Employment Restraint of Trade Clauses
There is a fine line between what is contracted, what is legal, and what is enforceable. Even though each situation is different, there are overriding themes in employment law that allow us to predict, reasonably well, what the Employment Relations Authority and / or the Employment Court would decide in such matters. Therefore, it is often better to agree to an amended set of restrictions than go through the expense of a court action.
What is written in a signed employment agreement does not always directly translate to what is legally enforceable. For a clause in an employment agreement to be enforceable, it first needs to be legal. I am struggling to recall the last time I saw an employment agreement that contained a "Restraint of Trade" clause that I thought was fully legal and enforceable in regards to how it was written. It is important not to get "Restraint of Trade" clauses mixed up with Non Solicitation clauses. Take a look at my Non Solicitation page for more information.
The essential elements of a "Restraint of Trade" clause are:
Geographical area
Usually defined as a radius of so many kilometres from a known geographical point. Any other type of definition will have either too much ambiguity. For example, a definition such as 'Auckland City'. Where does Auckland City start and finish? Is Manukau City considered to be part of Auckland City? It can be argued both ways. Alternately, if the geographic region is defined as "The North Island" then odds on, the courts would determine that the geographical region is unreasonably large.
Period of time
This is the duration that the Restraint of Trade clause is operative. The date of the termination of the employment relationship is usually the starting point for the time period of the restraint.
Details of the activities not permitted to be carried out
Typically, a 'catch-all' sentence or two details all in sundry as to what the employee is prohibited from doing within the geographical area for the period of time.
Our courts have ruled that the determining factor, in deciding if a Restraint of Trade clause is enforceable or not, is whether the employer's need for protection has been threatened, as opposed to punishing the employee. For example, say Joe is employed at a local fish and chip shop and he has signed an employment agreement that contains a restraint of trade clause. He resigns and goes and gets a job the following week at the fish and chip shop at the other end of the same block of shops. Is the restraint of trade clause enforceable?
Our opinion is that it is not. Typically, a fish and chip worker would not have a proprietary skill that would cause a mass movement of patrons from one greasy take-a-way shop to the other. Therefore, there is no interest that the first fish and chip shop can get protection of. If the restraint was enforced, it would unreasonably prohibit Joe from earning a living.
However, let's say Sally the hairdresser is employed by Harry's Hairy Salon, with a three month restraint of trade clause for the geographical region of 5 km from the place of employment. This would most probably be enforceable as hairdressers typically have a relationship with the people who go to them for their haircuts. Should Sally move to the salon just down the road, then there is a very likely chance that the people she developed relationships with whilst employed by Harry's Hairy Salon would follow Sally to the new salon. The three month restraint of trade would give Harry's Hairy Salon the opportunity to establish new relationships with those people, with their other hairdressers. Therefore, the restraint is a real protection to Harry's Hairy Salon as opposed to a punishment to Sally. If Harry was wise, he would also have a Non Solicitation clause in Sally's employment agreement.
To sum up, Restraint of Trade clauses are generally like a dog whose bark is bigger than its bite. To employees not in the know, these clauses can make them think twice prior to jumping ship. However, if they do jump, it is the exception rather than the rule, that these restraints will be enforceable.
However, in some situations, the former employer sends out what I call a "Monsters Inc" letter (i.e a letter that can appear to be very scary but, for those in the know, it is all just a theatrical act). The first line of defence, in these situations, is to let the former employer know that you are not scared by their communication and that you know your rights under New Zealand employment law. This can be done by either a letter from us direct to them or, a letter that appears to have come from you that we have drafted.
Contact us should you wish to discuss if you can enforce your restraint on a former employee or, if your former employer is trying to enforce a restraint upon you that you do not think is fair or reasonable.
