ERA scrutinizes 'reasonableness' of employer's restraint of trade clauses
The Employment Relations Authority recently dealt with a case involving a flight instructor whose new employment was challenged by his former company.
The decision sheds light on the enforceability of restraint of trade provisions in employment agreements and the factors considered by the Authority when determining the reasonableness of such provisions.
Cody O'Neill had resigned from his position at U-Fly New Zealand Limited (UF Ltd) and subsequently took up employment with Wanaka Helicopters Limited (WHL), a company closely associated with Learn to Fly Limited (LTF Ltd), a competitor of UF Ltd.
O'Neill worked as a flight instructor for UF Ltd from May 8, 2023, until his resignation on January 8, 2024. UF Ltd sought to enforce a restraint of trade provision in O'Neill's employment agreement, which prevented him from being engaged by a flight training or flight business within a 100-kilometer radius of UF Ltd's business premises.
UF Ltd filed an application for an interim injunction, believing that O'Neill had accepted employment as a flight instructor with LTF Ltd.
However, it was later revealed that O'Neill had been employed by WHL in an administrative assistant and ground crew role, although he had undertaken some contract work for LTF Ltd.
Reasonableness of restraint
The ERA considered whether the restraint was justified as reasonably necessary to protect UF Ltd's proprietary interests and was in the public interest.
It also looked into the nature of the work O’Neill undertook while in UF Ltd’s employ and “whether there was a risk of enticement of customers seeking ongoing and more lucrative flight training rather than one-off trial flights, and therefore being more likely to follow O’Neill to his new employer.”
The evidence suggested that O'Neill had signed the employment agreement without seeking independent advice, and the restraint provision was not clearly drafted.
Was there ‘reasonable’ restraint?
The Authority found that while O'Neill may have been privy to information amounting to a proprietary interest capable of being protected, there was no evidence of any breaches.
It was also noted that the scope and geographical extent of the restraint, which effectively required O'Neill to relocate outside central Otago to find comparable work, counted against its reasonableness.
While the ERA found that there were doubts about the identification of proprietary interests and the length of the restraint, it acknowledged that UF Ltd might have an arguable case to uphold the restraint for a shorter period to prevent O'Neill from engaging in further contract work for WHL on behalf of LTF Ltd or others.
The Authority highlighted the importance of carefully drafting restraint of trade provisions and ensuring that they are reasonable in scope and duration to protect legitimate business interests.
