New research by the e61 Institute presents five facts on the use of non-competes and other post-employment restraints in Australia based on new ABS survey data.

New research by the e61 Institute presents five facts on the use of non-competes and other post-employment restraints in Australia. These facts highlight the economic relevance of restraint clauses, detail how firms deploy them and present preliminary evidence on the consequences of their proliferation.

“For the first time we have data from the employer side on the prevalence of non-competes and other post-employment restraint clauses. This is important because employers likely have a better awareness about the prevalence of these clauses than workers. It also allows us to better understand how firms of different sizes and in different industries deploy these restraints.” e61 Institute Senior Policy Fellow Dan Andrews said.

The e61 Institute research used data from a new ABS survey of firms, developed in collaboration with e61, to examine the use of restraint clauses. Combining this data with employment data, the e61 research found that a large share of Australian workers are subject to restraint clauses.

“Roughly one-fifth of the Australian workforce are currently subject to a non-compete. No-poach agreements are even more widespread, with almost a third of workers subject to a clause that restricts their ability to ‘poach’ former clients and almost a quarter subject to no-poach of co-workers agreement.” e61 Institute Senior Research Economist Jack Buckley said.

“Firms are also planning to increase their use of these restraints. Roughly 1-in-5 firms who do not currently use non-competes say that they will likely do so in the future.” Mr Buckley said.

There are large differences in the use of employment restraints between industries. The use of non-competes and other restraint clauses is particularly prevalent in knowledge-based service industries, where high-skilled labour is a key determinant of firm success.

“Restraint clauses likely provide a lot of private value to individual firms in these industries, but their use may be hurting the efficient allocation of talent and the diffusion of knowledge.” e61 Institute CEO Michael Brennan said.

Many firms appear to be deploying restraint clauses indiscriminately. Of firms who use non-competes and no-poach clauses, almost 80% are applying them to more than three-quarters of their workforce.

“This blanket application of non-competes and other restraints has the potential to adversely affect low wage workers who lack the bargaining power to negotiate over these terms.” Mr Andrews said.

The widespread use of post-employment restraints could be having a negative effect on job mobility and competition. Preliminary analysis conducted as part of the e61 research found that job mobility and firm entry rates were lower in industries with a higher prevalence of employment restraints.

However, Mr Buckey added that “this analysis comes with some important caveats, including the fact that it does not account for a range of omitted variables that could affect the relationship between restraint clause use, job mobility and firm entry rates.”

“More research is needed to understand the extent to which the use of restraint clauses has contributed to the decline in job mobility and competition. But our analysis adds support to the hypothesis that non-compete clauses and no-poach agreements act as a barrier to labour mobility and competition.” Mr Brennan said.

Key findings:

This note presents five new facts based on a new, high-quality firm-side survey to help policy makers better understand the prevalence, use and economic consequences of non-competes and other post-employment constraints in the Australian economy.

Fact1: A large share of Australian workers are subject to restraint clauses.

• Non-disclosure clauses cover between one-half and two-thirds of the Australian workforce with a central estimate of 58%.
• Between one-quarter and one-third of workers have clauses restricting their ability to poach former clients with a central estimate of 29%.
• Roughly one-fifth to one-quarter of the Australian workforce are subject to non-compete and no-poach of co-workers agreements with a central estimate of 21% and 23% respectively.

Fact 2: Firms’ use of restraint clauses has increased over the past 5 years and is expected to increase further absent policy intervention.

Fact 3: Restraints are highly prevalent in knowledge-based service industries, potentially jeopardising the allocation of talent.

Fact 4: Many firms are deploying restraint clauses indiscriminately, potentially adversely affecting low wage workers who lack bargaining power.

Fact 5: Firm entry and job mobility rates appear to be lower in industries where restraint clauses are more prevalent.