Post-Employment Obligations – Worth the Paper They Are Written On?

“Gone are the days … when an employee could confidently sign up to a restraint and then breach it in the bold expectation that ‘those things are not worth the paper they are written on’”.[1]

Post-employment obligations have become a common feature of many employment relationships. However, enforcement of these obligations can be difficult for both employers and employees to navigate. 

This article answers frequently asked questions about post-employment obligations, including the different types of provisions, the enforceability of these provisions, and whether indeed these provisions are worth the paper they are written on.

What are post-employment obligations?

When someone refers to post-employment obligations, they are usually referring to provisions contained in an employee’s employment agreement which aim to limit or restrain a person’s ability to compete with their previous employer after the employment relationship has ended. The provisions may restrict a person’s ability to work for another employer or in the industry, deal with or solicit clients, suppliers, contractors, or employees of a person’s previous employer.

What are the different types of post-employment obligations? 

There are three common types of post-employment obligation provisions that will regularly appear in employment agreements:   

1. 1. Restraint of Trade clauses stop the person working in a particular industry or in a business similar to the employer’s business, within a geographical area, for a set period of time post-employment. They are the most onerous/restrictive of post-employment obligations.
   2. Non-dealing clauses stop the person from accepting work from or doing business with a client or customer of the employer (even if the approach is from the client or customer).
   3. Non-solicitation clauses stop the person from approaching or contacting a customer, supplier, contractor or employee in an effort to persuade them to leave the employer or otherwise alter their relationship with the employer.

Are post-employment obligations enforceable? 

Yes! But first the Employment Relations Authority (Authority) and Employment Court (Court) will assess whether the post-employment obligations are reasonably necessary to protect the proprietary interests of the employer and whether they are in the public’s best interest. There is well established case law which identifies the key considerations that need to be taken into account.

The Authority and Court do not take kindly to post-employment obligations which seek to restrict an employee’s ability to work elsewhere merely for the purpose of eliminating or reducing competition.

Proprietary Interests 

A proprietary interest must be a legitimate interest that is capable of protection and is an advantage or asset inherent in the business. The most common categories of proprietary interest are business connections, good will and confidential information.

In practice, post-employment obligation provisions which are designed to protect relationships with customers and suppliers, costing information, customer and supplier databases, strategic plans etc are seeking to protect proprietary interests.  

Reasonableness 

Determining whether post-employment provisions are reasonable, and therefore enforceable, is a factual exercise. The Authority and Court will consider, among other things, the following:

1. 1. Does the employer have legitimate proprietary interests (above) that require protection?
   2. Are the post-employment obligations no wider than necessary to protect these proprietary interests, and/or are the post-employment obligations proportionate to the interests being protected?
   3. Is the duration of the restraint reasonable?
   4. Is the restraint area or scope reasonable?

There will also usually be consideration of other factors such as an employee’s position, the exposure/access the employee has to the proprietary interests that the provision(s) are seeking to protect, the scope of the restrictions, whether there was consideration, and the circumstances that existed when the obligations were entered into.  

As a general rule of thumb, the more proprietary and confidential information the employee is privy to, the stricter their restraint may be (within reason). However, as the duration and geographical scope of the restraint increases, so too does the difficulty of proving that it is reasonable!

For example, it is less likely that a post-employment restraint for 12 months duration and nationwide will be reasonable for an employee who works in a warehouse and stacks shelves, as they would be unlikely to have access to, or knowledge of, proprietary information. However, this restraint could be reasonable for an employee who was the lead Business Development Manager and worked with clients throughout New Zealand.  

Does drafting affect the enforceability of post-employment obligation provisions?

Yes. Clauses that have been tailored to the employee to whom the obligations apply, and which specify the proprietary interests that it is seeking to protect, will generally be easier to enforce than a standardised clause. If a clause is standard or ‘one size fits all’, and applies to many employees with different positions and different levels, the Authority or Court will likely view this as an employer intending to limit competition, rather than protect any particular proprietary interest. 

Takeaways

Post-employment obligations are definitely worth the paper they are written on, and the Authority and Court have well and truly recognised this in recent years. However, employees and employers need to be aware that the enforceability of these provisions will always be dependent on the facts of the situation and how the provisions are drafted.

If you would like to learn more about post-employment obligations and whether a particular post-employment provision is reasonable, or likely to be enforceable, please contact the Employment Law Team or your usual contact at Hesketh Henry for advice.

Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required. 

[1] Green v Transpacific Industries Group (NZ) Limited [2011] NZEmpC 6 at [37].