Reading time: 5 minutes

If you are running a business in New Zealand, chances are you will have several employees. The agreement between yourself and the employee is known as the employment agreement and outlines the rights and obligations of each party. There are clauses in this agreement that govern how each party acts during and sometimes after employment. Two of these clauses are garden leave and restraint of trade. This article will outline whether these two clauses can overlap and the consequences if they do.

What Is Garden Leave?

Garden leave is a situation where an employee remains on full pay but does not come to work. It may arise because of a dispute, or it may be convenient for both parties. It is not explicitly referenced in legislation but is a common term within employment law. Additionally, an employee can only go on garden leave if both parties agree to it. 

Note that the garden leave period could be up to a year long.

If you have an employee on garden leave, they must follow all the terms and conditions of their contract as is it still binding on them. In addition, your employee may have to follow specific rules that only apply when they are on garden leave. For example, this may include a ban on talking to competitors or the media. 

From a business perspective, garden leave can be a useful option if an employee is being made redundant or under a disciplinary proceeding. It may also be useful if an employee has given their leave notice and there is no new work for them to conduct. 

What Is a Restraint of Trade Clause?

A restraint of trade clause can prevent a person from: 

  • working in the same industry to their former business; or
  • taking clients from their former business to a competing business.

Most restraint of trade clauses will usually have a time limit, so they will not apply forever. These clauses are agreed to at the start of the employment agreement and are usually negotiated between the two parties.

Additionally, you can use this clause so that a leaving employee cannot leverage their current employment with your business to benefit a competitor. However, a restraint of trade clause is only enforceable if they are reasonable. There are several factors that a court will look at when determining if a restraint of trade clause is reasonable. These include:

  • whether the employer has a business interest that needs to be protected;
  • whether the restraints are possible considering the location or industry of the business;
  • the position of the employee; and
  • whether the employee has been dismissed unjustly.

If a court seems a restraint of trade clause to be unreasonable, it is unenforceable. This means that the employee does not have to follow it. Likewise, if an employee breaks a restraint of trade clause, you can apply to the Employment Relations Authority to stop a specific action that is damaging to your business. An employer can also seek damages in court for breaching the contract

Overlap Between the Two Clauses

There may be a circumstance where an employee goes on garden leave immediately before they leave their job. 

For example, suppose an employee provides decides to leave your business. Likewise, you are aware that they will move on to work for a competing business. As an employer, you may not want your leaving employee to continue working in the business while their employment contract winds down. Therefore, placing them on garden leave reduces the employee’s exposure to sensitive business information before they officially leave.

After this time, there may also be a restraint of trade clause that applies. Many employees will ponder whether their time on garden leave can count in reducing or limiting the restraint of trade clause. Subsequently, courts have applied a test to determine whether garden leave counts towards the time spent restraining from trade. The first issue that you should consider is the reasonableness of the length of the restraint of trade. Next, courts will determine whether an employees time on garden leave is adequate to protect the employer’s business from any harm it may face. 

Ultimately, if a court finds the garden leave period to be sufficient, the restraint of trade clause will be unenforceable. This means that garden leave can overlap with the restraint of trade in New Zealand.

Key Takeaways

Garden leave allows an employee to take time off work whilst still under contract and on full pay. A restraint of trade clause restricts an employee from:

  • working for a competitor’s business; or 
  • soliciting their previous employer’s clients for a certain amount of time. 

These two clauses can overlap in certain circumstances. When they do, the courts can decide if the employee’s time on garden leave is sufficient to count towards their time restraining from whatever trade they have been banned from the undertaking. Additionally, courts will look to the reasonableness of the clause to determine if it should be enforceable. 

For more information on how a garden leave clause can overlap with a restraint of trade clause, contact LegalVision’s employment lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can a restraint of trade clause last forever?

Any restraint of trade clause that lasts forever is likely to be deemed unreasonable by the courts. This means that it will not be enforceable.

Are there situations where garden leave will not overlap with the restraint of trade?

Suppose the garden leave is insufficient to protect your business from the risk that an employee may leverage sensitive information to a competitor. In that case, the courts may declare that employees must also follow a restraint of trade clause. 

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.

The majority of our clients are LVConnect members. By becoming a member, you can stay ahead of legal issues while staying on top of costs. From just $119 per week, get all your contracts sorted, trade marks registered and questions answered by experienced business lawyers.

Learn more about LVConnect

Need Legal Help? Get a Free Fixed-Fee Quote

If you would like to receive a free fixed-fee quote or get in touch with our team, fill out the form below.

Our Awards

  • 2019 Top 25 Startups - LinkedIn
  • 2020 Excellence in Technology & Innovation Finalist – Australasian Law Awards
  • 2020 Employer of Choice Winner – Australasian Lawyer
  • 2021 Fastest Growing Law Firm - Financial Times APAC 500
  • 2021 Law Firm of the Year - Australasian Law Awards
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards