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Australia – Ban non-competes to boost innovation and labour mobility

08 October 2015

Employment contracts that prevent employees from going to work for competitors are outdated and stifle creativity, according to Australia-based employment law specialist Paul Murphy, reports The Brisbane Times.

According to Mr Murphy, Australian white-collar employment contracts abound with restrictions that prevent employees working for competitors. They are routinely enforced and the level of enforcement in growing.

Research from the US, however, clearly suggests that such restraints undermine innovation and collaboration, working against the creation of knowledge. 

Mr Murphy is calling on Australia to adopt similar regulations to those in California, which have been in existence for more than 130 years, and void restraints of trade in contracts. The law has encouraged, and at least partly facilitated, the development of knowledge hubs such as Silicon Valley.

Mr Murphy believes that such a legislative change in Australia would enhance knowledge collaboration, flexibility, labour mobility, entrepreneurship and restrain corporations from using such restraints as an attempt to stop its employees working for competitors.

The current situation in Australia vests power to large corporations to enforce their contractual rights if an employee breaches a non-compete clause. Often, the mere threat of action is enough to stop an individual working for a competitor.

Employers enforce the restraints with an application to the relevant court (usually the Supreme Court), seeking an injunction or damages. Unless the prospective employer is prepared to fund a defence most employees simply don't have the resources to be involved in such an exercise

A US study analysed the effect of non-competes on "brain drain" by looking at patent records from 1975 to 2005. It found there was a brain drain of inventors from US states that enforce employee non-compete agreements moving to those states that do not (including California, Oregon and now Washington). It was most visible on the margin of workers who are more collaborative and whose work has a greater impact.

The US study also found that the Californian law was a significant contributor to the success of Silicon Valley, which has become the most entrepreneurial area in the world. On the other hand, they found policymakers who allow non-competes could be inadvertently creating regional disadvantage.

Mr Murphy wrote: “The increasing use of non-competes is more about protecting market position and suppressing labour mobility than it is about the genuine protection of confidential information or processes (which was the original basis). The suggested change is easy with a simple amendment to the Fair Work Act. It would cost nothing but create an essential plank in building a smarter and more innovative nation.”

“There would be no cost impact to companies. Indeed it would remove from the courts unnecessary litigation, enhance and promote collaboration, and boost productivity and competition, especially in knowledge based industries. It would also reverse the brain drain,” he concluded.