How strong are post-employment restraints?

Post-employment restraints are a standard feature in many employment contracts but organisations can easily be caught out by a number of common pitfalls, warns one industry lawyer.

“A restraint of trade may contain prohibitions against either solicitation or competition, or both,” says Carl Blake, a senior associate with Simpson Grierson. “However, restraints of trade should be used carefully as the New Zealand courts consider them to be inherently against the public.”

Auckland-based Blake says courts are often tasked with determining the “reasonableness” of restraint trade clauses – during this process, they take the following factors into account:

• Whether the employer has a genuine proprietary interest (such as trade secrets, confidential information, or close client or supplier relationships) which warrants protection
• The scope and duration of the restraint
• The geographical area of the restraint
• The nature of the business
• The seniority of the employee
• Whether any consideration has been paid to compensate for such restrictions
• The impact of the restraint on the individual (eg. ability to earn a living)

“In order to be enforceable, the restraint must be both necessary to protect the company's proprietary interests and reasonable,” says Blake.

“It should be tailored to the individual concerned so that it is limited in duration, scope and geography to that which is absolutely necessary to protect the company's interests,” he continues.

“The most common mistake made by employers is to not take sufficient care to ensure each restraint is properly tailored to the individual and the role concerned.”

While a failure to tailor conditions to individuals may tri employers up most often, Blake says the non-compete aspect of a restraint of trade is the most difficult part to enforce.

“The roles for which a non-compete clause may be appropriate include senior staff who have important relationships with clients or access to trade secrets or other highly confidential information,” he tells HRM.

“Generally speaking, a restraint against competition will also only be reasonable for a period of around three months. However, in some circumstances, a restraint for a longer period may be justified.”

While a longer period may be considered reasonable in some cases, Blake says employers may be obligated to compensate employees if it severely restricts their ability to work.

“At the outset of employment, the terms and conditions contained in the employment agreement (including the pay) will be sufficient consideration, but may be insufficient to convince an employee to sign,” he says.

“Therefore a separate payment may have to be looked at. In relation to existing employees who the company wishes to negotiate restraints with, additional consideration is essential and will be entirely a matter for negotiation.”