As the government canvasses feedback on its plans to reform the law around non-compete clauses in employee contracts, the Financial Advice Association Australia has warned that the interest of employees must still be balanced to protect the employer’s business interest.
The government flagged changes due to concerns the current law was failing to protect employees from excessive employment clauses that can impact their ability to change jobs and stifle economic growth by diverting job switchers away from opportunities that better match their skills and experience.
In a submission to the consultation on Treasusry’s ‘Reform to non-compete clauses and other restraints on workers’, the association said the current “general position” of existing common law – that non-competes are largely unenforceable – should be supported by legislative measures.
“Employers’ practices of intimidating employees by including unenforceable clauses in employment contracts, and/or overly complex and ambiguous ‘cascading clauses’, should be curbed to promote greater efficiency in the Australian labour market,” the submission, signed by FAAA policy general manager Phil Anderson, said.
However, the association argued that employees’ interests “must be balanced” against employers’ business interests, including protection of confidential information and trade secrets, client relationships and workforce stability.
Furthermore, the FAAA noted there are two issues that are directly relevant to the financial advice profession that should be taken into consideration: protections for an employer’s investment in a professional year candidate and “sensible” non-solicitation clauses that “reflect the explicit business value of financial advice client relationships”.
The FAAA instead suggested it was “appropriate and necessary” to permit client non-solicitation clauses in employment agreements for 12 months after leaving the company, noting this was only for solicitation and that legally clients could choose to leave of their own free will.
“This would ensure that when an employed adviser leaves, the practice has confidence that they have 12 months before this adviser can seek to recruit clients and during that time the business can ensure that strong relationships have been formed with a new adviser. It is our view that these clauses should only prevent active solicitation.”
The conflict over who “owns the client” and the appropriateness of commoditising client relationships has been a long industry debate, but the FAAA said it believes that the retention of these client non-solicitation clauses is “essential” to preserve the value of these financial advice businesses.
“For an employed adviser who, as their career progresses, decides to establish their own financial advice business, they have the option of starting from scratch and building a client book, or to purchase a book of clients, potentially from an older adviser who has decided to exit the financial advice profession,” the submission said.
The FAAA said that purchasers of client books need to have certainty there is no risk the seller will solicit the clients to go elsewhere.
“In undertaking this purchase of a book of clients, they will also seek contractual certainty from the seller, that they will not try to solicit the clients to return to them,” the submission said.
“These controls help to ensure that there is an orderly market for the sale of financial advice businesses.”
The advice sector has long raised concerns over whether the benefits of investing in PY advisers outweigh the costs, particularly as they can easily get headhunted, and the FAAA suggested clauses to prevent them working for a competitor “in the same broad area” for up to two years after finishing their PY.
“We believe that in this case, there is a justified case for enabling these employers to apply a noncompete clause for a certain period after the new financial adviser completes the professional year,” the submission said.
“The professional year stage has become a bottleneck, as small businesses in particular are hesitant to invest in the appointment of these people, given the increased uncertainty that they will be poached after they conclude the training.
“Other businesses could easily offer them a pay increase to encourage them to move as a means of avoiding the cost of employing them during the professional year.”
