How employers can approach restraint of trade clauses in New Zealand

Earlier this year, the Employment Relations Authority (ERA) dealt with a case where a flight instructor’s new employment was challenged by his former employer.

Cody O'Neill had resigned from his position at U-Fly New Zealand Limited (UF Ltd) and later took up a position at Wanaka Helicopters Limited (WHL). WHL is 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 his 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.

In its judgment, the ERA looked at whether the restraint was reasonably necessary to protect UF Ltd's proprietary interests and was in the public interest. It 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.

So how should employers and HR teams best approach inclusion of these restraints in an employment contract?

Understanding restraint of trade

Hannah Carey, special counsel at Parry Field Lawyers, told HRD New Zealand that while there are different types of restraint of trade, non-compete clauses are a common one. Under these clauses, an individual who finishes their employment can’t go into competition or can’t work for a competitor, for example.

“You'll see some variations – it might be you just can't work for former clients or you can't solicit former clients or former employees of the business you've been working at,” Carey said.

She emphasised the two key considerations when it comes to enforcing these clauses.

“It has to be reasonable – you can't just put restraints on any employee’s contract and make it as wide as possible,” she said. “And it needs to protect a legitimate business interest like a confidential trade secret or customer connections that the employee has that you don't want to lose when they leave.

“You can’t have a junior employee, just came out of university, who has no real connections with clients and no access to confidential trade secrets and say, ‘Well, we're going to prevent you going to a competitor.’ Employees still need to be able to earn a living so it needs be a legitimate and reasonable interest.”

How HR should handle restraint of trade

Carey noted that there is currently no penalty for having an unreasonable restraint of trade against an employee.

“They may go through a process to try and enforce it, only to be told that they couldn't enforce it, it’s unreasonable,” she said. “And then they’re having to meet some costs of the employee who has been put through the expense of saying that they shouldn't have been subjected to it.”

However, Carey went on to pinpoint two key elements that HR needs to consider when implementing a restraint of trade clause.

“The key one is what you put in the restraint,” she said. “Sometimes we have clients and they will be given a template, and they'll just fill in that template without actually tuning their mind to: What is the risk when this employee leaves? Do they really have influence over customers or trade secrets? And if they do, how long will we need that protection for? And in what location of New Zealand?”

The other key consideration is making sure you don’t sneak the clause into the employment contract, Carey said.

“Once you've got an employee, it’s better to be upfront about it, and tell them that you've got it in there.”

This gives the potential employee time to get advice if they want to.

“And if they make some suggestions to negotiate that clause, try as much as possible to take that into account,” she said. “It's going to be much harder for an employee down the line to turn around and say, ‘I didn't agree to that restraint’ or ‘It wasn't reasonable’ when they’ve had a chance to feed into that decision as to what it contains.”