Restraints of Trade – Protecting Proprietary Interests

Trade secrets, customers/clients, suppliers, confidential information and intellectual property are all vital interests that businesses must protect to ensure viability and profitability. But how do you protect these interests, particularly when employees resign to work for a competitor?

One way to protect these interests is by including restraint clauses (Restraints) in your employment agreements.

Types of Restraint

There are several types of Restraints that an employer can use:

• Garden leave;
• Restraint of trade/non-competition;
• Non-solicitation.

Different Restraints have different impacts on an employee’s ability to find new work after the termination of an employment relationship. It is also important to include a confidentiality clause in employment agreements to help protect confidential information and trade secrets.

Garden Leave

Employees may only be placed on garden leave during their notice period if there is provision for this in their Employment Agreement or by agreement with the Employee. This is where an employee is paid as usual during their notice period but is not required to report for work. This is useful for protecting an employer’s confidential information during the final weeks of the employment relationship.

Restraint of Trade/Non-Competition

Restraints of trade or non-competition clauses prohibit an employee from setting up their own business, or sometimes even working as an employee for a competitor of the employer. This is useful for protecting trade secrets and confidential information after an employment relationship has terminated.

Non-solicitation

Non-solicitation clauses prohibit employees from approaching customers/clients, suppliers or employees from a previous employer. This is useful for protecting a business’s customer/client relationships.

Reasonableness

Restraints must be reasonable in the circumstances of each case in order to be enforceable. The starting point that the Court or the Employment Relations Authority (ERA) will take is that the Restraint is unlawful unless the enforcing party can show that the Restraint is reasonable and necessary to protect a specific proprietary interest, such as trade secrets or confidential information. They must also be reasonable in both temporal and geographical scope. For example, a small business servicing a small town such as Hokitika or Greymouth and having a 2-year Restraint that applies throughout New Zealand would not be considered reasonable and therefore would be unenforceable.

Even if a Restraint is considered unenforceable, the ERA may use section 83 of the Contract and Commercial Law Act 2017 to modify the Restraint to something it considers reasonable, for example changing a six-month restraint to a three-month restraint.

Restraints must also be in the public interest. This means that the employer must have some proprietary interest that is reasonable for them to protect.

Enforcing Restraint of Trade Clauses

The first step in enforcing a Restraint is to assess the reasonableness of the clause and ascertain the interests that the Restraint protects. Even if the clause is drafted unnecessarily widely (and would therefore be likely to be held to be unenforceable), it may still be worth pursuing as the Court or the ERA could modify the Restraint rather than delete it altogether.

The next step is to write to the ex-employee and set out clearly how they are in breach of the Restraint. It may be necessary to also write to the ex-employee’s new employer, to either set out how that Company is assisting the ex-employee to breach the Restraint, or to inform them that the ex-employee is breaching the Restraint.

If the ex-employee continues to breach the Restraint, you may file proceedings in the ERA against the employee and potentially the new employer. If the ex-employee is held to have breached the Restraint, they may be liable for penalties and, if the Restraint contains an indemnity clause, the ex-employee may also be liable for indemnity costs. You can also ask for an injunction (an Order from either the Court or the ERA) preventing the employee from continuing to breach the Restraint.

Restraints are just some of the ways we can help you protect your business interests.

For any employment needs, contact the Employment Team at Saunders & Co Lawyers – Partner, Andrew Riches, Claire McCool, Deborah Hendry