Andrew Leigh

E&OE TRANSCRIPT
PODCAST INTERVIEW
THE CONVERSATION – POLITICS WITH MICHELLE GRATTAN
THURSDAY, 4 APRIL 2024

SUBJECTS: Non-compete clauses, restraint of trade, no-poach agreements, competition reform

MICHELLE GRATTAN, HOST: The Albanese Government and the Australian public are at present highly focused on the immediate cost of living crisis, the implications of it and the ways to deal with it. But the longer-term economic story is all about the fundamental reforms that are needed. And one of these is finding ways to make the Australian economy more competitive.

There are calls for change from business and other stakeholders and from economists. But, like most areas of reform, boosting competition is a challenging task because while there are winners, there are also losers, and they have loud voices.

A Minister at the forefront of this debate is Dr Andrew Leigh. He is the Assistant Minister for Competition, Charities, Treasury and Assistant Minister for Employment. In a speech he'll deliver on Thursday, Andrew Leigh outlines the need to rethink current provisions under which people who leave their jobs can be banned from competing with their former employer, whether that's for a certain period of time, or in a particular geographic area, or even both.

Andrew Leigh joins us today to discuss the future of the so called non-compete clauses and what the government is doing to address the broader questions of how to get more competition into our economy.

Andrew Leigh, can you explain in more detail these non-compete clauses and the extent of them. For example, you say in your speech, and I quote, once upon a time only the best paid corporate executives were required to spend a period of gardening leave between jobs. Now, gardeners are being forced to take gardening leave. Give us some examples of how different categories of workers can be affected.

ANDREW LEIGH: Thanks Michelle. It's both a pleasure and honour to be on your podcast. Non-compete clauses are cropping up in a range of employment agreements. And essentially, they constrain workers from moving to a better job. They might prescribe an industry and a geography and a time. So it might say that a hairdresser, for example, cannot work within 50 kilometres for six months. Many variants of these also have cascading provisions. So it might say that a hairdresser can't work within 50 kilometres force for six months, or if the courts renders that invalid within 25 kilometres for three months, or within 10 kilometres for one month. The employee is then left not quite knowing what they're constrained to do, but knowing that if they quit their job, then potentially they would face legal action from their former employer. That then constrains their ability to move, which has two important impacts to the economy. One is that switching jobs tends to be the point in the workers career when they get the biggest wage gains – so this may be dampening wage gains. And the other is that productivity comes from the reallocation of workers to new firms. And if a new startup can't hire new workers, then it's going to struggle to compete against the incumbents.

GRATTAN: I think we've all been familiar with top executives having these sorts of clauses in contracts, but has this practice spread over time, increased over time with other jobs?

LEIGH: I wish I knew. My guess is that it has but we really only have the new surveys, which show that they're surprisingly prevalent. When I began talking about non-compete clauses a couple of years back, the response I got was ‘it's just CEOs and top executives that get these’. But then when we did a survey, we found that one in five Australian workers were constrained by a non-compete, a higher share even than in the United States. And we also found that non-competes were popping up in close contracts for security guards, for early childhood workers, for yoga instructors. And that's essentially because many of these employment agreements are standard form agreements, which have been put together by employment lawyers. They're boilerplate text, and the employer has every incentive to put in a non-compete clause. And just as few couples standing at the altar find themselves negotiating over the terms of the pre-nup, so too employees going into a new job are reluctant to negotiate over a non-compete because it implies that they may not be loyal to the firm in the long run.

GRATTAN: Do you think that they are justified in some cases, at least?

LEIGH: It's difficult to see their justification given that there are a range of other direct ways that employers can look after their intellectual property requirements. I absolutely have no truck with employees who are stealing confidential secrets from employers. But if it is critical, confidential material, then it's hard to see how the employer is really able to defend themselves with a clause that that just locks it up for six months. There are direct ways in which employers can deal with this. And I think in many cases, non-competes are the easy way out for employers.

