'Non-competes may also be damaging economic growth and innovation'
Employees under non-compete clauses (NCCs) are experiencing slower wage growth over the first few years of their employment, according to new research.
The report from e61 Institute found that one in five Australian employees has a non-compete clause in their employment agreement.
According to the report, workers at firms using NCCs extensively are paid four per cent less on average than their counterparts at similar firms that do not use non-competes.
In addition, the report found that workers under non-competes in lower-skilled occupations were earning 10% less after five years on the job, despite starting on a similar wage to those not under NCCs.
"Our research shows that workers at firms using non-compete clauses experience slower wage growth over the first few years of their employment," said e61 Research Manager Ewan Rankin in a statement.
Rankin attributed the situation to the clause reducing employees' power to bargain for higher wages by limiting their future employment options.
"The reduction in wages is particularly acute for lower-skilled workers, likely because they benefit less from any positive effects of non-competes, such as encouraging the firm to invest in worker training," he added.
Limiting job mobility
Meanwhile, the report further found that employees at organisations which increased their use of NCCs between 2018 and 2023 were 10% less likely to change jobs.
Employees who were able to change jobs had likely taken six months or more off in between.
Rankin said the results are consistent with the view that the use of non-compete clauses has "contributed to lower levels of job mobility and wages growth."
"By locking people into jobs that may not be the right fit for them, non-competes may also be damaging economic growth and innovation," he said.
Alternative to non-compete clauses
With NCCs limiting mobility and slowing wage growth for employees, the e61 Institute pointed out the use of non-disclosure agreements (NDAs) as a potential alternative to protect trade secrets.
"NDAs appear to offer some similar potential benefits to NCCs, with fewer downsides for job mobility and worker wages," the research stated.
According to the research, NDAs can also prevent workers from disclosing confidential information gained during the course of employment.
"US evidence suggests that a combination of NDAs and NCCs does not protect trade secrets any more than NDAs alone," the report stated.
"If a similar finding were to hold in Australia, then it would be notable that NDA use does not appear to have a significant negative relationship with job mobility and that wages growth for workers with only an NDA is higher than for those with an NCC in addition over the first few years of tenure."
The use of NCCs in contracts has been under review by the Australian government after noting the clause’s impact on employment and wages.
The Ai Group, Australia's national employer association, warned the government that imposing constraints on NCCs in employment contracts would be a “backward step.”
"Any changes that reduce an employer's ability to protect its confidential and commercially sensitive information would be a backward step," said Ai Group chief executive Innes Willox.
