In the United States the Federal Trade Commission has voted to ban employers getting their employees to sign agreements with non-compete clauses (often also called restraint of trade clauses). The Commission estimates that the ban would increase wages and benefits by up to $US488 billion over a decade and will lead to the creation of more than 8,500 new businesses each year.
The Commission estimates that around 30 million US workers are bound by a non-compete clause in their current jobs. The Commission asserts that such clauses restrict workers from freely switching jobs, it lowers wages, stifles innovation, blocks entrepreneurs from starting new businesses and undermines fair competition.
Currently three US states, plus Washington DC, already have nearly complete bans on such clauses, while some other states have restrictions on their use within certain parameters, such as limiting them to high-wage earners.
After the Commission made the announcement, President Joe Biden said “the FTC is cracking down on ‘non-compete agreements,’ contracts that employers use to prevent their workers from changing jobs even if that job will pay a few dollars more, or provide better working conditions. Workers ought to have the right to choose who they want to work for.”
There is likely to be legal pushback from US employers and business groups that may delay enforcement of the rule while it is challenged in court. Major business groups such as the US Chamber of Commerce have said they will challenge the Commission’s ruling. Unions are of course backing the ruling.
Across the Tasman, the Australian Government in September 2023 released an Employment “White Paper Roadmap” which noted that non-compete clauses effectively deter employees from switching jobs, which in turn inhibits wage growth, even when there could be uncertainty around their enforceability. With that finding, the Australian Government committed to investigate the use of non-compete clauses as part of a review on competition, productivity and wage movement. The public and stakeholders had until the end of May 2024 to make submissions about whether reform is needed to control the use of non-compete and restraint related clauses.
Because non-compete clauses can impose restrictions on the freedom and mobility of workers, they could be considered a form of indentured servitude. Master and Servant Acts were laws designed to regulate relations between employers and employees. Countries such as the United States, the United Kingdom, Australia, Canada, New Zealand (an 1856 Act) and South Africa used them to require obedience and loyalty from servants to their contracted employer. Infringements were punishable by courts, and could involve a jail sentence of hard labour.
Today, in New Zealand, restrictions on economic activity after the end of employment are not illegal, but are often considered unlawful because they are anti-competitive and contrary to the public interest. In principle, New Zealand workers are regarded as being free to “sell” and use their skills to earn a living. Where an employer requires a worker to agree on a non-compete clause, if they wish to enforce the restriction the employer will need to establish to the courts satisfaction that it is reasonable. As a result, non-compete clauses often include a time and geographical limitation, or a restriction on working for an employer’s competitor for a limited period of time.
The Employment Relations (Restraint of Trade) Amendment Bill was introduced to Parliament in September 2022 as a Private Member’s Bill. The Bill provides that restraints of trade could no longer be used for low or middle-income employees. For high income employees, employers would have to pay half of the employee’s average weekly earnings for the period of the restraint of no more than six months after employment ends.
The Bill passed its first reading in Parliament in July 2023 and has been sent off to a Select Committee where members of the public will have an opportunity to make submissions. The National and Act parties opposed the Bill at its first reading, so it is unlikely that it will progress further.
At least for the present, for those New Zealand employers that have non-compete provisions for their employees, they will still need to justify their reasonableness should they be challenged in court. Read more....