GRATTAN: I’m just thinking of a variation because of course, when former ministers leave Parliament, they're not supposed to be in certain jobs for a certain period.

LEIGH: Yes, but that's less about competition, we're not worried that another government is somehow going to compete with the Australian Government. That's about them not using the secrets and not taking them into a very different domain. It's not that we're worried about consulting firms competing with the Australian Government, it’s that we’re worried that the very special information they have may be misused. So in that sense, I'd regard that as a different form of agreements than we have here where, typically, employers are concerned that the worker will go off and work in a very similar job doing very similar activities. If that other firm is more productive, though, constraining mobility is not only bad for wages, but bad for innovation and growth.

GRATTAN: So if all these agreements were banned, what effect would that have on wages overall in the economy do you think? You've spoken about people being able to move more easily to get better paid jobs, but what would be the macro effect? Do we have any data on that?

LEIGH: Only limited studies, but there's some research out of e61, suggesting that there might be a 4 per cent increase in wages overall. And the literature really is emerging out of this, Michelle, because if we had had this conversation a year ago, my answer to all of this would be don't know, don't know, don't know. Thanks to e61, we've had a survey on the employee side, which estimates that one-in-five workers have a non-compete clause. And then we have we had a survey that we asked the Australian Bureau of Statistics to do on the employer side, which found that half of all employers bind some of their workers. And when you when you look at the employer survey, it seems to line up in the overall prevalence with about a fifth of employees being bound. So that’s reassuring, when we survey employers, we survey employees, both of them give us this troubling high figure of a fifth of the workforce.

GRATTAN: You’re releasing a discussion paper on the issue. Is the government therefore determined to remove these clauses, and is just seeking feedback on the detail through this discussion paper rather than on the more basic issue of the principle?

LEIGH: Michelle, we're determined to get views back on this critical issue. We do see it as potentially a constraint on productivity and wage growth. But we're a consultative government, we've engaged constructively with business, with the community sector, with unions on a range of other issues. And this will be no different. We're very enthusiastic about the conversation, keen to get feedback, including from those who've been litigating over these clauses, those who are drafting the agreements from firms about other ways in which they might protect intellectual property and client lists apart from non-compete clauses. We're keen to work constructively with business on this as with all other issues.

GRATTAN: So what sort of feedback have you had so far from business about the proposal, the broad proposal?

LEIGH: Some of the early feedback was people saying, ‘well obviously these clauses don't apply to low wage workers’. Sadly, that's not true. The facts from the survey very clearly show their high prevalence. As some firms have talked about the importance of protecting trade secrets and I think that then leads on to an important conversation about how firms can make sure they do that. Protecting intellectual property and client confidentiality is obviously critical. We do want to make sure that businesses are able to grow and thrive. That's our end goal here.

But as the Assistant Minister for Competition, I'm really passionate about the importance of getting more startups in the economy. Australia's listed firms tend to be quite old, older than in many other countries. We've got a lot of stasis, the biggest five firms in Australia now almost exactly the same list of firms as in the mid-1980s whereas in the United States, the top firms have turned over entirely in that period. If you want a bit more growth and dynamism in the economy, you've got to be thinking about things not just from the perspective of the current incumbents, but how you encourage startups to grow and thrive.

GRATTAN: Your issues paper also includes questions such as non-disclosure and non-solicitation clauses. Are you contemplating changes to those? Or is your focus just on these non-compete clauses 

LEIGH: You have to look at all of these clauses together. One of the reasons for that is that they operate in similar ways. The other is that we don't want to set up an environment in which, for example, changes were made around non-compete clauses but then the same effect was to show up via other clauses.

There's also clauses which can have potentially pernicious impacts, such as no poach clauses. Now, a couple of years ago, I wrote to all the major franchises in Australia and asked whether their standard form franchise agreements contained any constraint on franchisees poaching workers from other franchise outlets. Most of them couldn't be bothered to reply, but a number of them replied, and of those replies, in a number of major franchises – McDonald's, Domino's and Baker's Delight – were honest enough to say yes, we have franchise agreements that prevent franchises from poaching workers. And I have heard of instances in which McDonald's outlets for example, reluctant to hire workers from other McDonald's stores. That's pretty tough on the low wage workers who work in those stores.

