How to support your Pasifika employees in NZ workplaces - Learn about cultural understanding, mentorship programs, family-centric work policies, and more.
Is a restraint of trade clause appropriate?
You may be familiar with restraint of trade clauses but are you familiar with the circumstances in which they are enforceable? I am here to shed some light on when it is appropriate for an employer to use a restraint of trade clause and when they should refrain from doing so. After all, it is vital to uphold best legal practice when creating or altering an employment agreement.
What is a restraint of trade clause?
A restraint of trade clause prevents an employee, for a fixed period, from working in a business similar to their former employer in a manner that may affect the former employer’s business. Many employers have trade secrets, information, and processes that provide them a competitive advantage above other businesses in the same industry. Therefore, it is essential for the survival and success of a business to protect this information. In order to safeguard this, restraint of trade clauses are put into employment agreements to prevent employees taking business away from their former employer when they go elsewhere.
Two types of clauses
There are two main types of restraint of trade clauses: non-competition and non-solicitation.
Non-competition is often used to prevent a former employee from working in a similar field to their employer’s business. For example, this is suitable when the CEO of a plastic bottle manufacturer gets a new job as the CEO of another plastic bottle manufacturing company.
Non-solicitation is often used to prevent a former employee from contacting their former employer’s clients or staff. For example, this is suitable when a former employee sets up a company in a similar industry to which they were working or when a beauty therapist leaves a salon and starts working at a new one. Often clients will follow someone, but this must be done of their own accord and not because the former employee has contacted them.
Enforceability of the restraint
For a restraint of trade clause to be enforceable, there must be sufficient grounds justifying the need for enforcement. The onus is on the employer to demonstrate that the restraint has been agreed to and is within the bounds of what is necessary or reasonable to protect the employer’s business.
A restraint of trade will undoubtedly affect a person’s life and ability to work, so there must be an agreement between the parties. Often this occurs when someone signs their employment agreement. By doing so, the employee agrees to the clauses within the agreement, which may include a restraint of trade clause. There may be circumstances when an employer promotes an employee to a position requiring a restraint of trade clause where their previous role did not. In this case, the employer can make it a condition of the promotion for the employee to agree to the restraint of trade.
Necessary to protect business
The employer must prove that the restraint of trade is essential to protect their business. In most businesses, exiting employees will have information about the business they work for, but the potential use of this information must amount to a realistic risk of loss. Common risks employers are worried about is that the former employee may take clients, use confidential information from the employer’s business to further the competing business, or persuade other staff to leave for a competing business.
To determine the degree of the risk of loss, consider what the employee was privy to. If the employee dealt with and held good relationships with many clients, this would likely amount to a realistic risk of losing clients. On the contrary, if the employee had standard access to the businesses systems but not to the extent of how a product is made or the ingredients for a product, this would likely not be a realistic risk, as the employee may not be able to duplicate that information for the benefit of another business.
Scope of restraint
The restraint of trade will only be enforceable if it is within a reasonable scope in order to protect the employer’s business. Consideration should be given to factors such as:
- Duration of the restraint: common restraints tend to span between 3 to 6 months and with long restraints extending to 1 year in special circumstances.
- Geographical location: this factor may become less relevant as work becomes less defined by location but in a small town, for example, it may be unreasonable to restrain someone from working within a small radius as similar businesses are often in the same area.
With all of this in mind, it is important to remember that people must still be able to earn a living and provide for themselves and/or others. Therefore, restraints will only be enforceable if there is agreement between parties, it is necessary to protect business, and it is within reasonable scope.