Restraints of Trade 101
A restraint of trade clause in an employment agreement is designed to protect a business’ commercially sensitive information by restricting an employee‘s business activities after they leave.
Restraints of trade are common in certain industries and senior roles. However we speak to many businesses who believe they are not enforceable. Fundamentally, employees have a right to earn a living. The courts commonly rule on the side of the ex-employee due to the inherently non-competitive nature of the restraints that are included in their agreements. A private member’s bill seeking to ban clauses for lower-paid workers is being worked on as we speak. However, a recent ERA ruling found that if an employer can justify that the restraint of trade is legitimate, it may be upheld. As the Court of Appeal said in 2007, “agreements are made to be kept“.
Recent Ruling – Watching What Happens in Court
In the second half of 2021, prominent NZ political journalist Tova O’Brien resigned to go to work for the competition. As a result, her ex-employer challenged her right to do that. Under the restraints in her employment agreement, she was prevented from being involved in a competitive business in NZ for 3 months following the end of her employment. Her ex-employer had advised her of their intention to enforce the restraint clauses. The Authority upheld the challenge and enforced the restraint of trade clauses.
In this case, the Authority found that Ms O’Brien had breached the terms of her employment agreement. She was ordered to pay a $2,000 penalty to her ex-employer for the inconvenience and resources used in pursuing the matter. A rare victory for the employer! However the Authority did find that the terms of the restraints were wider than were reasonably necessary and reduced them.
So What Does a Political Journalist Have to do With My Business?
To have restraints of trade in your employment agreements that are considered reasonable, you must demonstrate you have a legitimate interest to protect. The difficulty is the subjective nature of what may be considered “reasonable.” Focus on the facts of each case to evaluate this. For example, how senior is this employee? Is their business knowledge unique? Is their access to confidential information extensive? These are all relevant factors.
At FixHR we recommend that a decision on whether a restraint is genuinely necessary, and what restrictions are reasonable, should be considered for each role. Avoid blanket restrictions that you automatically include in your employment agreements. Unreasonable restrictions may put off a candidate (NOT what we want in this market) or ensure that they completely ignore the term. For example, non-compete clauses can be tailored to a set time or a geographic restriction – or both.
In addition, you should also review whether to introduce or revise a restraint if someone is promoted or moved within your business. As this might disadvantage an employee’s current terms and conditions, some ‘consideration’ would need to be offered. Promotions generally come with a pay rise, so this can usually be easily covered.
Tova O’Brien’s case has underscored that if you make an employee aware that you would seek to enforce any restraints, you increase your chances of your case being upheld. If you are using a restraint, this can be part of your discussion when recruiting and making an offer. It should also be reinforced when an employee indicates their intention to leave, and in your letter confirming acceptance of resignation. Please note too, this finding shows that restraints can be enforced even when they may be wider than necessary.
Contact us if you would like assistance understanding how to use restraints in your business.