ERA looks into employer's interest in securing customer base after sales rep's departure
The Employment Relations Authority (ERA) recently dealt with a case involving a former employee who joined a competitor company, raising questions about the enforceability of restraint of trade and non-solicitation clauses.
This case highlights the balance between protecting an employer's legitimate business interests and an employee's right to pursue their career. The worker argued that the restraints in his employment agreement were unreasonable, citing their broad geographical scope and lengthy duration.
He also claimed that the definition of "client" in the non-solicitation clause was ambiguous. Furthermore, the employee asserted that an overlap in his employment dates with the two companies was due to a misunderstanding, not an intentional breach of his obligations.
This case serves as a reminder that while employers have a right to protect their legitimate business interests, restraint clauses must be carefully drafted and proportionate to be enforceable.
The case centred around a former employee who had worked for a minerals supply company based in Auckland. The company carried out business as an integrated minerals supplier to industrial markets in both New Zealand and Australia.
Initially hired as a customer services/inward sales representative in June 2021, the employee was promoted to area manager (sales) in June 2022. At the start of his employment, he signed both an employment agreement and a separate confidentiality and restraint agreement.
In late April 2024, the employee resigned from his position. He was on leave until 24 May 2024, which was set as the formal end date of his employment. However, on or about 21 May 2024, he started employment with a competitor company. This overlap in employment dates became a point of contention in the case.
When the employer found out about the employee's new job with the competitor, they wrote to him seeking undertakings that he would comply with the non-competition and non-solicitation clauses in the confidentiality and restraint agreement. When full undertakings were not provided, the employer applied to the ERA for interim orders to restrain the employee from breaching the agreement.
The former employer argued that the restraint clauses were necessary to protect its legitimate proprietary interests. These interests included:
The company emphasised the importance of these factors, given its small workforce of seven employees and the significant role the sales team played in forming strong bonds with customers. The employer said:
"[The employee] had responsibility for managing key relationships throughout his employment with business owners, manufacturers, purchasers, tradesmen, producers, suppliers and agents."
On the other hand, the former employee and his new employer questioned the reasonableness and enforceability of the restraint clauses. They argued that:
The employee also said that the overlap in employment was due to a misunderstanding about the timing of his employment ending with the first company. The ERA noted:
"[The worker] says he proceeded on the basis his employment had come to an end by 7 May 2024. [The manager] denies directing [the worker] to return his vehicle. Instead, [the manager] says he chose to return it on 7 May 2024, and he had asked [the worker] to remain contactable about work matters if they arose (which they did not)."
The former employer presented evidence suggesting that the employee had breached the non-solicitation clause by engaging with their clients after joining the competitor.
This included allegations of processing sales orders and leveraging existing contacts. The ERA summarised:
"[The employer] believes [the competitor] is in direct contact with customers of [the employer] and soliciting custom and business from it. [The employer] says [the worker] is actively dealing with customers that have a trading history with [the employer]."
However, the employee and his new employer denied these allegations, providing explanations for the cited incidents and asserting that he had only been involved in training and administrative tasks since joining the new company.
In weighing the evidence and arguments presented, the ERA considered several factors:
Ultimately, the ERA decided to grant a modified interim order, focusing on the non-solicitation clause. The Authority stated:
"When I stand back and look at this case, the overall justice favours granting some interim orders, not just because of the arguable case and the balance of convenience. I measure the overall justice by reducing the interim orders sought in relation to clause 7.2 to a more reasonable timeframe and definition of what constitutes a 'client', for [the employer] to re-establish its customer base."
The ERA also noted the importance of balancing the employer's interests with the employee's ability to work:
"The duration of clause 7.1 of the C&R agreement has not been shown to be either reasonable or necessary to protect propriety interests of [the employer]."
"Overall, I find that [the employer] does not have an arguable case for the reasonableness and enforceability of clause 7.1, particularly in light of the significant restraint it purports to place on [the worker]'s ability to earn a living."
This decision aimed to strike a balance between protecting the former employer's interests and allowing the employee to continue working in his chosen industry.
The ERA issued an interim order preventing the employee from soliciting certain clients of his former employer until 24 November 2024, a period shorter than the original 12-month restraint in the agreement.
