Restraint of Trade: Everything You Need To Know

Published 27 March 2024 | 3 min read

Ever felt like you've hired the perfect person, only to worry they might be swept away by a competitor come autumn?

Restraint of trade clauses (also known as non-compete clauses) might seem like a magic solution, but hold on a sec, These clauses can get tricky, and could land you in a legal fall.

Emma, a friend of mine, works in the insurance industry. She has been in this business since she left school and trained, becoming very proficient at what she does and really enjoying her work. 
However, having been with her current employer for 6 years, it is now time to move on. She checked her Employment Agreement to make sure that she wasn’t contravening any clauses and recalled that she had a Restraint of Trade clause, preventing her from working for a rival business or operating in the same industry within a radius of 3 kms and for a 6-month time period.  

While this may seem restrictive if it stops someone from doing what they were trained to do, restraint of trade agreements are valid and enforceable in New Zealand. Many employers have information, trade secrets, and processes that they’ve established to give them an edge in the market. Naturally, they want to protect this as it’s often pivotal to their business success. They see a restraint of trade clause as something that protects them from having their specific and sensitive business information or processes shared with a similar business.

Emma’s dilemma was that Insurance was what she loved and what she was trained to do. Fortunately, there are rules in place to ensure that a Restraint of Trade clause doesn’t hinder an employee’s ability to keep working in the field that they have been trained in.

There are two common types of relevant clauses in New Zealand:

  • Non-Competition: prevents a former employee from working for a company that conducts work that is similar to their former employer’s business.
  • Non-Solicitation: allows a former employee to work for a company in a similar field or industry but prevents them from contacting clients from their former employer about the new business.
    Businesses need to have a Restraint of Trade clause that suits their specific business and circumstances. This includes differences in time periods and in proximity. Most restraint clauses are in place for less than 12 months and in terms of proximity, the conditions must be reasonable to allow the employee to still earn a living without huge distances to travel.

As an Employer what can you include in a Restraint of Trade clause?
Conditions in a Restraint of Trade clause need to be reasonable for it to be enforceable. Because you are afraid of the competition is not a good enough reason to enforce this clause. More importantly for Emma, it is also unreasonable to enforce a clause that makes it hard for the employee to find employment in their field of work.

There are some business interests that, as an employer, you can reasonably protect:

  • confidential information
  • specialised knowledge about the business’s processes, methods and techniques
  • existing customers and client connections
  • trade connections

What if Emma decided to challenge her restraint of trade clause?

If an employee feels that their restraint clause is unreasonable, they can go to the Employment Relations Authority (ERA), who can (depending on the circumstances) work with both parties to develop more reasonable terms.

What is considered a breach of a Restraint clause?

As outlined, there is the potential for certain processes, knowledge, and trade secrets to be considered the sole property of an employer. Determining whether the information is, in fact, their confidential property can depend on a number of things:

  • is the information highly sensitive to the business or confidential?
  • is the information a trade secret that relates to the creation of a carefully guarded product or service?
  • did the employer make it clear to the employee that the information was highly sensitive or confidential?
  • was the information gained directly from the employer?

If you feel that a former employee is using such information and thus, breaching their Restraint of Trade, there are steps that you can take to get them to stop. You may be able to ask the ERA to step in and inform the employee to stop the activity. The ERA may also impose penalties and recover lost business or the cost of damage as a result of the employee’s breach.

Is using confidential information from a previous job breaching a restraint clause?

Naturally, not all skills and knowledge gained from an employee are considered confidential. This will depend on the information and how it is being used in the employee’s new position. General skills learned in the course of the job wouldn’t be considered a breach of this clause. It is only when that skill or knowledge is specific to the previous employer that it may be considered confidential.

As an employer, it is ideal to make it clear to employees which information is confidential and not to be taken from the company.

As Emma found, a Restraint of Trade clause – being industry-specific – is often complex. Enforcing this against a former employee who has joined a competitor or started a competing business needs guidance. If you have an employee who has resigned and is contesting your Restraint of Trade clause in their agreement, please contact one of our consultants to discuss your options.

Written by

Jenny Barr, Senior Consultant at EQ Consultants

Jenny Barr
Senior Consultant

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