No doubt you have recently seen or heard some of the media coverage surrounding former political editor Tova O’Brien and the drama she has faced over a Restraint of Trade provision with her former employer. Typically a change in role for a journalist would not merit a tonne of National media attention. This case was different due to the sentiment and national furore stirred up due to the actions of Tova’s former employer seeking to restrain her through the Courts from starting her new role due to a Restraint of Trade that she had agreed to in her employment agreement.
Tova recently resigned from her role as a political editor with Discovery NZ Limited to take up a new role with MediaWorks Radio Limited as a breakfast host on a new morning show. The problem for Tova was that her old employment agreement with Discovery NZ contained a restraint of trade provision restraining her from working in any business or activity in competition with Discovery within the whole of New Zealand for a period of 3 months post her date of termination. The dispute went to the Employment Relations Authority, and they ruled in favour of Discovery NZ, upholding the Restraint of Trade (albeit with a reduction in the duration of the restraint from 12 to 7 weeks) against Tova which stopped her from commencing her new role with MediaWorks until the period of the restraint had elapsed.
It would be fair to say that the Restraint of Trade provision included in Tova’s employment agreement has raised a lot of questions about Restraints of Trade and whether Employers can legally include these types of provisions in employment agreements. Labour MP Helen White has called for a ban on employer’s using these clauses, at least for lower-paid workers.
This article looks at what a Restraint of Trade is and the principles that must be considered when looking at whether a Restraint of Trade is enforceable.
What is a Restraint of Trade?
A Restraint of Trade is a clause that is often included in many Individual Employment Agreements that seeks to restrain someone’s ability to work for another employer, usually within the same industry, for a specified period of time, within a certain geographical boundary post the employee’s last day of work.
A Restraint of Trade clause is supposed to protect the Employer, by offering them protection for proprietary interests and trade secrets that may be at risk if an employee leaves to work for a competitor.
The concept of stopping someone ‘earning a crust’ in their chosen field is foreign to many New Zealanders and seems grossly unfair. In my 20 plus years of experience working as an employment lawyer (for both employers and employees), I think it is fair to say that Restraint of Trade clauses are often overused, especially where there is no good or lawful reason for their inclusion into an employment agreement.
Historically, Restraints of Trade have been held (at first look) by the Courts to be invalid and unenforceable. However, there is a common misconception amongst many people that this is the end of the story. That is not the case (confusingly!) because although Restraints of Trade might be unenforceable (at first look) they can be, and regularly are, enforced at a significant cost (think tens of thousands of dollars) to the parties locked in such a dispute. Fortunately, we have case law that has developed a number of guiding principles to help establish when and how a Restraint of Trade clause might be enforceable.
Enforceability
The first and probably most critical element that needs to be established for a Restraint of Trade to be enforceable is the presence of some proprietary information personal to the Employer that may be at risk should the Employee leave to go and work for a competitor.
Proprietary information is typically any information that deals with the activities, business or products of a Company. Some things that commonly fall under this umbrella include trade secrets, financial data, product research and development, computer software, business processes and marketing strategy.
Proprietary information can often amount to a Company’s competitive advantage in the marketplace. Employees in more senior roles (management) often have access to such proprietary information as do some employees who undertake niche or complex roles within an organisation. There is a risk that the current employer’s proprietary information may be used to advantage the departing employee’s new employer to help them claw back the competitive advantage. These scenarios play out repeatedly every day in many industries, and it is no doubt this concern that resulted in the Restraint of Trade clause in Tova O’Brien’s employment agreement.
In addition to a Restraint of Trade clause, an Employer who is keen to guard against the associated ‘fallout’ of an employee who resigns to work for a competitor could look to include a Non-Solicitation provision in their Employment Agreement, to try and protect against the departing employee ‘poaching’ incumbent staff or suppliers.
It bears pausing at this point to discuss the difference between a Restraint of Trade and a Non-Solicitation provision as the two terms are often confusingly used interchangeably when they are both separate and distinct restrictions.
What is a Non-Solicitation clause?
A Non-Solicitation clause in an Employment Agreement is a clause whereby an Employee agrees that for a period, typically anywhere between three to twelve months following their exit from employment, that they will not solicit (i.e., encourage to move away from) any employee, customer, or client and/or supplier of their former Employer within that period. This essentially restricts the Employees from poaching either former co-workers, clients, or suppliers to come to the new Employer. These clauses are most definitely enforceable against wayward ex-employees.
