Restraint of Trade Clauses in Australia: A Shifting Legal Landscape for Commercial Employers

The Albanese Government’s 2025–26 Federal Budget proposal to abolish non-compete clauses for the majority of Australian workers marks a turning point for employers who rely on post-employment restraints to protect their commercial interests. For businesses operating in competitive markets, the change introduces a new layer of legal risk—particularly in relation to staff with access to trade secrets, clients, and confidential information.

While non-compete clauses have long been difficult to enforce, especially in standard employment contracts, recent case law confirms that even restraints in a sale of business context are now under closer judicial scrutiny.

Combined with impending legislative changes, these developments signal the need for a thorough review of current employment and commercial agreements.

The Reform Proposal: What’s Changing?

As part of the March 2025 Budget, the Government announced its intention to:

1. Ban non-compete clauses for employees earning less than $175,000 p.a., with this threshold indexed annually;
2. Reform competition law to crack down on wage-fixing and no-poach agreements;
3. Consult on extending the reform to high-income earners, non-solicitation clauses, and other work arrangements; and
4. Enact legislation to take effect prospectively from 2027.

The reform reflects growing concern that non-compete clauses restrict job mobility, suppress wages, and limit innovation, especially for lower-income workers with limited bargaining power.

Judicial Treatment of Restraints: What the Courts Are Saying

While the reform proposes a bright-line rule for lower-income workers, the courts have historically taken a nuanced approach, assessing enforceability based on reasonableness, legitimate interest, and context.

Employment Cases: Narrow Restraints Favoured

• In McMurchy v Employsure[1], the NSW Court of Appeal upheld a non-compete clause where an employee joined a competitor during his notice period and solicited another employee. The enforcement turned on misconduct, not merely the clause’s text.
• In Shire Real Estate Pty Ltd v Kersten[2], however, the NSW Supreme Court refused to enforce a restraint against an employee made redundant after a short tenure, finding the restraint unjustified.

These decisions underscore the court’s reluctance to uphold restraints in standard employment unless the conduct is egregious or the employee held a particularly strategic role.

Sale of Business: The Escala Decision

Traditionally, courts have taken a more liberal approach to restraints in sale of business contexts, recognising the buyer’s interest in preserving goodwill. However, 2nd Chapter Pty Ltd v Sealey & Ors (No 2) [2024] VSC 672 shows this is no longer guaranteed.

In that case:

• The restraint scope extended to all clients of the business, not just those of the former employees—this was held to be excessive.
• The restraint duration (up to five years) was also found unreasonable, especially given the restrained employees’ minimal equity stakes.
• The court refused to “read down” the clauses under the ‘blue pencil’ rule, rendering them unenforceable in full.

The decision reinforces the principle that restraints must be tightly drafted, tailored to the employee’s role, and not blanket protections masquerading as risk mitigation.

What This Means for Employers: Navigating the Risk Landscape

For commercial employers, the changes create a narrower window in which post-employment restraints can be used effectively and a greater likelihood of restraint clauses being deemed unlawful or unenforceable.

Key takeaways:

1. Lower-income staff: Non-competes will soon be prohibited outright, regardless of their content.
2. Senior/high-income staff: Clauses may still be valid, but only if proportionate, narrowly drawn, and linked to legitimate business interests.
3. Sale of business: Even in transactional settings, scope and duration still matter—shareholding alone is not enough to justify overly broad restraints.

How Employers Can Protect Their Interests Despite the Changes

Although non-competes are being phased out for most workers, employers still have several tools to safeguard their interests. Here are five quick, practical tips to adapt your contracts and strategy:

• Use Garden Leave Strategically

Include longer notice periods and reserve the right to place employees on garden leave, keeping them out of the market while still bound by contractual duties.

• Strengthen Confidentiality Provisions

Ensure confidentiality clauses are clearly worded, comprehensive, and survive termination. Define confidential information broadly to capture key business data, pricing, processes, and client intel.

• Use Paid Restraints in Exit or Shareholder Deeds

Tie post-employment restraints to equity payouts or termination payments, especially for senior staff or vendors. This can give you additional leverage where standard employment law is tightening.

• Incorporate Cascading Restraints

Use tiered or cascading clauses that scale back the time or geographical scope of a restraint. This maximises the chance that at least part of the clause will be upheld.

• Reframe Your Focus

Shift from trying to “lock out” former employees, and instead double down on internal safeguards.

Robust onboarding, data management controls, and ongoing education about confidentiality obligations.

Need Help Navigating the Changes or Managing a Current Dispute?

If you’re:

• Reviewing your post-employment protections;
• Considering a high-risk termination;
• Or currently engaged in a contractual dispute;

Our team practices in all areas of commercial litigation, including employment law and can help you respond strategically to the changing legal landscape. We’ll work with you to preserve your competitive edge without overstepping the new boundaries.

[1] McMurchy v Employsure Pty Ltd [2022] NSWCA 201

[2] Shire Real Estate Pty Ltd v Kersten [2021] NSWSC 1255

The content of this publication is intended to provide a summary and commentary only. It is not intended to be comprehensive nor does it constitute legal advice, and has been prepared based on applicable legislation and case authority at the date of publication. You should seek legal advice on specific circumstances before taking any action.