Employment dispute in Christchurch where a business faced consequences for dismissing an employee before their start date, resulting in an $18.5K payout.
The Employment Authority made its decision on the Tova O’Brien restraint of trade case this week. If you have not seen last week’s exclusive HR Today members article explaining this, it’s a good read to check out. In this article below, Black Door Law articulates the court's considerations which led it to enforcing, albeit a reduced restraint of trade.
Restraint of trade clauses commonly feature in employment agreements. Whether or not the restraint is enforceable is a different story. Despite many incorrectly stating that restraint of trade clauses are not “worth the paper they are written on”, on 24 January 2022 the Employment Relations Authority demonstrated how incorrect this blanket statement is.
Tova O’Brien, a well-known political reporter, initiated proceedings in the Employment Relations Authority against her former employer Discovery NZ (who own TV3’s Newshub) regarding the enforceability of a 3-month restraint of trade clause in her employment agreement.
The Employment Relations Authority issued it determination upholding the restraint of trade clause and issuing a ‘compliance order’ stating that Ms O’Brien must comply with the restraint of trade clause. However, the Authority shortened the length of the restraint. This means Ms O’Brien is prevented from taking employment or being involved with any competitor to Discovery. Therefore, she is unable to commence her new role as a presenter on the new Mediaworks breakfast show (which was expected to launch days after the decision was released) for 2 months.
What is a restraint of trade?
In employment law, restraint of trade is an umbrella term for three specific types of restrictions – non-competition provisions, non-solicitation provisions and what are colloquially called no-deal provisions. The clause most people are familiar with is a non-competition provision which purports to prevent an employee working for a competitor or setting up in competition to the employer after their current employment ends. Restraints are included in employment agreements in favour of the employer to protect their business interests.
Can an employer enforce a restraint of trade?
Whether a restraint of trade is enforceable is not always straightforward. Take Ms O’Brien’s case for example – the Authority found the restraint was enforceable, but for a lesser period than contemplated under the employment agreement.
The starting point is that a restraint of trade is unenforceable. However, an employer can overcome this the employer by proving:
1. they have a proprietary interest to protect; and
2. the extent of the restraint is no wider than reasonably necessary to protect that proprietary interest.
The proprietary interest:
Discovery sought to protect three categories of proprietary interests, all of which the Authority decided were valid. These were:
- Confidential information (including editorial priorities and future plans, identities of confidential sources and team salaries).
- Business relationships, particularly Ms O’Brien’s close friendship with the owners of Reid Polling who conduct Newshub’s political polling.
- Goodwill relating to Discovery’s development of Ms O’Brien’s reputation.
Based on the facts of the case, it can be concluded that Discovery has a valid proprietary interest when an employee has inside information and a significant viewership following.
Is the restraint reasonably necessary to protect the interest?
Generally speaking, there is no fixed legal test as to what is reasonable – every case will depend on its unique facts. However, the law has developed a list of factors to help employers and employees assess reasonableness. These include:
· the status (or seniority) of the employee;
· the scope of the restraint;
· the duration of the restraint; and
· the area to which it applies.
The Authority analysed these and other relevant factors and held the restraint was reasonable to protect Discovery’s proprietary interests. However, the Authority decided it was appropriate to modify the duration of the restraint from 3 months to 7 weeks. Clause 8 of Ms O’Brien’s agreement required her to give three months’ notice of resignation. When Ms O’Brien gave her notice in October 2021, Discovery NZ had the ability under the terms of the employment agreement to put her on garden leave. This meant the potential period of restraint available to Discovery was effectively 6 months (3 months garden leave, 3 months restraint of trade), which the Authority held was too long to be reasonable for a role of Ms O’Brien’s nature.
Are restraints simply anti-competitive?
Whether the clause was reasonable was heavily influenced by whether Mediaworks breakfast radio show would be in direct competition with Newshub’s AM morning show.
The Authority rejected Ms O’Brien’s assertion that her previous role as a political news reporter would be materially different to that of a radio host. It was decided that despite the difference in medium, MediaWorks and Newshub were competitors in the broad sense as there was a degree of competition for both audience and advertising revenue.
Furthermore, the commercial benefits to Discovery were considered a “commercial reality” and do not mean the clause was anti-competitive or punitive. Ultimately, it was found that the benefit to Discovery in protecting their proprietary interests, justified limiting Ms O’Brien’s autonomy and freedom to work.
Key considerations for employers
Post-employment restraints do not only impact employees, but former and prospective employers, too.
For employers, it is imperative that restraint of trade clauses are drafted carefully and are tailored to the role. A clause that is too vague or general will not offer effective protection of the organisation’s interests. If an employee challenges the restraint, the Authority has the power to modify it (as we have seen in Ms O’Brien’s case).
Prospective employers may also have a role to play when it comes to enforcing restraints of trade. Although MediaWorks does not appear to be a party to the proceedings in the Ms O’Brien case, prospective employers may be joined into disputes if they have knowledge of the restraint and are complicit in the employee’s breach.
Key considerations for employees
We generally recommend that employees get independent legal advice before entering into an employment agreement. When there are restraint of trade clauses in the agreement it is imperative to get advice prior to signing the agreement. This can avoid uncertainty and disputes down the track.
For the entire article, find it here.