Is time running out for restraints of trade?
Is time running out for restraints of trade?
Friday 30 September, 2022
Restraint of trade clauses hit the headlines in January 2022 when Tova O’Brien lost a legal battle with her former employer Newshub over a clause in her contract which delayed her start as a radio host on Today FM. Helen White MP spoke out at the time against restraints of trade and in May 2022 entered a Private Member’s Bill into the parliamentary ballot that would significantly reduce the use of restraints of trade. The Employment Relations (Restraint of Trade) Amendment Bill has now been drawn from the ballot and was introduced into Parliament on 22 September 2022.
What is a restraint of trade?
A restraint of trade prevents an employee from working in a similar business in a way that could affect their previous employer’s business. There are two main types of restraints: non-competition and non-solicitation. A non-competition provision prevents the employee from working in a competing or similar business to their former employer. A non-solicitation provision prevents the employee from trying to attract their former employer’s clients, or their former co-workers, to their new place of work.
Are restraints of trade enforceable?
A restraint of trade is only enforceable if they are reasonable. Generally, the broader the restraint of trade, the less likely it is to be enforceable. Whether a restraint is reasonable depends on a number of factors, including:
- Whether the employer is trying to protect legitimate business interests, such as trade connections, close relationships with clients, secret processes, or particularly sensitive confidential information.
- A restraint of trade cannot be used just to prevent competition with the employer, or to prevent the employee from using their skills, experience, or knowledge.
- The length of the agreement. Enforceable restraints of trade generally only last for a few months. More than 12 months is unusual.
- Geographical limitations, as the restraint of trade should be limited to the market where the employer operates. This could be a city or town, or within a certain distance from their former employer. It is less common for restraints of trade to cover all of New Zealand.
- Whether the employee receives consideration (payment) for the restraint of trade. If there is a restraint of trade at the start of the employment relationship, the employee’s usual remuneration can be deemed to include this consideration. However, if the employer wishes to introduce a restraint of trade during the employment relationship, extra consideration should be paid.
What could change?
If passed, the Employment Relations (Restraint of Trade) Amendment Bill would prevent restraints of trade for employees earning less than three times the minimum wage. For employees earning over this threshold, the Bill would:
- Limit restraints of trade to no more than six months;
- Require employers to pay employees half their weekly earnings for each week that a restraint of trade is in force;
- Restrict the use of restraints of trade to situations where the employer is trying to protect proprietary interests.
When will this happen?
Although the Bill has now been drawn from the ballot, it will need Government support to pass. White expects that there may be opposition to the three times the minimum wage requirement if the Bill makes it to select committee stage. The Government has not yet indicated whether it intends to support this Bill, however, supporting this employee-friendly legislation would be in line with this Government's approach towards enhancing employees’ rights.
Originally published in May 2022 and updated to reflect further developments in September 2022.