GRATTAN: So you are thinking of those sorts of areas for action?

LEIGH: Absolutely. And a no poach clause is not in the contract between employer and employee. It's in the contract between franchisor and franchisee, so you need to think about this as a whole ecosystem. When the late Alan Krueger did work on this in the United States, there was immediate outrage, quick action by a number of state Attorneys-General, including New York, and an agreement by many major franchise chains to take the no poach clauses out of their standard form agreements.

We haven't seen that in Australia. Part of our challenge is we don't have very much visibility over what's in a standard form franchise agreement. Unlike in the United States, most of those agreements aren't public, they're kept secret.

GRATTAN: Coming back to the non-compete issue, are we looking here at general ban, or is there a pathway to reform that's more limited than that? And if so, what are some of the more simple measures you could take?

LEIGH: Michelle, we're open to a whole range of options there. There's a terrific article just written by Iain Ross, who has talked about perhaps a ban below a certain income threshold. Others have said the challenge for that is if you're worried about productivity gains, then actually the biggest drag on productivity might come, for example, from constraining a tech worker from leaving one technology firm and setting up another. And I can't help being reminded of the fact that Silicon Valley has thrived in a state, California, that has banned non-compete clauses for more than a century. Some people make the point that the ability of tech workers to leave one firm and start a competing firm has been part of the Valley's story for decades. And that hasn't prevented firms from hanging on to their rightful trade secrets and confidential information.

GRATTAN: I want to ask you about a very specific non-disclosure issue. The government has come under criticism from commentators and others for the fact that firms and individuals have to sign often non-disclosure agreements when they consult on government legislation. Now, clearly we have a special case with the tax legislation where we saw an absolute scandal there when confidentiality was broken, but I'm talking about more general legislation. One excuse that the government has given for these non-disclosure agreements is that some companies want to present some information but keep it confidential. But when that's not so, isn't the government just limiting debate and potential pre-emptive criticism by forcing those it consults with into confidential agreements?

LEIGH: Michelle, our view on those agreements is that they ensure that firms aren't able to monetize the information that they have through the consultations. We saw that, as you say, most egregiously in the case of PwC and its former partner, where the company was setting up tax contrivances and marketing those to clients based on the information they'd garnered through the confidential consultations. But there'll be another range of contexts in which there might be an advantage of one firm over its rivals. We don't want to have to think about every possible firm which might be involved and provide them all the same information. The non-disclosure agreements, put firms that are inside the consultation and outside the consultation on the same playing field in terms of their ability to monetize the information. And there's confidentiality exists in other contexts, of course. Cabinet confidentiality, Caucus confidentiality. All of that provides a framework in which you're going to have a robust discussion.

GRATTAN: Well, that's right, but it also limits that discussion to insiders doesn't it? Insiders versus outsiders, that is the general public.

LEIGH: Well, the general public are welcome to engage in a whole range of different consultations. Just to take one we announced over the weekend, the National Autism strategy is open for discussion. Anyone can go to engage.dss.gov.au and have their say. A lot of our tax consultations or typically our tax consultations are up on the Treasury website. We really welcome the views of interested stakeholders. We've had a robust discussion in the press and you've been a part of that as much as anyone else. And over these big reforms are often will have an exposure draft out there for public digestion. So you're only talking about non-disclosure agreements in one part of the policy conversation. The rest of it in my view is refreshingly open.

GRATTAN: Let's go back to competition policy generally. The government has various inquiries on the go at the moment looking into the major supermarkets and how they conduct themselves and how they price the goods. Do you think that there is a serious problem with Australia's supermarkets? Or is it more that they've become a lightning rod as prices have gone up and people feel the pinch?

