Restraints of trade

21 January 2020

Stu AdamsonIn a period of low unemployment workers are more able to move between employers.  When an employee moves they may attempt to take with them part of your investment in the form of business information.  This might include customer lists, unique methods of working, research, or plans and designs.  It is very easy to copy and distribute electronic information.

Employers can attempt to control the risk by including restraint of trade clauses in employment agreements, however a restraint clause must be carefully considered or it will not be enforceable.  It is not enough to complain that the employee may become a competitor.  Here’s why …

Restraint clauses are generally unenforceable as a matter of legal policy because they restrict competition.  They will only be enforceable if they are reasonable.  A reasonable clause is defined by:

  1. The nature of the interest it protects (the proprietary interest).
  2. The worker’s role and the employer’s business.
  3. The extent of the restraint (what activity is being restrained).
  4. The application of the restraint (by geography and duration).

It’s up to the employer to prove reasonableness.  It’s not up to the worker to prove the restraint is unreasonable.  In the absence of proof, the clause falls away.

Identifying the proprietary interest will help dictate the other considerations in a restraint of trade clause.  Examples of proven interests worthy of protection are:

  • Goodwill in customer relationships or trade connections;
  • New product development initiatives;
  • Insurance policy renewal dates;
  • Emerging technology;
  • Price lists;
  • Computer code; and
  • Website and social media content.

Restraint clauses do not protect a worker’s general knowledge and skills acquired during employment.  A restraint clause that limits competition excessively may be read down by the Courts to one that is only of sufficient duration and scope to protect the interest claimed by the employer.  A restraint clause that restricts an employee from contacting former clients, may not necessarily prevent the clients contacting the former employee.

The Employment Relations Authority recently upheld Tradestaff’s restraint of trade (two months, 10km radius) against Ms Bailey who was a team leader of a personnel recruitment office.  Ms Bailey went to work for a competitor within 10km of the Tradestaff office, and upon leaving Tradestaff she took with her various document templates and client contacts.  The Authority held that Tradestaff’s restraint was reasonable and that Ms Bailey had breached the restraint as well as a confidentiality clause in her employment agreement.  She was ordered to pay a penalty to Tradestaff.  The competitor employer was also sued by Tradestaff for aiding and abetting the breach, but the Authority was not satisfied that the competitor knew of the restraint clause.

It is not unusual for the new employer to become embroiled in restraint cases between their new employee and the former employer.  The new employer may well be funding the employee’s defence in Court.  In some circumstances the value of the information available may outweigh the costs of a legal argument.

Restraints need to be properly considered at the time an employee exits, as well as at the time that they are engaged.

 

Stu Adamson | Solicitor


 

Legal Team

 

David Browne | Senior Solicitor/Legal Team Manager | 03 456 1812 | 021 225 6938 | david@osea.org.nz

Adam Siwerski | Solicitor | 03 456 1809 | 021 756 809 | adam@osea.org.nz

Stu Adamson | Solicitor | 021 197 4603 | stu@osea.org.nz 

 

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