A restraint of trade can offer vital protection to an employer if used correctly and more and more frequently, the Employment Relations Authority and the Employment Court are upholding restraints and injuncting those who breach them.
The key is always in the drafting. That is because restraints are treated at law as void and unenforceable unless the restrictions are reasonable and protect a genuine proprietary interest. That means an employer has to carefully consider what protection is actually required and tailor the clause to meet that need and no more.
The most common mistake employers make is to make the restrictions too harsh. This just invites an employee to treat the restraint as unenforceable, and it opens the door for our courts to strike out the restraint as unlawful.
Restraint of trade clauses typically fall into the following categories:
- Restraints against competition
- Restraints against soliciting clients or suppliers
- Restraints against soliciting other employees or contractors
Restraints that prevent an employee from working for a competitor, or in an industry are the hardest to enforce – and should be used sparingly. Restraints that prevent employees from soliciting clients or staff are generally easier to uphold, as they are less intrusive and more likely to be “reasonable.”
The starting point however, will always be, is this restraint necessary? The employer needs to be able to show that, if not restrained, the departing employee could unfairly compete with it and that the restrictions simply give the employer time to prepare for this level of competition.
The court will look at a range of factors in testing whether the restraint is genuinely needed. These include the nature of the employer’s business; the position and seniority of the employee; the degree of customer contact and opportunity for developing personal influence over customers; and the type of information the employee had access to.
Then, if it accepts that some restrictions are needed, it has to assess if the restrictions are reasonable. Typically that means examining the reasonableness of the time period and geographic area, as well as the impact of the restrictions on the individual.
A restraint will only be reasonable where the employee has received something for it whether it is the offer of employment itself (if it is in the initial employment agreement) or a salary increase or separate payment.
So, when thinking about the content of these clauses, consider who, what, where and when:
Which of your employees should be restrained? Who has close relationships with key customers or suppliers? Do they have influence over them? Could they unfairly compete if they left? Remember, you should not attempt to restrain everyone indiscriminately.
What are you seeking to protect? Relationships, information, products or pricing? Or is it the poaching of key staff? Remember, only protect what you need to and what is legitimately yours to protect.
How far should the restraint extend? Auckland, North Island, New Zealand, Australasia, the World or a two kilometre radius? What is the reality of your operation? Where did this person work? Remember, the restrictions must be reasonable.
How long should the restraint last? Three months, six months, two years? How long do you need to effectively communicate a change in personnel and build or rebuild relationships? This very much depends on all the other factors set out above. Often the broader the restraints, the shorter the timeframe should be for enforceability.
The key though, is to tailor the restraint to the individual, and never to go for too much – less is often more.