. A firm might wish to protect its trade secrets or client relationships. It may also wish to train staff, but hesitate to invest in training if workers might leave the firm shortly after. A NCC could thus support more staff training and potentially more innovation in general.
For high paid staff, the NCC might represent a legitimate part of the explicit contract: more money in exchange for agreeing not to leave and work for competitors.
But in recent years, a more critical view has emerged. By this account, NCCs are used by employers to limit worker mobility – enhancing the market power of the boss and diminishing that of the worker by restricting their outside options.
The effects can spread beyond the firm to the broader economy. If labour mobility is restricted, and barriers are put in the way of new firm creation, this can stifle the economy’s ‘diffusion machine’ by stopping the spread of new ideas and business models, and the emergence of new competition. It also distorts the Schumpeterian creative destruction process by which resources like labour move from lower value uses to higher value ones, as when a worker goes from a low productivity to a high productivity firm.
To these competing economic views we could perhaps add a third, essentially legal, view:that NCCs, whether good or bad in theory, are irrelevant because in practice they are hard to enforce.
By early 2023 the weight of empirical evidence overseas was tilting in favour of the more critical view of NCCs. US evidence suggested that:
NCCs had spread to low wage occupations, like fast food workers and hairdressers
NCCs were rarely an explicitly bargained outcome, with fewer than 10 per cent of workers negotiating higher pay in return for the NCC. Around one third of workers were asked to sign an NCC after already accepting the job
NCCs could have a chilling effect even if not technically enforceable. Many workers were turning down job offers from competitors due to a NCC in their contract, even when they worked in US states which had deemed NCCs to be non-enforceable
But in Australia, even by early 2023, this was all still fairly obscure to the domestic policy debate. There was no empirical evidence on the prevalence of NCCs or on the effects of their use. And the issue was decidedly not on the policy agenda. Until it was.
The remainder of this article is published in full on Inflection Points.
Michael is e61 Insitute's CEO. He was previously Chair of the Productivity Commission.
Dan is the Head of Growth, Competitiveness and Regulation at the OECD.