“Charlotte”, a 17-year-old casual dance teacher, quit her job after being harassed at work. But she was about to experience a different kind of harassment from beyond the employment grave.
When she landed a job at a different dance studio months later, she received a warning letter from her former employer saying she had breached a restraint of trade clause in her previous contract. That meant she wasn’t supposed to work for a competing business for three years within a 15-kilometre exclusion zone of their multiple studios. Her former employer also contacted Charlotte’s new employer, in a blatant attempt to cajole them into firing her if Charlotte weren’t already frightened off.
Charlotte lives in Australia, where such conduct is still allowed. But it isn’t in America as of last week, when the US Federal Trade Commission (FTC) voted to ban such “non-compete clauses” (NCCs).
NCCs aren’t just weapons for vindictive bosses; they have a wider chilling effect on employees’ willingness to switch jobs, which could otherwise be a driver of wages growth (workers “trade up”, and employers feel pressured to improve existing staff salaries to prevent further defections).
Studies show at least 18% of US workers are subject to an NCC, and 40% had turned down a job offer from a competitor because of concerns about one, even when they worked in US states where NCCs were technically non-enforceable. The US FTC claims its national ban will raise average workers’ earnings by US$524 (A$803) per year.
Should Australia follow America’s lead? Our Assistant Minister for Competition Andrew Leigh is considering it. He recently referenced Charlotte’s story as just one real example of employers overusing and abusing restraint rules here, saying they are “harming job mobility, innovation and wages growth”.
What was once thought to be a US problem, and one primarily suffered by high-income professionals and executives who know where the bodies were buried, is now recognised as widespread Down Under. Recent research by the Australia-based E61 Institute shows NCCs “may be even more widespread here than in the US”, and they have spread to dozens of ordinary jobs from childcare to fitness to boiler-making.
E61 found at least one in five Australian workers are subject to NCCs. And because they only surveyed workers who had changed jobs in the past 12 months (and thus were more likely to fall foul of an NCC), the number of workers who aren’t even bothering to apply elsewhere due to NCCs is likely even higher.
Australian workers who do switch jobs get an average 8% pay rise. Switching from a poorly matched to a well-matched job reportedly improves mental health more significantly than most other major life changes, including getting married (though, to be fair, some weddings kind of suck). And those workers who stay on at the firm feel greater confidence and power when negotiating for a better deal, including at the collective level, if they see others successfully move on.
Yet despite these benefits, the probability of Aussie workers switching jobs has fallen from 12.8% to 9.5% over the past three decades, due at least in part to rising constraints.
NCCs aren’t the only rules restraining labour mobility — and when the other types are included, the number impacted rises to half of all Australian workers. There are also “no-poach” agreements between competing firms: often informal understandings not to hire each other’s talent.
Leigh recently told the McKell Institute that “major franchises such as McDonald’s, Bakers Delight and Domino’s have standard clauses that prevent franchisees from hiring workers in other stores.” He noted that in many overseas jurisdictions, such behaviour is considered “cartel behaviour, and illegal”, but in Australia, exemptions may “mean these no-poach agreements don’t fall foul of competition laws”.
About 80% of companies using non-compete and no-poach rules applied them to more than 75% of their workforce — a staggeringly wide net that makes businesses’ ostensible justification of “protecting trade secrets” hard to believe.
Then there are the restrictions on employees during the term of their employment. Understandably, many businesses want to prevent their senior employees from simultaneously working for their competitors — or running their own side businesses — and sharing sensitive information or poaching clients.
However, businesses often also apply clauses preventing such behaviour to junior part-time and casual employees, who often need to work multiple jobs to get by. In a recent issues paper, the Australian Treasury tentatively raised the possibility of a distinction based on seniority, but didn’t reach a firm conclusion.
At a minimum, the case for Australia to follow the US in banning NCCs is strong. It wouldn’t only benefit employees’ pay packets, but productivity too. Better matching of employees and jobs improves innovation and output.
Politicians often bemoan our productivity slow down, sometimes suggesting it is the only reason wages growth has been sluggish, often with the subtle implication workers are getting lazier. But E61 found the industries where there are the fewest resignations are the ones where workers’ productivity is least often converted into wages growth. When workers feel stuck in badly suited jobs and are penalised for it on pay day, is it any wonder they’re less productive?
Following the US ban on NCCs, Treasurer Jim Chalmers signalled his government will respond, but noted that could entail a total ban or a “more nuanced reform”. If said nuance deals with other restraints, then great. But if it merely ducks a full ban for fear of business backlash — which has been hysterical in the US — the government would squander a prime moment of political cover from the Biden administration. It should hardly be controversial if the non-interventionist Americans have already done it.
If lousy businesses can’t retain staff with subpar wages and conditions, they deserve to suffer the consequences. Let’s let employees vote with their feet.
Should Australia do away with non-compete clauses? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.
