RESTRAINT OF TRADE CLAUSE

A Restraint of Trade clause in an Employment Agreement is a clause that restrains (i.e., stops) someone from trading (i.e., working for someone else). There are two ways they typically appear:

• Non-competition: the Employee cannot accept a similar job in the industry within a certain territory and/or certain timeframe of them leaving their current employment.
• Non-solicitation: the Employee can accept a similar job in the industry within a certain territory and/or certain timeframe BUT they cannot contact the previous Employers’ clients about their new job/business.

Restraint of Trade clauses are common in contracts across New Zealand – they are found across every industry from your local fast-food restaurant to the most highly paid executives in our biggest companies.

The thing is that most of these clauses are not worth the paper they are printed on.

In Practice

Restraints of Trade clauses are presumed unenforceable by the courts. The person seeking to enforce the Restraint – almost always the previous Employer – must prove to the courts that the clause should be upheld. To do that, they must prove that the Restraint does not unreasonably prevent the Employee from earning a living in their industry or field of work.

Last year, Tova O’Brien, the political reporter, became the poster child for Restraints of Trade disputes. Tova left Discovery and intended to move to the (now defunct) Today FM radio station. There was a Restraint of Trade clause in her contract that Discovery attempted to uphold – meaning that she couldn’t work for their ‘competition’ anywhere in New Zealand for three months after her employment ended with Discovery.

The Court ended up backing Discovery – forcing Tova to delay her start date at Today FM. This caused a public outcry – how could it be fair for your past Employer to effectively stop someone working for months on end?

In Tova’s circumstance:

• Tova was in a highly paid senior role,
• The period of restraint was three months,
• That role (political journalist) relied in part on her name brand and, though the Today FM role was not a political journalist role, it was that of a media personality which would have certainly leveraged off her name brand also that Discovery had helped her build up,
• Discovery had a business interest (their own brand) that Today FM would have been able to utilise.

The Court’s conclusion that this was a ‘reasonable’ restraint, is not therefore the biggest surprise. However, it is an outlier.

Is my Restraint of Trade Clause Enforceable?

When determining whether your clause would be upheld by a Court, consider these points:

• Is the Clause wider in scope (think time period/geography/industry) than what would be necessary to protect the party/employer it is intended to protect?
• Does the former Employer have a legitimate business interest (such as confidential information or trade/client connections) that needs protecting? A Restraint of Trade clause cannot stop someone from merely competing in the marketplace for another Employer.
• Very few Clauses would include a restriction of over 12 months.
• What is the Employee’s position? Do they hold a relevant position that relates to the business interest that the former Employer is trying to protect?
• Has there been fair compensation given to the Employee?

If the Restraint of Trade Clause is ruled ‘unreasonable’, the Employment Court or the Employment Relations Authority can either:

• State that the Employee does not have to abide by the Restraint Clause; or
• Modify the Employment Contract to make the Restraint of Trade Clause reasonable (such as reducing the time or area the restraint covers).

The Employment Relations (Restraint of Trade) Amendment Bill

There is a Member’s Bill currently at Select Committee in Parliament called the Employment Relations (Restraint of Trade) Amendment Bill (‘Bill’). This Bill would:

• Prohibit the use of Restraints of Trade in Employment Agreements for Employees who earn less than 3 times the minimum wage.
• Limit the use of these clauses to a situation where the Employer has a “proprietary interest” to protect.
• Requires Employers to pay Employees who come under a Restraint of Trade clause to an amount equal to half of the Employee’s weekly earnings for each week that the restraint is in place.
• Limits Restraint of Trade Clauses to no more than 6 months

There are several reasons for this Member’s Bill.

Firstly, it recognises the reality that many Restraints of Trade clauses wouldn’t stack up in Court – but that Employees (understandably) might not want to go through the stress, time, and expense involved defending a case for breaching a Restraint of Trade clause. Removing the ability for obviously unenforceable clauses to be fought over in Court (or before the Employment Authority) would also free up some time for these forums to deal with other Employment cases and disputes, which would save time and taxpayer dollars.

Secondly, it is trying to avoid the stifling effects that a Restraint of Trade clause can have. Unenforceable Restraint of Trade clauses means many employees on modest incomes choose to stay in lower paid work or to abide by the restraint. This, in turn, depresses wages and stifles innovation.

The Bill has a long way to go before it gets near to being enacted. We will be paying close attention to the Select Committee report to see if there are any recommended changes. The threshold of “3 times the minimum wage” is likely to be challenged. Minimum wage is currently $47,216 annually (full time, before tax). Three times this is $141,648 annually (full time, before tax) – which would mean that Restraint of Trade Clauses would only be able to be used in the top 5.6% of earners in New Zealand.

Whatever happens with this Bill, in the meantime there are a lot of unenforceable Restraint of Trade clauses floating about.

How can we help?

• If you are an Employee who is thinking of moving on and are concerned about your Restraint of Trade clause
• If you are an Employer who needs assistance on ensuring that your Restraint of Trade clause is legal and enforceable

Please don’t hesitate to reach out to our talented Employment team. Restraint of Trade clauses are an important part of our business and employment environments, but you don’t want the stress of getting it wrong. Call us today.

• Samantha Wood (Senior Solicitor)