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Restraint of Trade Clauses in Employment Agreements

The Employment Relations Authority (ERA) has confirmed that Discovery, the parent company of Three, can enforce its Restraint of Trade clause against political reporter, Tova O’Brien. O’Brien has taken up a new role with Discovery’s competitor, Mediaworks, and believed she was not acting in competition as she is moving from a TV-based role to radio. Marija Urlich, the Authority Member, stated that the evidence establishes that O’Brien would be working in competition with Discovery. O’Brien’s lawyer has publicly said that she will have to revert to bartending, and Ms O’Brien stated that the enforcement of the clause amounts to bullying. The case has garnered a lot of public interest and prompted Labour MP, Helen White, to call for a ban on restraint of trade clauses, suggesting that they suppress wage growth. The clauses are by their nature contentious and though Discovery has been successful in enforcing its covenant against O’Brien it is not always straightforward.

Where a restraint of trade clause is contained in an employment agreement, the intention is to limit an employee’s ability to compete with the employer after the employment relationship ends; be it by working for a competitor, trying to hire its staff or starting a competing business. The rule of thumb in New Zealand is that a restraint of trade clause should be no wider than what is required to protect the party in whose favour it was given (usually the employer). It is normal for the clause to contain a geographical limit – a radius from the business premises in which the employee cannot work for a competitor – and a time period for which the restraint applies. The limits must be reasonable, and what is “reasonable” depends on a number of factors that vary between employment relationships. Relevant factors include the nature of the business, the nature of the role and the geographical location of both the business and the employee.

In Medic Corporation v Barrett & Ors [1993] 2 NZLR 122 the High Court noted that, Restraint of Trade clauses are potentially harmful to the public intert because they are designed to suppress competition. The Court also stated they are potentially unfair because the party demanding the covenant is usually in a stronger bargaining position than the party on whom it is imposed. In Medic Corporation Termm J said that the law starts with the assumption that the restraint of trade is unenforceable, and it is up to the party seeking to enforce it to show that it was reasonable. Because of this, employers can run into trouble when attempting to enforce the clause. Reasonableness must be determined with reference to the private interests of the parties concerned and the interests of the public at large.

Principles applicable to Restraints of Trade

In Prendergast v Davies (2002) Potter J set out seven principles which apply to Restraint of Trade clauses. This was cited and concisely summarised in Duffill Watts & King Ltd v Moore BC200470251:

• A restraint must be no wider than the circumstances of the case can reasonably require, where reasonableness is measured in relation both to the legitimate interest of the parties and to the wider public interest.
• Restraints by Employers on Employees are scrutinised with particular care and enforced only to the extent that they are required to protect a proprietary interest of the employer.
• A restraint is generally unreasonable if the disadvantage to the employer is greater than the benefit to the employer.
• Reasonableness is measured at the time the covenant was given.
• It is necessary to consider whether the clause was fair in the circumstances, or if it was a one-sided arrangement only entered into because of the employer’s superior bargaining power.
• The reasonableness of the clause depends on the assessment of all relevant surrounding circumstances not simply the nature, duration and area of the restraint.
• The nature of the employer’s business and of the relationship between the employee and customers or clients of that business are important in considering whether restraint is reasonably necessary.

Put simply, the Restraint cannot be so limiting on the Employee that they are prevented from being able to earn a living. The Employer cannot protect itself against mere competition; and, if the Employer seeks to enforce the Restraint it is up to them to prove its reasonableness.

Restraint of Trade clauses can be valuable protection for businesses if executed properly but can create animosity between parties if they are handed poorly. Saunders & Co are available by phone and email to provide legal advice and guidance on a range of matters.

For more information and specific advice on your employment agreements, please contact our employment team or Abi as below:

Abi Borrows (Lawyer)

Email: abi.borrows@saunders.co.nz

Mobile: 021 169 3865