Andrew Leigh

Why the battle over hiring rival employees could be the next big challenge for Australian workplaces, Business Insider, 19 January 2019

In 2006, Michael Devine worked as a computer scientist for the tech-giant Adobe in Seattle, Washington. Like most, he was always on the lookout for new and exciting job opportunities. But strangely, for a reputable computer scientist in the heart of Silicon Valley, the offers weren’t flooding in.

Four years later, Michael found out why. It turned out that his company had entered into a secret agreement with five other tech-giants – Apple, Google, Intel, Intuit and Pixar – not to hire each other’s workers. In an angry phone call, Apple’s Steve Jobs had warned Google’s Sergey Brin: ‘If you hire a single one of these people, that means war’.

When he realised how the firms had colluded, Michael Devine wasn’t happy. He and 64,000 other employees filed a class action and ultimately received a settlement. Unfortunately, it was only the tip of the iceberg. Soon after, the online retailers Ebay and Ituit were caught doing the same thing. So were the film producers Lucasfilm and Pixar. It wasn’t just the tech-giants, either. Hospitals had agreements to fix the pay and conditions for temporary nurses. Fashion designers were caught trying to reduce the pay and conditions for models. The list goes on.

What’s most alarming was just how widespread this conduct was once US regulators started looking. It made me worry: is this happening in Australia?

Right now, no-one has uncovered the sorts of dodgy dealings between human resources departments that have been exposed by US antitrust agencies. But there’s another way that firms can restrict their employees’ outside job options. Australia’s competition laws permit what are called ‘non-compete clauses’ in employment contracts. These clauses prevent employees from working for a competitor, starting a competing firm or poaching their customers. They are legal and they are being used more and more frequently.

Non-compete clauses hurt workers. A lack of competition for employees means lower wages, worse conditions and reduced worker mobility. With wage growth at a 30 year low, inequality at a 75 year high and fewer employees moving between jobs, having strong competition for employees is more important than ever.

Not only do non-compete clauses make it harder for workers to switch to a better job; they also stifle start-ups. Since many new companies are created by employees who leave to start a competing company, non-compete clauses reduce innovation. Using three decades of US patent data, Matt Marx, Jasjit Singh and Lee Fleming found a ‘brain drain’ of inventors from states that enforce non-compete clauses to states that do not.

No-one is suggesting that departing workers should be able to take confidential information like client lists. But non-compete clauses go further: effectively banning ex-employees from working in the industry for a fixed period of time. This means fewer new businesses, which in turn means less consumer choice, lower quality and higher prices. As a side-note, artificially reducing employee mobility also harms the industry for employment and recruitment services, which contributes more than $30 billion a year to the Australian economy.

Research shows that the laws around non-compete clauses in Australia are vague, have a chilling effect on employees and are being used more frequently. An Australian study by Christopher Arup, Chris Dent, John Howe and William Van Caenegem found that non-compete clauses have an ‘intimidating effect, which means that employees observe restraints, even if they overreach [the law], without challenging them in court’. The researchers concluded that the use of such clauses is not only growing but is ‘daunting for many employees to navigate’.

Perhaps the best argument for banning non-compete clauses is that one of the most innovative places on the planet – California – does not allow them. Google, Apple and Facebook all have California headquarters despite the fact that they cannot use non-compete clauses in their employment agreements. Indeed, the ban on non-compete clauses is one factor that spurred the growth of Silicon Valley.

Labor also believes there are other ways to make the Australian economy more competitive. We are committed to raising penalties for anti-competitive conduct, doubling the Australian Competition and Consumer Commission’s litigation budget and giving it a market studies function to delve deeply into overly concentrated industries.

There’s an old saying that ‘competition is the consumer’s best friend’. But what’s often forgotten is that competition is the worker’s best friend, too. Just as competition in product markets benefits consumers through cheaper prices and better products, competition among employers benefits workers through higher wages and better conditions. The clue is in the name: ‘non-compete’ clauses probably aren’t doing much to make our economy more competitive.

Andrew Leigh is the Shadow Assistant Treasurer and the Shadow Minister for Competition and Productivity. This opinion piece was first published in Business Insider on Thursday, 19 January 2019.