LEIGH: We do have a very concentrated supermarket sector in Australia, much more concentrated than a typical European country or say the United States. The supermarket duopoly has grown through a series of mergers, gobbling up past supermarket chains such as Franklins which existed when I was a lad. And that's meant that they have significant both monopoly power over their consumers, but also monopsony power over their suppliers. That buying power has seen farmers squeezed pretty hard. And there's been a Food and Grocery Code of Conduct established to look into that.

We've now got Craig Emerson, the former Competition Minister and one of Australia's very best policy economists, looking at whether the Food and Grocery Code of Conduct should be made mandatory. That's looking hard at the supplier side, then we've got the Australian Competition and Consumer Commission doing a whole-of-economy analysis of the supermarket's impact, but also looking at the consumer side things such as loyalty schemes and how they play out for consumers.

GRATTAN: So just to come to the central point, do you think that the supermarkets are doing bad things?

LEIGH: Well there’s certainly instances in which the supermarkets have not treated their suppliers well. There have been allegations on the consumer side, we need the experts to look carefully into those. Supermarkets though are just one sector in an economy which has become on average more concentrated over the last couple of decades. I don't want Australia to end up the land of the duopoly where you've only got a couple of choices, but as the House Economics Committee report, chaired by Daniel Mulino, noted last week this is a real problem for the Australian economy. Increased market concentration, increased markups, all of that is a challenge for the kind of dynamism and productivity that we need to see. Under the former Government we had the lousiest period of productivity growth in the post-war era and, and part of that is problems in market concentration, which includes but is not limited to supermarkets.

GRATTAN: In a case of very strange bedfellows, the Greens and the Nationals would like legislation to allow forced divestiture if a company abuses its market power. And Allan Fels, who is former head of the ACCC, has also supported adding such a power to the measures that are available to a government. What's the Government's attitude to forced breakups?

LEIGH: Look, I respect Allan Fels but I disagree with him that this is a top priority at the moment. If you look at the Harmer Review or the Hilmer Review, they didn't recommend divestiture powers. The ACTU has said they're concerned about divestiture powers through the potential impact on workers of those firms and the National Farmers Federation has argued against them. So they're not the government's priority right now. We've got the Competition Taskforce in Treasury looking at non-compete clauses, looking at merger reform. They’re looking at the way in which the net zero, care economy and digital economy industries can grow and remain competitive. They're our priorities right now. Of course, we'll see what the ACCC Supermarkets Inquiry comes back with, but divestiture is not the priority of the government.

GRATTAN: How have such powers worked abroad?

LEIGH: Well, they exist in a range of countries. Some countries have them others don't. They are used relatively rarely. I mean, in the United States for example people can point to the breakup of Standard Oil or the breakup of Bell Telephone. But more recently, the court-ordered breakup of Microsoft didn't end up going ahead. So it's difficult to point to many examples in which divestiture have made it has made a big difference. Now, advocates of divestiture powers might well say it's their power is all in being able to wave a big stick around even if you never use it. I'm not aware though of instances of supermarket breakups. So to see this as a primary tool in producing better outcomes for consumers in the supermarket context, I think is misplaced. A better focus for supermarkets is the analysis that we're doing through Craig Emerson's work through the ACCC, and also the work we're doing through funding CHOICE to do quarterly price monitoring, which began collecting data this week and will report for the first time around the end of June.

GRATTAN: Apart from what we've canvassed, what other areas of competition policy would you like to make a priority?

LEIGH: Oh, that's a great question, Michelle. And I mean, the big picture for this is if you go back to the early 1990s you see a period in which Prime Minister Paul Keating tasked Fred Hilmer and his team to do a review of competition policy. And that really changes the conversation around competition and policy. It sets in train national competition policy in which states and territories come on board to do important reforms in the area of electricity, in the area of road user pricing, railways and much more. And all of that, together, adds up to the best decade for productivity growth in my lifetime. The gains from that according to the Productivity Commission were a permanent two and a half percent lift in GDP. In today's money that's $5,000 for every Australian household. So that's what good competition policy can achieve. And after, in an era where we've seen rising market concentration and falling productivity, I'm really excited that the states and territories have come on board with national competition policy, because it gives us the potential to set in train a series of data-driven reforms that will ultimately drive a more competitive and a more dynamic economy with higher living standards for Australians. 

