Small business owners who have traditionally relied on non-compete clauses to protect their client relationships, training investments, and business knowledge will need to develop alternative strategies once it becomes law
COSBOA
SMEs across Australia face a seismic shift as the Albanese government plans to ban non-compete clauses for workers earning under $175,000 annually, according to a joint media release from Treasurer Jim Chalmers, Minister for Employment and Workplace Relations Murray Watt, and Assistant Minister Andrew Leigh.
Set to take effect in 2027, the reform will affect approximately three million workers in SME-heavy sectors like childcare, construction, hairdressing, retail, hospitality, administrative support, and healthcare support. While aimed at boosting wages and economic growth, the policy challenges small businesses that rely on these clauses to protect their interests, says the Council of Small Business Organisations Australia (COSBOA) in a 1 April 2025 statement, updated 2 April.
“We will ban non-compete clauses for most workers that have no justification and drag down wages,” the government stated, noting that “right now, more than three million Australian workers are covered by these clauses, including childcare workers, construction workers, and hairdressers.” The decision follows Treasury’s Competition Review, which uncovered misuse: “Treasury’s Competition Review heard troubling accounts about the misuse of non-compete clauses, including minimum wage workers being sued by former employers and workers being threatened with legal action if they switched jobs.” Even unenforceable clauses “can lower worker mobility.”
The government projects significant economic benefits. “Research suggests the reforms could lift the wages of affected workers by up to four per cent, or about $2,500 per year for a worker on median wages,” while “Productivity Commission modelling suggests the changes could improve productivity and add $5 billion or 0.2 per cent to GDP annually, as well as reduce inflation.” By removing barriers, the reform will “spur new business entry and competition,” as “non-compete clauses are a handbrake on business creation and a speed bump on aspiration.”
Challenges and opportunities for SMEs
For SMEs, the ban marks a “fundamental shift in how small businesses can protect their interests when employees depart,” COSBOA warns. Small businesses in sectors like hairdressing or childcare, which have “traditionally relied on non-compete clauses to protect their client relationships, training investments, and business knowledge,” face risks. A childcare center, for example, could lose families if a former employee joins a competitor nearby.
Compliance will also bring “legal costs associated with contract revisions and compliance,” and SMEs risk “potential financial penalties for attempting to enforce banned non-compete clauses,” “compensation claims from affected employees,” and “regulatory oversight from bodies like the ACCC or Fair Work Ombudsman.” Increased worker mobility, since “the restrictions prevent workers from setting up their own shop and pursuing entrepreneurial ambition,” could heighten competition for SMEs.
Yet, opportunities exist. The reform’s promise to “make it easier for workers to switch to a better job” could help SMEs attract talent from rivals. The projected $5 billion GDP boost and lower inflation may create a stronger economic environment for growth. SMEs could also pivot to retention strategies, offering better wages, training, and workplace conditions to keep staff without restrictive clauses.
COSBOA’s advocacy and SME Strategies
COSBOA is rallying to support SMEs, pledging to “work with its membership to represent the interests of small business in the consultation process to ensure any potential challenges are addressed and mitigated as far as possible.” It is pushing for exemptions, such as “protection for genuine business sales,” “safeguards for genuine partnerships and joint ventures,” “special provisions for businesses with highly specialised intellectual property,” and “modified rules for professionals with unique client relationships (like medical practitioners).” To prepare, COSBOA advises SMEs to adopt “alternative strategies.” This includes using non-disclosure or confidentiality clauses to protect sensitive information, enhancing retention through competitive wages and training, consulting legal professionals for compliance, and engaging in consultations via COSBOA to advocate for SME-friendly policies.
The government has set a clear timeline: consultations with industry groups, including SMEs, will run from 2025 to 2026 to finalize exemptions, penalties, and details. Legislation will be drafted and presented to Parliament in 2026. The reforms will take effect in 2027, operating prospectively, meaning they “won’t invalidate existing arrangements immediately but will prevent their enforcement after the implementation date,” COSBOA noted. The government confirmed, “Following consultation and passage of legislation, the reforms will take effect from 2027, operating prospectively to give businesses and workers time to adjust.”
The ban is part of the National Competition Policy, which includes a “national licensing scheme for electrical trades people” to enable work across state borders without extra licenses or fees. Guided by the Competition Review Expert Advisory Panel, including experts like Dr Kerry Schott AO and Ms Danielle Wood, the reforms aim to foster a dynamic economy.
The 2027 non-compete clause ban will reshape how SMEs in sectors like childcare, construction, and hairdressing operate. While promising a $5 billion GDP boost and higher wages, it challenges small businesses to rethink client protection and compliance. By adopting alternative strategies and leveraging COSBOA’s advocacy, SMEs can navigate these changes and seize opportunities in a more competitive market.
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