Blog
Practicing Restraint
November 13, 2017
It may be trite to say that a business’ most valuable asset is its employees, but it is certainly true in a number of senses (although, in fact, it is the bill-paying customers that truly fund the business). The value of a high performing employee, especially with regard to those bill-paying customers, can make employer’s anxious when the employment relationship terminates.
For many employer’s the response is to take steps to prevent the employee from maintaining a relationship with those customers, by seeking the employee’s agreement to restraint their future activities. Usually this is by way of written agreement obtained at the beginning of the employment relationship, hidden in the bowels of an employment agreement. These types of clauses are collectively known as restraints of trade.
The law has an interesting perspective on restraints of trade. As a starting point, they are contrary to public policy because they prevent real competition in the market place. Competition is considered a social good, and legislation exists specifically promoting it. However, in the employment arena, the law recognises that it would be unfair to let an employee take advantage of their employer’s resources for their own benefit, or the benefit of a different employer.
For that reason, an agreement in restraint of trade might be enforceable if certain conditions are met. Those conditions are:
The employee received “consideration” – that is something of real value – for their agreement to the restraint.
The restraint is there to protect something in which the employer has a legitimate proprietary interest – that might be a special type of knowledge (eg the employee has been working on the cure for cancer, or the next break-through bit of coding), or details about or a relationship with particular clients or suppliers.
The restraint does no more than is necessary to protect that particular interest.
The third condition is an area where there can be real debate. What might be reasonable or necessary depends on the interest the employer seeks to protect, and how that interest operates in the market place. There are many different types of restraint. Some might prevent the employee from working for any competitor. That might be limited by geography (say for instance in the case of the barista who makes your morning coffee) while others might be nationwide (perhaps in relation to the sales manager for a specialised product). They might apply for a short period or a long one (frequently the length of the sale-cycle is a good lime period).
Other restraints might focus on particular clients, and limit a person from doing any work with a client of the employer, or might simply prevent them touting for work amongst the employer’s clients (this is a “non-solicitation” provision).
In every case, the question of whether the restraint can be enforced will be examined with reference to what the employer seeks to protect, and how they propose to do it. If there is nothing special to protect, or the limits are too great, the restraint will be unenforceable, or may be subject to modification by the Court to a point where it is reasonable and therefore enforceable.
Restraints of trade are a complex area of law, and should not be entered into lightly. My advice to employers is to carefully examine what it is you hope to achieve, and tailor an agreement that serves that requirement. Consider making an additional payment to the employee to secure agreement to the restraint, and avoid taking a ‘one size fits all’ approach. My advice to employees is to avoid agreeing to restraint of trade provisions unless you are sure you understand how they will work in practice. If there is a restraint of trade in your employment agreement which may prevent you from taking that next job opportunity, take good advice and consider negotiating an amendment before accepting new work.
There are some powerful enforcement mechanisms in the Employment Relations Authority – including the possibility of an interim injunction, so it is important to be aware of risks on both sides.
If you have a restraint of trade issue, or want to review your current practice, please do not hesitate to call me.
