Here at Foley Douglas we have experienced a significant increase in enquiry from our clients in respect of restraints of trade.
Employers have been seeking to enforce restraints against ex-employees and Employees have been seeking advice as to whether the restraint of trade in their employment agreement is enforceable.
The purpose of a restraint of trade clause is for employers to be able to protect trade secrets, confidential information, and client relationships. Ordinarily, two different types of restraints are contained in employment agreements in New Zealand:
1. A non-competition clause, which prohibits an employee from setting up their own business in competition with their employer or working for a competitor; and
2. A non-solicitation clause, which prohibits employees from approaching customers/clients, suppliers, contractors, or other employees associated with the employer.
The current legal position is that often restraint of trade clauses are unlawful and difficult to enforce. This is because they are often deemed to be overly restrictive, anti-competition, contrary to the public interest and restrictive of an employee’s ability to earn a living.
The question everyone wants to know is – what is considered an enforceable restraint of trade?
The Courts consider each matter of a fact-specific basis. Some factors that a Court may consider are:
1. Whether the employer has a genuine proprietary interest that they are seeking to protect (i.e. a trade secret such as the KFC chicken recipe).
2. Whether the time period of the restraint is reasonable. In most cases three months is considered reasonable, however in some circumstances 12 months can be justified (such as when a shareholder, or senior member of the team exits).
3. Whether the geographical limit of the restraint is reasonable.
4. The employee’s position held in the employer’s business (i.e. the employee must have been in a position to obtain information that is being considered as the employer’s proprietary interest).
Restraints can be enforced by the Courts if an employer can prove and demonstrate that the restraints are reasonable and no broader than necessary to protect their legitimate proprietary interest. It is also worth noting that the Courts have the power to vary a restraint if they consider the restraint is too broad or narrow (depending on the proprietary interest).
In the background, there is also a proposed law change, currently being considered, that is somewhat not in an employer’s favour at all. The law change proposes that restraint of trade clauses would be completely unenforceable unless:
1. The employer has a legitimate proprietary interest to protect;
2. The employee earns more than three times the minimum wage;
3. Reasonable compensation is paid to the employee for the restraint period. This means an employer would have to continue to pay an employee ‘a reasonable’ sum after termination of employment; and
4. The restraint cannot be any longer than 6 months after termination.
If you have some questions about restraints of trade, contact one of our employment law experts at Foley Douglas for some advice.
