The Federal government is progressing significant reforms to restraint clauses in employment contracts. The changes will affect how clients protect their commercial interests when employees leave to work for competitors.

Under the draft legislation released last month, employers would be prohibited from imposing post-employment non-compete clauses on employees who earn less than the Fair Work Act high income threshold (currently $190K pa). The reforms would also prohibit clauses preventing former employees from recruiting their previous co-workers, while introducing restrictions on agreements between businesses concerning employee recruitment and wage-setting.

Importantly, the proposed changes would not remove an employer's ability to protect legitimate business interests. Confidentiality obligations, intellectual property protections and appropriately drafted customer non-solicitation provisions would remain available, although some post-employment restraints would be subject to stricter enforceability requirements.

The reforms would also restrict the use of cascading restraint clauses, which are commonly included in employment contracts to provide alternative restraint periods or geographical areas. Employers who currently rely on these provisions may need to reconsider how their contractual protections are structured.

What should clients consider?

Employers should review their existing employment contracts and restraint arrangements, particularly for employees with access to commercially sensitive information, customer relationships, pricing arrangements or proprietary business processes. Key considerations include:

• Reviewing employment contracts to identify non-compete, non-solicitation and cascading restraint clauses that may be affected by the reforms.

  
  

• Protecting confidential information through appropriate contractual obligations, information security measures and controls over access to sensitive business information.

  
  

• Reviewing customer protections to ensure non-solicitation provisions are appropriately targeted towards legitimate commercial interests.

  
  

• Examining recruitment arrangements with other businesses to identify potential no-poach or wage-fixing concerns.

  
  

• Strengthening employee retention strategies, rather than relying on contractual restrictions to discourage employees from leaving.

A particular concern for businesses is that confidentiality provisions may not always provide sufficient practical protection against the loss of valuable customer relationships or commercially sensitive information. Once such information has been disclosed or used by a competitor, the resulting commercial damage may be difficult to remedy. Preventative measures, including appropriate access controls and employee exit procedures, will therefore become increasingly important.

What about existing employment contracts?

The proposed legislation includes transitional arrangements, meaning existing restraint clauses would not necessarily become unenforceable immediately upon commencement. However, subsequent variations to employment arrangements may affect the application of those protections.

Clients should therefore exercise care when updating existing employment contracts and avoid assuming that current restraint provisions will remain enforceable indefinitely.

Preparing for the changes

The reforms are proposed to commence in 2027, subject to the legislation being finalised and passed by Parliament. While the final requirements remain to be settled, employers should take the opportunity to review their current contractual arrangements, identify the commercial interests requiring protection and consider whether their existing safeguards will remain appropriate.