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As an employer, you will enter into many employment agreements with your employees. Amongst other clauses in your employment agreement, is the term ‘restraint of trade.’ However, it may sometimes be unclear what this means, or how such a clause works. It is essential to understand your contract’s contents, especially as you are the person supplying the contract to your employees. This article will detail what a restraint of trade clause is, and how these provisions work in New Zealand. 

What Is a Restraint of Trade Clause?

A restraint of trade clause will be a term in an employment contract that prevents your employees from:

  • working for a rival business; or
  • engaging in a particular activity once their employment stops.

If such a clause exists in your employment agreement, you can essentially prevent or ‘restrain’ your employees from engaging in trading activities with a rival business. In New Zealand, you can pursue legal action if one of your employees breaches this clause. A court can uphold or enforce a restraint of trade clause for you. However, it is your responsibility to demonstrate that it would be reasonable to enforce such a clause.  

What Does It Mean for a Clause to Be Reasonable?

You may need to determine whether a restraint of trade clause is reasonable. You can assess reasonableness’ by evaluating your interests (to have your employee refrain from a certain activity) against your employee’s interest (to work or do a certain activity). Both interests are also measured against the interests of the public. 

If you wish to enforce the restraint of trade clause, it is your onus or responsibility to conduct this reasonableness argument. This assessment will be from the time both you and your employee entered into the contract. The reasonableness assessment will involve looking at the employment agreement as a whole and any particular circumstances of the employer-employee relationship. Ultimately, as the party bringing the action and seeking to enforce the clause, you must undertake such an evaluation. 

Employer’s Interests

As an employer, a restraint of trade clause will be in your interest if it affords adequate protection to you and your business. Some matters do not fall within this idea of adequate:

  • you do not have protection rights against ordinary competition with other businesses; and
  • you cannot enforce the clause if your business has closed down or stopped.

A court can protect two types of interests. These will usually fall into one of two categories; trade connections or confidential information. 

Trade Connection

A trade connection will be some advantage inherent to your business that can be regarded as your property. This will typically concern evaluating the influence an employee has over your clients or customers.

For example, a restraint of trade clause was enforced when a popular radio announcer, whose popularity affected their employer’s advertising revenue, started working for a rival radio station, despite their employment agreement. 

Confidential Information

Confidential information focuses on trade secrets. These are different from the general skills, experience and knowledge that your employee will acquire as they work for you. As an employer, you would have to be able to identify these specific pieces of information that your employee could not pass on. Therefore, it will be relevant to look into how long that employee has been with your company, or what status they have in your business. An experienced employee who has been with your company for five years would likely have more access to trade secrets compared to a casual summer worker. 

These interests can only be protected to a certain extent. Suppose the clause applies for a geographical area far more expansive than it needs to be to protect your interests as an employer. In that case, it may be held to be unreasonable. However, it may be necessary for some businesses to have clauses that restrain trade from occurring across the North Island, the whole of New Zealand, the Trans-Tasman or the world. 

Employee’s Interests

A restraint of trade clause can be beneficial to you and your business. However, your employees also have specific interests which your employment agreement should not unreasonably restrict. 

For example, your employees have a right to work and to access work. You cannot prevent an employee from ever engaging in, or associating with, any other business other than that of your own.

Public Interest

Although this is less influential, the public’s interests can also be considered when assessing whether a restraint of trade clause is unreasonable. For example, the public has an interest in getting access to cheaper products or various products. This may be infringed if a company gets a monopoly in a particular area through a restraint of trade clause. 

What Happens if a Restraint of Trade Clause Is Unreasonable? 

Your employees have a legal right to challenge a restraint of trade clause which they consider unreasonable. Hence, it is best practice to engage an employment lawyer to ensure your contract agreement is fair and robust. If not, you run the risk of an employee or ex-employee seeking a declaration from the courts regarding the validity of the provision against you and your business.  

What Happens if an Ex-Employee Breaks a Restraint of Trade Clause?

If one of your ex-employees has broken their restraint of trade clause, you can seek legal action against them. 

You would first have to prove that this clause was reasonable. A court may provide you with an injunction. This can stop your ex-employee from carrying out actions that would be harmful to you and your business. If this is not available, the court may find that payment of damages is more appropriate. This is because it would usually be undesirable to leave employees with only the alternative to return to their ex-employer or remaining unemployed. 

Key Takeaways

A restraint of trade clause is a term found in employment contracts. This clause prevents employees from working for rival companies. It could also prevent them from carrying out particular activities once their employment has stopped. It is lawful to include these types of provisions in your employment agreements. However, they must be reasonable. Whether a restraint of trade clause is reasonable will depend on a wide range of factors. These include the interests of the employer, the employee and the wider public. 

It is best practice to seek legal advice if you are intending to enforce a restraint of trade clause against one of your employees. If require assistance, contact LegalVision’s employment lawyers on 0800 005 570 or complete the form on this page. 

FAQs

What does restraint of trade mean?

A restraint of trade is a term in an employment contract that prevents employees from engaging in a particular activity or working for a rival business once, or if, their employment ends.

Does the restraint of trade apply when made redundant?

Termination or justified dismissal does not automatically mean a restraint of trade clause ceases to apply, provided that the provision makes it clear that it is to apply after the termination of the employment. It is best to look at the specific wording of your contract.

Are restraint clauses enforceable?

Restraint of trade clauses are enforceable in New Zealand if it is reasonable for the employer to do so.

How do you enforce a restraint of trade?

To enforce a restraint of trade clause, an employer must first establish that enforcement will be reasonable. A court may enforce the provision through the granting of an injunction.

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