Enforcing restraint of trade clauses requires 'really careful balance'

Restraint of trade clauses are controversial parts of employment agreements that can lead to legal pitfalls for both organisations and employees if neglected.

Kieron Creagh, Senior Associate at Russell McVeagh, described them as a clause in agreements that "restricts behaviour during and after the termination of employment with the employer."

"It can prohibit behaviour like going and working for a competitor, setting up your own business in competition with the employer, soliciting employees, consultants, contractors, suppliers, and customers of the employer to come and work with you after employment," Creagh told HRD.

She elaborated that these clauses can be highly effective in protecting business interests, though they can also be "very, very restrictive" from the employee's perspective.

"This is where the disputes arise and that's why we see these types of clauses being reviewed by the courts," said Creagh, who will speaking at the upcoming Employment Law Masterclass New Zealand.

Enforcing the restrictions

Enforcing restraint of trade clauses would require a "really careful balance" from organisations, according to Creagh.

"For them to be enforceable, they need to be tailored to the role, right? And that means it's not just a blanket one-size-fits-all approach to all your employees, whether they are your administrative part-time type of people right up to your CEO type," she said.

"They really need to be tailored to the role, and they need to be really carefully thought about in terms of the area that the employer works in and also the time frames."

Creagh also stressed the importance of avoiding overly broad restrictions: "You can't just say 'the entire world for the rest of your life' because it's never going to be enforceable."

"Everyone has a right to go out and work and earn a living, to put a roof over their heads and food on the table for their families."

Including restraints of trade in agreements

When crafting restraint of trade clauses, Creagh noted that several factors should be taken into account, particularly the nature of the employee's work in the organisation.

"It's really considering what they do, how much face time they have with clients and customers, and how much confidential information they are going to be privy to in terms of price lists," she said.

She also stressed the importance of ensuring the clarity of the clauses in the employment agreement: "Because if it's not clear, then it may be deemed to be unreasonable and therefore unenforceable."

Creagh said the courts assess restraint of trade clauses to determine if they are against public policy and if they are reasonable.

"And then they look at the clarity of the clause, so can it actually be understood? And the length and the geographical area that is within the clause," she said.

Employment Law Masterclass

Creagh said it's important that employers join this upcoming Employment Law Masterclass on October 24 because this is the "foundation to set the business up and to avoid getting into disputes later down the track."

"So, if you get it right now, then hopefully there's no issues down the track," she said.

Creagh’s session will delve into key aspects of restraint of trade agreements and consider recent changes to New Zealand employment law as well as global trends that expand workers’ rights and limit when restraint clauses can be applied. 

• Understanding different types of restraint of trade clauses and common approaches – what is legal and what is enforceable 
• Key considerations when implementing a restraint of trade clause within agreements 
• Recent Authority and Employment Court guidance on restraints of trade 
• Best practice for drafting restraints to ensure reasonableness and enforceability