Australian small businesses using non-compete clauses to protect client relationships and confidential data are being advised to rethink their contracts ahead of sweeping reforms coming into effect next year.
New laws will ban post-employment restraints for lower and middle-income workers with no exemption for SMEs, many of whom regard the clauses as a critical safety net. But experts say business owners often have a false sense of security about existing rules and the new legislation offers a timely opportunity to reassess.
“I think most small businesses see it as an insurance policy,” says Karen Greenidge, a Partner in the Corporate and Commercial Law team at PCL Lawyers. “But there are a lot of hurdles to get through to make sure that they’re actually enforceable.”
1 in 5 Australian employees is bound by a non-compete clause, while half the workforce faces other restraints, such as no-poaching or non-solicitation agreements. For SME owners, the challenge goes beyond having a cookie-cutter restraint clause in place. The key is to ensure the protections are realistic, reasonable and fit for a changing legal landscape.
SMEs Can Face Unique Protection Challenges
Small businesses often lack the heavy-duty protection that larger corporations take for granted. While a multinational might rely on a portfolio of patents, an SME’s value is frequently tied to its people and the information they carry.
“It would be things like pricing and strategies and supplier lists,” Greenidge explains. “Those are the items that are really considered valuable. And if it’s easy to access, a departing employee can just walk out the door with those intangible assets and potentially start competing.”
These concerns are particularly valid in businesses that rely heavily on client relationships, where the loss of a popular employee could drastically affect the bottom line. “There’s also a brain drain that goes on,” Greenidge says. “If the small SMEs spent a lot of money developing and training staff, having those employees poached is a massive cost to the business. So, these are many, many reasons why they tend to put these restraints in place.”
Treasury research confirms that these clauses have spread beyond senior executives to outward-facing roles like childcare workers, hairdressers and real estate agents. The review notes that while employers consider these agreements essential to protecting proprietary knowledge, they are often imposed regardless of whether the employee actually has access to trade secrets. This can have a ‘chilling effect’ and deter employees from switching jobs even when clauses are unenforceable.
In Restraint Clauses, One-Size Does Not Fit All
Greenidge says it’s a common misconception among business owners that a signed contract promises security. “Many employers think if I’ve got a restraint clause in a contract that the employee’s entered into, that it’s enforceable,” she explains. “That’s probably the biggest mistake that they make. They think they have a rock solid guarantee which isn’t the case because a lot of the time these clauses get read down by courts.”
She says it’s easy for SME owners to confuse different types of restraints, with non-competes often treated as interchangeable with non-solicitation clauses. Non-solicitation clauses don’t prevent employees working elsewhere but do prevent them from taking specific clients when they leave.
“This is quite standard and is usually enforceable, depending on the role of that employee,” Greenidge says. “Where the employee is providing personal skills, so, a hairdresser or builder or chef, in those situations, you’ll find it hard to have the restraint apply because it’s their skill. In professional services arrangements, like law firms, accounting firms, it’s easier to have [the restraint] apply.”
She says when courts refuse to enforce clauses, it’s usually because they fail the “reasonableness” test and have been drafted using a generic one-stop-shop approach. “One size does not fit all,” she says, offering sage advice in the age of AI assistants.”You can’t just stick a standard template off the internet.” She notes that a senior manager would require a very different approach to a junior clerk.
“They’re not bringing in clients and they also shouldn’t really have access to genuinely sensitive or confidential information. So restraint in those types of roles is probably going to be struck out because it’s unreasonable for the type of work they’re doing.”
Reasonable Contracts Will Best Pass The Test
To make sure a restraint stands up in court, Greenidge recommends owners look at three things: duration, geography and scope. “For example, should it be 3 months, 6 months, 12 months?” she asks. The geographic region – whether it’s a 5km radius or the whole of Australia – will depend on the type of business and the employee’s connections, she says. As for scope, that is also determined by the nature of their role and interaction with clients.
She recommends owners give themselves options when drafting contracts. “When you’re preparing that clause, you’d want to make sure it’s cascading – some people refer to it as a ‘waterfall clause’ – which means you tend to drop from the highest level,” she explains. “For example, if you had a restraint area of Australia, then you drop to state of Victoria, to 50 kilometres from the office, to 30 kilometres, et cetera. And same with the restraint period, you can start with 5 years down to 6 months.”
This means if the contract was tested in court and a restraint was found to be unreasonable, the other options would be considered next. ”Now, if you had put in just one liner, such as, you’re restrained for 5 years right across Australia, it’ll just be struck out all together and you wouldn’t have any restraints. So these waterfall causes, um, are really critical.”
Do The Ground Work Now For 2027 Reforms
From 2027, non-compete clauses will be banned for employees earning below the high-income threshold, which currently sits at $183,100 per year. The ACCC has signalled it will be watching to ensure businesses align with the changes.
While an implementation date is yet to be confirmed, Greenidge says now is the perfect time for SME owners to start preparing, especially if they need a refresher on existing rules.
She recommends a three-step course of action for businesses which rely on post-restraint clauses:
Map staff salaries: See who earns above and below the $183,100 threshold to determine how many contracts will be affected.
Refine strategies: For employees below the threshold, employers could consider tightening alternative restraints. “Focus more on non-solicitation clauses… and make sure they’re robust,” Greenidge advises.
The salary “bump”: if a star employee is towards the upper end of the middle-income bracket and is vital to a business’s competitive edge, a strategic pay rise is an option. “If you consider them valuable… increase their wage to above the threshold minimum so that they’re not captured by this ban,” Greenidge suggests.
Ultimately, Greenidge says proactive auditing and careful planning is the best protection in the changing legal landscape.“There’s a few tactics that employers can look at to make sure they’re protecting the goodwill that they’ve built as best they can.”
