Restricting the restrictions? New Bill aims to regulate post-employment restraints

Restraint of trade clauses are commonly found in employment agreements and are often used without much thought as to whether they are reasonable in the circumstances.

As a result, many of these ‘pro forma’ clauses are probably unenforceable. However, they can be a source of much stress for employees leaving a role, and also the battleground for a great many legal disputes.

MP Helen White has introduced a bill, the Employment Relations (Restraint of Trade) Amendment Bill (Bill), which aims to restrict the use of restraints of trade to circumstances where the parties (theoretically at least) are on a more even bargaining footing, and have actually considered whether the restraint is necessary.  Accordingly, the Bill would prohibit the use of restraint of trade clauses in employment agreements for lower income employees.  It would also require an employer to pay the employee during the restraint period – so the employer needs to consider whether the restraint is really necessary.

What are restraint of trade clauses?

Restraint of trade, and other post-employment restrictive covenants, limit an employee’s right to work following the end of the employment relationship.  Common types of restraint include:

  • Non-compete: this clause restricts the employee from competing against the employer, either by setting up in business or working for a competitor in the same industry after the employment ends.
  • Non-solicitation: this clause prevents the employee from attempting to solicit, encourage or persuade the employer’s clients, customers, distributors, suppliers, employees, contractors or consultants away from the employer’s business after the employment ends.
  • Non-dealing: this clause prevents the employee from dealing with an employer’s customers or clients after the employment ends.

The starting point for such provisions is that they are unlawful and unenforceable, unless the employer can establish that the restrictions extend no further than reasonably necessary to protect its legitimate proprietary interests.  An employer’s proprietary interest can include confidential and commercially sensitive information, goodwill, and client/supplier relationships.  A restrictive covenant that protects the employer from mere competition will not generally be reasonable; there needs to be an identifiable interest that the employer is protecting through the restraint.

Whether the restraint is reasonable will always be considered in the context of the whole employment relationship.  The Court will take into account the nature of the interest that the employer is seeking to protect; as well as factors such as the duration and geographical area of the restraint; the consideration paid for the restraints; the seniority of the employee and the nature of the industry.  If the restraint is broader than is reasonably necessary, it will likely be unenforceable.

What is in the Bill?

The private member’s Bill would cover non-compete, non-solicitation and non-dealing restraint clauses and would amend the Employment Relations Act 2000 to:

  • Provide that restraints of trade have no effect if an employee earns less than three times the minimum wage.
  • Limit the use of restraints to those situations where the employer has a proprietary interest to protect, which must be described in the agreement.
  • Require employers to pay half the employee’s weekly earnings for each week that the restraint of trade remains in effect.
  • Limit the duration of restraints of trade to no more than six months.

Where a restraint of trade provision does not meet the above criteria, it would be of no effect.  An employee would also be able to raise a personal grievance where they have been disadvantaged due to their employment agreement containing such a provision that is not in accordance with the new amendments.

The Bill is not intended to limit or affect the common law duties of confidentiality and fidelity –that an employee owes during the employment relationship.  Nor does it impact any contractual requirements regarding confidential information or intellectual property that apply after the employment relationship comes to an end.

Lastly, the amendments made by the proposed legislation would not apply to employment agreements that were entered into before the enactment of the future Act (if it passes).

What the Bill could mean for employers (and employees)?

The Bill would create some welcome certainty for employers and employees alike.  As the Bill’s explanatory note states, “challenging provisions in the Employment Relations Authority or in a court can be expensive and uncertain and, as a consequence, many unreasonable restraints of trade have the effect of restraining an employee even though they are probably unenforceable”.  Removing restraints of trade for those not in senior/executive positions may make it easier for most employees to change jobs – this is of course, a double-edged sword in that it may be easier for employers to attract new talent from competitors!  This could result in employers having to raise wages or salaries and introduce other attractive conditions to encourage employees to stay.

Many employers will also (understandably) be concerned about the Bill seeking to restrict non-solicitation or non-dealing provisions.  For example, an employer operating in sales should be able to confidently encourage a sales representative to develop direct, close relationships with clients, knowing that it can protect its clients through non-solicitation or non-dealing provisions if that employee leaves.  As a result, junior to intermediate employees may see career and business opportunities become more infrequent as employers (and senior employees) take steps to protect those relationships.

Obviously, there is no guarantee that this Bill will pass, and we know that the Government has other employment-related legislation on its agenda (the revised Holidays Act and the Fair Pay Agreements Bill being top of the list).  Ms White expects strong debate and some push back at the select committee stage should the Bill make it that far.  So, employers can continue to rely on their restraint of trade provisions (as long as they are reasonable) for the foreseeable future.

In the meantime, we eagerly look forward to the Bill’s first reading and will update you as it progresses through the Parliamentary process.

If you have any questions about the Bill or need advice about your existing restraint of trade clauses, please give us a call and we would be delighted to help.

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.

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