Can an employer stop an employee from working elsewhere when they leave?

With recent low unemployment rates in New Zealand, issues about restraints of trade have become more frequent as competition for employees heats up. However, there is always a question mark over how enforceable a restraint will actually be. Often post-employment restraints will be included in employment agreements in the hope that they will have a deterrent effect on employees, without having to enforce them.

The starting point is that restraints are unenforceable and the onus is placed on the employer to show the restraint is reasonable and necessary to protect the employer's proprietary interests. An assessment of reasonableness will include:

• The geographical area it covers (ie. does it only apply to a particular suburb, or city, or island)
• The length of time it applies for
• The type of work the employee does
• The employee's remuneration.

Parliament looks set to step into this uncertain area of employment law by legislating the parameters of restraints of trade. In its current form, the Employment Relations (Restraint of Trade) Amendment Bill will severely restrict the use of restraints of trade. The Bill had its first reading in Parliament on 26 July 2023 and is now in the Select Committee stage.

Defining restraints of trade

A restraint of trade under the Bill is defined as a provision that operates after the employment ends, and prohibits or restricts the former employee from one or more of the following:

• Performing work in a similar field to their former employer’s business
• Contacting or dealing with employees or clients of their former employer’s business
• Offering employment to employees of their former employer’s business.

Under the Bill, an employer will only be able to enforce a restraint of trade where:

• The employee is paid at least three times the minimum weekly adult rate (currently NZ$908 per week)
• The employer pays the employee "reasonable compensation" for the restraint (which must be at least half of the average weekly earnings of the employee for each week that the restraint applies
• The restraint is for six months or less (after which it will be unenforceable).

Let's use Jane and ABC Limited as a fictional example to demonstrate what will be required if the Bill becomes law:

Jane is a sales representative for ABC Limited. ABC Limited has a proprietary interest in the connections Jane has with its clients in the South Island. It wishes to protect this interest if Jane leaves the company and works for a competitor. ABC Limited agrees with Jane at the start of her employment that she will not work for a competitor of ABC Limited in the South Island for four months after the termination of her employment. Jane and ABC Limited also agree that Jane will not solicit ABC Limited's clients or employees for the same four-month period.

For the restraints of trade to be enforceable, ABC Limited must pay Jane at least NZ$2,724 per week (three times the current minimum weekly rate). At the end of her employment, ABC Limited must also pay Jane NZ$1,362 per week for the entire four-month restraint period (even though she will not be working for it and may be employed elsewhere). This weekly payment is in addition to any contractual or statutory entitlements Jane is also entitled to (such as unused annual holidays or a payment in lieu of notice).

Increase scrutiny on restraints of trade

While the Bill is not law yet (and might never become law) it gives guidance on what a reasonable restraint might be and how much an employer should compensate an employee for a restraint.

With increasing scrutiny on restraints of trade, and the cost and uncertainty in enforcing them, employers should consider other methods of retaining their employees and protecting their business from ex-employees. This can be achieved by shoring up relationships with clients, providing competitive employee terms and conditions, and creating a workplace culture that employees want to be a part of – using the carrot instead of the stick.

Employers will still be able to take other steps to protect their businesses from exiting employees. These steps could include reminding those employees of their ongoing duties of confidentiality and any intellectual property obligations. The employer could also consider placing the employee on garden leave during the employee's notice period, and monitoring (and potentially restricting) IT access for the employee prior to the termination date.

Shaun Brookes is a special counsel specialising in employment law, industrial relations, human rights, and health and safety at Buddle Findlay in Christchurch.