A restraint of trade clause prevents a former employee from working in similar businesses to their former business, for a period of time. It can also prevent your employees, once they leave your business, from contacting or soliciting old clients for a period of time. These clauses are aimed at protecting your business, particularly when employees have access to commercially sensitive information and valuable client relationships. 

However, there can often be misunderstandings about how restraints of trade operate. This article will set out the two main types of restraint of trade clauses: 

  • non-competition clauses; and
  • non-solicitation clauses.

It will also look at what makes a restraint of trade clause enforceable or not. 

The Two Main Types of Restraint of Trade Clauses

No matter the type of restraint of trade, it must be outlined in the employee’s employment agreement. All restraint of trade clauses must be:

  • limited to a specific geographical area; and
  • only last for a specific period of time after the end of the employee’s work. The most common time period is three months.

The two main types of restraint of trade clause are:

  • non-competition clauses, which can prevent a former employee of your business from working in a similar field to your business; and 
  • non-solicitation clauses, where a former employee of your business is allowed to take another job in the same or similar industry but is restricted from contacting your business’ clients. The risk of former employees ‘soliciting’ clients in this way is a risk to many companies and so non-solicitation clauses are extremely common.

Is a Restraint of Trade Clause Enforceable?

Just because a restraint of trade clause has been included in an employment agreement does not necessarily mean it can be ‘enforced and have legal effect. Whether a restraint of trade clause is actually enforceable depends on a number of factors. 

These include:

Factor
Description
Business Interest

Whether the former employer has a business interest to protect will be a factor for consideration regarding enforceability. These would include, for example:

Reasonableness

The time period of the restraint must be reasonable. Most restraints of trade last for a few months, and few clauses with periods longer than 12 months are enforceable. The length of the employee’s service with your company may be relevant, as is any period the employee has spent on garden leave.

Geographical or Population Limits

The geographical or population limits of the restraint must be reasonable. Restraints of trade may be limited to a particular area.

For example, a restraint of trade clause will commonly limit an employee from working for a competing business within a 50km radius of their former employer;

Employee’s Position

The employee must have held a relevant position to have access to the information necessary to make up the business interest. Junior or other staff without access to the commercially sensitive information may not justify a more serious restraint of trade clause.

Reason For Employment Ending

For example, if the employee has been unjustifiably dismissed, a restraint of trade clause may no longer apply.

If an employee has been justifiably dismissed, a restraint of trade clause may still apply, depending on the wording of the clause.

If the clause is unreasonable, the courts may state that the clause cannot be enforced. When this happens, the employee does not have to comply with it. This means they can find work that is meant to be restricted by the restraint of trade clause.

The courts also have the power to modify contracts to make restraint of trade clauses reasonable. This is often the case if an employee challenges a restraint that is overly long, like twelve or more months. In these cases, the courts may modify the restraint clause to have a period of three months.

Key Takeaways

A non-competition clause (or ‘non-compete’ for short) can prevent a former employee from working in similar businesses to their former business, for a period of time. A non-solicitation clause, by contrast, can prevent former employees from contacting or soliciting old clients for a period of time. These clauses protect businesses when employees have access to commercially sensitive information and client relationships. However, they must be enforceable: clauses that are too extreme or unreasonable will not be useful in enforcing against an employee. If you want to know more about drafting or enforcing restraints of trade, contact LegalVision’s New Zealand employment lawyers on 0800 005 570, or complete the form on this page.

FAQs

What is a non-competition clause?

A restraint of trade which prevents a former employee from working in the same or similar industry to their former business, for a period of time.

What is a non-solicitation clause?

A restraint of trade which prevents a former employee from ‘soliciting’ (contacting) clients or customers of their former business, for a period of time.

How long is the period for most restraints of trade?

The most common period is three months for non-solicitation clauses, although longer periods can be enforceable for more senior employees. Few clauses have a period of longer than six months. 

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. For just $199 per month, membership unlocks unlimited legal consultations, faster turnaround times, free legal templates and members-only discounts.

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 2019 Top 25 Startups - LinkedIn
  • 2020 Fastest Growing Law Firm - Financial Times APAC 500 2020 Fastest Growing Law Firm - Financial Times APAC 500
  • 2020 Law Firm of the Year Finalist - Australasian Law Awards 2020 Law Firm of the Year Finalist - Australasian Law Awards
  • Most Innovative Law Firm - 2019 Australasian Lawyer 2019 Most Innovative Firm - Australasian Lawyer