Elements of a Restraint of Trade
If there is a legitimate reason for the inclusion of a Restraint of Trade in an employee’s employment agreement (protection of proprietary interests of the Employer) then we must consider if the clause is both reasonable and certain. This requires the Restraint of Trade to be well-defined in the employment agreement.
So, what does a comprehensive Restraint of Trade clause need to include?
A) Certainty of Application (Geographical)
Certainty of application in a Restraint of Trade clause refers to the geographical area to which the restraint applies. This is identified as either a radius within a certain number of kilometres from the place of work or by reference to a geographical boundary such as Canterbury or the South Island. The geographical reference is important as without specifying the boundary the restraint seemingly applies to the entire world, which is unreasonable and unenforceable.
B) Reasonable Duration
A reasonable Restraint of Trade typically applies for up to 3 months post-departure. It is not uncommon however to see Restraint of Trade clauses that apply for 12 months. The appropriate length of a Restraint of Trade provision generates a lot of debate. There are a lot of questions to be answered as to whether it is reasonable to restrain someone from working and earning a living in their chosen industry or profession in favour of protecting the former employer's proprietary information. It is a difficult question to answer because there is no definitive way to measure the risk or chance of the information being used against the Employer.
A duration of three months is generally considered reasonable for a Restraint of Trade clause. Although, courts have been known to uphold a Restraint for up to twelve months, provided the employee was provided with an appropriate sum of consideration (payment) during employment to agree to be bound by the Restraint of Trade.
C) Payment for the Restraint
For a Restraint of Trade to be enforceable the Employer must have paid the Employee adequate consideration for them to agree to be bound by the restraint and curtail their earning ability upon any eventual resignation. Think of this as some sort of bonus or financial compensation.
Typically, employment agreements will include an acknowledgment that the wage or salary paid by an Employer to an Employee includes a component (or top-up) for the Employee agreeing to be bound by the Restraint of Trade. The problem here is that it is easy to say a wage or salary includes a component for restraint of trade consideration but proving it (and the actual amount so paid), when push comes to shove, can be difficult if not impossible for Employers.
Failing to pay an identifiable and reasonable sum to an Employee to secure their agreement to a Restraint of Trade can significantly damage your chances of successfully enforcing a Restraint of Trade provision.
In the Courts
The inclusion of a Restraint of Trade clause requires careful consideration about what the clause is designed to protect and how it is best drafted to ensure appropriate protections are in place. When Courts interpret Restraints of Trade and their enforceability, they will be going through a checking process to ensure they are reasonable and certain in application. But they also have the discretion to reduce a restraint down to something more reasonable in the circumstances as evidenced in Tova O'Brien's case. This means that even if a restraint is unreasonable, the Court has the power to amend the clause to make it more suitable and reasonable thereby striking a balance between the parties’ interests.
One of the concerning things that I have seen over many years of experience in the Employment Law field is that restraints are being used carte blanche and in Employment Agreements across a range of roles with little regard to the need or appropriateness of doing so. It will be a rare scenario in my view where it would be appropriate to include a Restraint of Trade for an Employee in a position other than Senior management. In part, I think this is one of the reasons why restraints cause a lot of tension because they are used indiscriminately. The Courts are very much alive to these abuses.
Where to?
It remains to be seen if the Government has any will to intervene in this space by seeking to outlaw Restraints of Trade or limit their application to certain workers. No doubt New Zealand business owners would lobby hard against any such proposal. In the meantime, businesses may continue to use Restraint of Trades in their employment agreements.
Properly designed Restraints of Trade can be legally enforced by Employers against Employees (and the cost of doing so is significant for both parties). However, employers need to be aware that it will not always be appropriate to include such a restriction in every role in your organisation. If an employer wishes to include a restraint of Trade in an employment agreement, they need to exercise a degree of common sense, careful consideration and draft a restraint so it is appropriate (and reasonable!) to the role and risk faced.
If you have any questions with respect to either Restraint of Trade, Non-Solicitation provisions or any Employment Law questions feel free to contact me or any member of the Employment Team at Godfreys Law.
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