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.
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.
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:
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.
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:
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.
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.
A restraint of trade clause in New Zealand is a section in an employment agreement that restricts an employee’s ability to work for a competitor, start a competing business, or approach clients after leaving a job. These clauses are only enforceable if they are reasonable and protect genuine business interests.
Yes, restraint of trade clauses are legal in New Zealand, but they must be reasonable in scope, time, and geography. They cannot simply prevent competition and must protect things like confidential information, client relationships, or trade secrets.
Most restraints in New Zealand last less than 12 months. The Employment Relations Authority will not enforce restraints that are excessive or stop an employee from earning a living in their trained profession.
A non-compete clause stops a former employee from working for a competitor. A non-solicitation clause allows them to work in the same industry but prevents them from contacting former clients or customers. Both must be reasonable to be enforceable in NZ.
If an employee breaches a restraint, an employer can apply to the Employment Relations Authority or the Employment Court for an injunction to stop the activity. They may also seek compensation for lost business or damages caused by the breach.
Under the proposed Employment Relations (Restraint of Trade) Amendment Bill, restraints will be banned for low and middle-income employees. Employers who impose restraints on higher-income employees will need to justify them and provide financial compensation.
Written by
Jenny Barr
Senior Consultant
