Restraints of Trade - Are they Worth It?

In early February the topic of Restraints of Trade (RoT) came under the media spotlight.  A well-known TV personality, Tova O’Brien announced she was leaving her role as political editor with Mediaworks and was going to take up a new role on a radio breakfast show with TodayFM.  The difficulty for Tova was there was a Restraint of Trade clause in the depths of her employment agreement that prevented her from working for the competition for a period of three months after ceasing her employment. 

The Tova case was argued at the Employment Relations Authority, and despite the ERA being renowned for favouring the employee, Tova lost.  The RoT was held to be enforceable. 

Subsequently we have seen a Member Bill be submitted to Parliament by Helen White to ‘prohibit the use of restraints of trade in employment agreements for lower and middle income employees.”  That Bill is awaiting first reading.

What is a Restraint of Trade?

It is simply a clause in the Employment Agreement that is aimed at preventing (restraining) an employee from behaving in certain ways after their employment has ended.  They are limited by time and geographical area.  The types of ‘behaviour’ that is to be prevented generally falls into three categories:

  1. Non-solicitation:  For example, poaching staff and stealing clients.
  2. Non-dealing:  Prevents the employee dealing with an employer’s customers after their employment has ended. 
  3. Non-competition:  Prevents the employee from working for a competitor or setting up their own competing business after their employment ends. 

Why have Restraint of Trade provisions in an Employment Agreement?

Simply put, RoT’s are an insurance policy against future actions or behaviour by an employee when they move on so the business can continue its operations for example managing its client relationships.  It can be difficult and may seem pessimistic or negative to be thinking about a brand new employment relationship going pear shaped over time, but it can happen!.  Despite the excitement of a new hire, it is at the time you prepare an Employment Agreement that you need to stop and think what protections your business may need longer term and what could be reasonable to achieve that.  Adding in well thought out non solicitation and/or restraint of trade clauses might be a good idea depending on your business and the position you are appointing to.

Are Restraint of Trade clauses worth the paper they are written on?

Generally speaking, the starting point is that RoT’s are unenforceable until you can prove that you have a genuine proprietary interest that needs protection (such as trade secrets, knowledge of pricing structures, client information etc).   

The Tova case shows us that so long as the RoT is reasonable they can and will be enforced.  In that case, the launch of an entire new radio channel was at risk.    The key to RoT’s is the term ‘reasonable.’ 

What does reasonable look like?

This is a difficult question to answer in an article like this, as there is simply not a ‘cookie cutter’ answer.  What is reasonable will look different for each business, each role within the business and set of circumstances.  Broadly though, the key principles when considering a RoT are:

Duration.  The RoT cannot be too long in duration.  The restraint on Tova working for a direct competitor survived examination by the Authority at three months duration.  Different periods can be considered for the different types of behaviours depending on the nature of your operations and role.

Geography.  The geographical boundaries need to be clear and relevant to where your role operates.  You cannot prevent an employee from working for an employer that does what you do but in a different market or region for example.  The Authority said that Tova’s new employer operated in the same market.

Protection.  Are you protecting confidential information or trade secrets?  You cannot simply try to prevent an ex-employee from using their skills and experience gained by working for you elsewhere.  You need to be able to show that there is confidential information or trade secrets, held by the ex-employee that are your property and are worthy of protection.  This could include for example;

  • Your confidential information that the ex-employee knows e.g. client list, manufacturing process, chemical formula etc.
  • Product lines, detailed accounting information, budget forecasts, customer preferences, pricing policies.

Compensation.  You also need to be clear in your employment agreement how you compensating your employee for restraining what they can do after their employment ends.   

What do I need to do?

We recommend regular review of employment agreement templates to ensure they remain aligned to legislation, case law and best practice.  If you use restraining clauses regularly review your priorietary interests (what you are trying to protect) and then check (or have checked) that your employment agreement clauses are aligned. 

As you prepare each new Employment Agreement consider the relevance of such clauses to the role and what you could argue if your provisions were to be challenged.  Where you are including restraining clauses in an employment agreement check that you have included duration of restraints, geography and compensation and that these are reasonable.     

For help on wording for clauses or assessing what could be reasonable contact a member of the Grow HR team.

What to do if an employee breaches their Restraints?

The answer to this question is very dependent on the specific circumstances.  If you think or know an existing or ex-employee has acted, or is acting in breach of their restraint of trade obligations:

  • Act quickly.  The longer you wait the more the Courts will consider you didn’t really have a proprietary interest that needed protecting and they will not enforce the RoT. 
  • Get advice.  Every situation is unique, and the solutions or options are just as unique.  Contact us, we will guide and assist you through what can be a tricky situation. 

In Summary

For a RoT to be considered reasonable it needs to be given careful thought and consideration and be customised to your particular business and context.  The RoT clause ‘plucked out of the air’ is a gamble and may not survive scrutiny by the Authority or Court.

Ultimately, the clause that restrained Tova O’Brien was entirely reasonable and it held up because of that. 

If you are considering adding restraint clauses to a new Employment Agreement or if it is time to review your master agreements, give Grow HR a call


DISCLAIMER: The content of Grow HR articles are general in nature and should not be relied upon as a substitute for specific professional advice.