GRATTAN: When you undertake reform, however, there's always resistance, there are always some stakeholders who are going to be losers. Where do you see the main roadblocks to getting our economy more competitive?

LEIGH: Invariably, if you've got a monopoly, you'll be keen to maintain that monopoly. One of the points Rod Sims likes to make is that the sort of corporate strategy that's often taught in business schools is almost exactly the opposite of competition. If you take Michael Porter's five forces model, the gist of that model is about protecting yourself against the challenge of competitors, making sure that they're crowded out of the market or you've built so called ‘moats’ around you. That's not what economists would want. And going right back to Adam Smith and Joan Robinson, economists have realised the value of competition for spurring living standards. Monopolies tend to charge too much and produce too little. They don't do enough research and development, they underpay their workers. A competitive, vibrant economy is good for consumers, good for workers and good for innovation.

GRATTAN: So it’s a matter of monopolies beware?

LEIGH:  We need we need to make sure that we've got more dynamism in the economy, that we have more startups. I certainly celebrate those firms that have managed to stay on the top of their game for many decades. But the fact is, if you look at the Australian economy, you do see an economy which is at the very top strikingly similar to what it was 40 years ago, whereas in other countries, you've seen much more turnover, churn, dynamism, more productive job creation. We know from the Harvard Atlas of Economic Complexity, that the Australian economy is not a particularly complex one. And that might be because we have some sectors in the economy that are dominated by just a few big firms, whether it's banking, baby food, beer. I'd like to see a little bit more dynamism in the Australian economy. And I believe that that would be one of the best ways of delivering long run productivity and the living standards that flow from that.

GRATTAN: We might just finally make the political point that we see the duopoly of the Australian federal political system much under challenge and will indeed at state level too. And the electors seem to want to get a few more small firms into that sphere.

LEIGH: Indeed, and I gave a speech last year titled ‘A more competitive Australian Labor Party’ where I noted the benefits of competition and some of the analogies that can be drawn in the political system. So I am keenly aware that we operate in a contested market and marketplace. I think that's a great thing. You know, you worry about a country where one political party is just completely dominant. And there are democracies in the world, where a single political party has reigned for decades. I don't think that's healthy. I disagree with my opponents, but I don't dislike them, I don't seek to demonise them. I don't see their existence as being a bad thing. It is healthy for us to be kept on our toes, whether it's by opposing teams or by opposing individuals. I like and respect many of the Independents who have joined the House over the over the time since I came into parliament in 2010. And political competition is just part and parcel of a healthy democracy.

GRATTAN: One of those independents is in your home territory, the ACT, who holds a lot of power in the Senate.

LEIGH: Absolutely. And I've had many respectful conversations with David Pocock, I really enjoy his contribution to Australian politics. Of course, I disagree with him and with some others over specific issues. And I do think that there is a value to political parties. Sometimes it's undersold, but the strength of a political party is this the strength of teamwork, that you can really work together to come up with a set of policies that are better than any individual can come up with on their own, that you get the experiences of the truck driver and the school principal and the former paediatrician, all gathered together in the one room, and the diversity of geography. That interplay when a political party is operating well is something that no individual independent can match, and I think provides a sense of robustness, which also makes the system less susceptible to corruption and problematic dealmaking than in environments and countries where you see no strong political parties, and everything centred around personalities and individuals.

GRATTAN: Andrew Leigh, thank you very much for talking with us today. That's all for today's politics podcast. Thank you to my producer Ben Roper. We'll be back with another interview soon, but goodbye for now.