5 Things To Know About A Non-Compete Clause (Important 2025 Update)

One of the biggest fears business owners have is employees leaving the company and using the information and skills you have provided them with to start a competing business. However, there are ways you can protect your business. And that’s where non-compete clauses come into play. 

A non-compete clause (otherwise known as a ‘non-competition clause’) will prevent an employee from opening a competing business for a certain period of time. Most often, it forms part of an employment agreement, which an employee agrees to before they start working at your business.

In this article, we’ll explain how non-compete clauses work in Australia and 5 crucial things you should know about them (including a major upcoming change).

What is a non-compete clause?

A non-compete clause is a provision contained in an employment contract that comes into effect after an employee has left your business. Above all, it’s a method of ensuring a level playing field with competitors. This clause is a means by which you can prevent an employee from starting a business that:

• Uses your business’s confidential information
• Solicits your clients and/or customers

Once your employee signs the contract, they are prohibited from providing services within a specific geographical area, for a particular period of time. In other words, it’s a tool that enables businesses to have one less worry on their mind when it comes to strategy and hiring.

5 important things to know about non-compete clauses 

1. It’s easy to insert into an employment contract.

You can include a non-compete clause as a paragraph in an employment contract, or in a completely separate document. A properly drafted non-compete clause may effectively prevent employees from joining rival organisations and also starting competing companies. 

Furthermore, the law will ensure upon the termination of employment, your employee will not use confidential knowledge to your detriment.

Example

Rod is hiring a product manager for his education technology startup. He knows the space is competitive, and the new employee will have access to confidential information (i.e. go-to-market product ideas for next quarter). He sits down with an employment lawyer to insert a non-complete clause into the new employee’s employment contract to ensure that his IP is not used against him.

2. You must have a legitimate business interest to protect

Be aware you cannot unreasonably impose a restriction that has the effect of stopping an employee from earning a living. Therefore, if you intend to restrict an employee, you must have a legitimate business interest to protect. 

For example, the protection of confidential information, customer connections or a stable workforce. Otherwise, your restraint may be regarded as unreasonable if you only seek to prevent an employee from working with a competitor.

Example

Georgia runs an event management company that has 6 employees. However, 3 of these are referrals from one member of staff. Georgia recognises that the referring employee may take the 3 employees with her if she leaves. Hence, she inserts a non-compete clause into the original employee’s employment contract.

3. A non-compete clause can cover an employee’s use and disclosure of information both during and after employment

You can validly restrain your employees from taking a position where it would give rise to an incentive for the employee to disclose confidential information or take advantage of your customer relations. 

Examples of confidential information include:

• Business strategies
• Sales run sheets
• Brand plans
• Market research data
• Client proposals and presentations
• Training and education material

However, if your employee only has access to non-confidential information in the course of their employment, a non-compete clause may not be reasonable to protect your business interest.

4. A non-compete clause can prevent your employee from recruiting your clients

If you have regular clients/customers, then a non-compete clause will preserve your relationship with them. How frequently you contact your client/customer and the nature of your business interest will determine what period is reasonable for a restraint. Keep in mind that although you have a non-compete clause, it is not impossible for your clients/customers to move to your former employee’s business if they find out he or she moved there.

Example

Jason runs a private tutoring company. He employs 6 student tutors and assigns specific clients to them. As such, to legally enforce his rule that student tutors who leave aren’t allowed to poach his clients. He inserts a non-compete clause into all of the current and future hires’ employment agreements. Effectively, he has prevented current employees from recruiting his clients in future.

5. Major Changes Coming to Non-Compete Clauses in Australia (2025-2027)

Australian businesses and workers are facing a significant shake-up in how non-compete clauses operate. In a landmark policy shift announced in the 2025-26 Federal Budget, the Australian Government plans to ban non-compete clauses for most workers earning below $175,000 per year, with reforms set to take effect from 2027. This historic change will impact over three million Australian workers across industries ranging from childcare and construction to hairdressing and professional services.

What’s Changing and Why It Matters

The proposed reforms respond to growing concerns that non-compete clauses have been misused to suppress wages and limit job mobility, particularly for lower and middle-income workers. Research from the e61 Institute found that businesses using widespread non-compete clauses pay workers approximately 4% less on average than similar businesses without such restrictions. The Government estimates the ban could boost affected workers’ wages by up to $2,500 annually and add $5 billion to GDP through improved productivity.

Key features of the upcoming ban include:

• Income threshold: The ban will apply to all workers earning below the high-income threshold under the Fair Work Act (currently $175,000 per annum, adjusted annually each July 1st)
• Prospective application: The ban will operate prospectively, meaning it won’t automatically invalidate existing contracts, though transition rules are still being finalised
• Broader reforms: The Government also plans to prohibit wage-fixing agreements and no-poach agreements between companies
• Substantial penalties: Employers who breach the new laws could face fines of up to $50 million, three times the benefit gained, or 30% of annual turnover

What This Means for Employers and Employees

For employers, the countdown to 2027 means now is the time to:

• Review all employment contracts containing non-compete clauses
• Strengthen alternative protections like confidentiality agreements, non-disclosure provisions, and client non-solicitation clauses
• Consider restructuring remuneration packages for key employees whose roles justify earning above the $175,000 threshold
• Develop robust intellectual property protection strategies that don’t rely on non-compete restrictions

For employees, these changes promise:

• Greater freedom to switch to higher-paying jobs without fear of legal action
• Increased opportunities to start competing businesses or pursue entrepreneurial ventures
• Reduced barriers to career advancement and skill development
• Protection from what the Government has called “unfair” restrictions that handcuff workers to their current employers

FAQs 

Are non-compete clauses legally binding? 

Non-compete clauses can be legally binding in Australia under certain conditions. However, their enforceability depends on various factors, including the reasonableness of the clause, its scope, and the specific circumstances of the case. 

Courts in Australia assess the reasonableness of a non-compete clause by considering its duration, geographical limitations, and the legitimate business interests being protected.

How long is a non-compete clause in Australia? 

The length or duration of a non-compete clause in Australia varies depending on the circumstances and the industry involved. While there is no specific maximum duration set by legislation, courts generally look at the reasonableness of the restriction. 

Typically, non-compete clauses that extend beyond 12 months are considered more likely to face scrutiny and may require stronger justification to be deemed enforceable.

Are non-compete clauses applicable to contractors? 

Yes, non-compete clauses can be applicable to contractors in Australia. Contractors, like employees, may be subject to non-compete agreements if such clauses are included in their contracts. 

However, the enforceability of these clauses will be assessed based on the same factors as with employees, including reasonableness and protection of legitimate business interests. It is important for contractors to carefully review and negotiate the terms of any non-compete clauses before signing their contracts.

Conclusion

Thus, a non-compete clause can provide your business with protection from former employees competing against your business. However, it is important to understand that a non-compete clause may not be reasonable in all circumstances and/or industries. To ensure your non-compete clause gives you sufficient legal protection, contact an employment lawyer for relevant legal advice.