Restraint of trade clauses: all you need to know

Jocelyn Visser, HR Business Partner
By Jocelyn Visser, HR Business Partner

The recent high-profile case of media personality, Tova O'Brien, challenging the restraint of trade in her employment agreement has shone a light on these clauses and what they can be used for.

When O’Brien left her job at TV3 to work for a new radio station run by a rival media company, her former employer enacted the clause restricting her ability to work in a business or activity in competition with them. Despite taking the case to the Employment Relations Authority (ERA), O’Brien had to wait 7 weeks before she could start her new role.

The majority of previous ERA rulings on restraints of trade have been that they are generally unenforceable so why is it that employers routinely include them in employment agreements and employees agree to them when they sign?

This blog post takes a close look at restraint of trade and non-solicitation clauses. We cover what they are, how they can be used, whether you need them, and if so, how to make yours compliant and enforceable. We also have a look at the Tova O’Brien case in more detail, so you'll be fully equipped to understand these clauses and know when to use them appropriately in your business.

What is a restraint of trade?

A restraint of trade is literally what it sounds like: a clause in an employment agreement that restrains an employee who leaves your company from starting a business or working for one that is in direct competition to you. 

Sometimes known as non-competition or non-compete restraints, they are useful to protect your intellectual property (IP) or trade secrets, especially if you are in a highly-specialised area. It means someone cannot leave with things like your exclusive technology or specialised ways of working and set up an organisation in direct competition with you or go work for your direct competitors.

Restraints of trade are typically for a set period of time (e.g. 3 or 6 months), a defined geographic radius or area (e.g. all of NZ or the wider Auckland area), and scope (e.g. specific to your company’s product or area of specialisation).

However, as the ERA’s standpoint in the Tova O’Brien case affirms, restraint of trade clauses are notoriously hard to enforce. That is because case law has established that every person has a basic right to earn money and work in their chosen field. From a review of previous cases, there are many more times they are NOT enforced, than times that they are. So often, in practice, employees do have the right to leave your business and work for a similar business.

Restraint of trade vs non-solicitation clauses

The difference between a restraint of trade and non-solicitation clause is that a restraint of trade restricts the ability for an employee to work or set up a business somewhere else in competition with you, while a non-solicitation clause means they cannot poach your clients, employees, suppliers or other stakeholders.

A non-solicitation clause is pretty easy to uphold legally for a wide range of roles. It protects your commercial interests, while not putting onerous restrictions on any employee who leaves.

Depending on your industry, it's important to remember customers are free to choose to move, and you would need to prove someone solicited them to enact this clause.

A restraint of trade is much harder to enforce because it restricts the employee’s freedom to earn a living and/or work in their field of expertise.

Do you need restraint of trade clauses?

Whether you need to include restraint of trade or non-solicitation clauses in your employment agreements really depends on your industry and the role.

We don’t recommend having restraint of trade clauses across the board for all your employees, unless you are in such a specialised area that it is warranted, e.g. you make niche products or offer a unique service. We do recommend restraints of trade for senior or executive roles, as they typically have access to commercially-sensitive information. We also recommend non-solicitation clauses for all employees, as they give you good protection and are enforceable.

If you are thinking about using restraint of trade clauses for your employees, here are some questions to ask yourself:

  • What is the position? Is this a senior enough position to warrant it?
  • What access does the person have, i.e. will they have access to sensitive strategic information, IP, or trade secrets?
  • What potential risk does this pose? This needs to be more than just “the person sees how our operations work”; they need to have significant enough knowledge to be able to potentially damage your business if they leave and take that information or expertise elsewhere. In most scenarios, this would be your executive team and no one else.
  • Is your industry highly-specialised or do you have proprietary technology?

Remember, if you do include restraint of trade clauses, you have an obligation to act in good faith. They are to protect your business interests, not to discourage people from leaving the company or to stop them working in their chosen field when they go.

So, to increase the likelihood of them being enforceable, they need to be reasonable while not unfairly restricting a person’s ability to earn a living. This means the combination of the time period, geographic radius, and scope of coverage should not be unreasonable.

In general, you should also compensate the person for this, either in their salary or some form of payment. This is so, if the person leaves, they can get by without working for the period of time the restraint covers.

The Tova O’Brien case

Tova O’Brien’s case and the fact the ERA ruled in favour of her former employer, Discovery New Zealand, created a lot of interest.

O’Brien is a high-profile media personality, which Discovery NZ used in its argument to defend the restraint of trade clause in her employment agreement. They argued that in the media, the brand and IP is intrinsically linked to the person. They also argued they had a right to protect their confidential information and business interests, such as editorial priorities and plans, identities of confidential sources, and employee salaries that she was privy to.

O’Brien’s counter argument was that the different media and time slots (morning talk radio vs evening TV news) weren’t in competition and that the clause was an unreasonable limitation on her right to use her skills and knowledge to earn a living.

Ultimately, as we saw, the ERA ruled that the restraint clause was reasonable in scope, but it did reduce the length to 7 weeks (from the original 3 months). They also ordered O’Brien pay $2000 for taking part in promotional activities while still employed by Discovery NZ.

While we were a little surprised by the ruling, it wasn’t as groundbreaking or alarming as many proclaimed. O’Brien’s position as a well-paid media personality was a key consideration, as the courts are reluctant to rule in favour of employers if it means the employee is going to struggle or be out of pocket for a length of time.

Editing current clauses

In light of all this, you may want to review and edit any existing restraint of trade clauses you have in your employment agreements.

As mentioned before, have a look at the radius, bread, time length, and compensation. If you don't have these things in your current clauses, or they are unreasonably restrictive, they need amending. 

In doing so, you must consult with the affected employee before you make changes to their employment agreement, even if they are beneficial to them.

A working example

Here’s an example of a restraint of trade clause: Billie Beans is an Account Manager for a coffee roastery, based in Hamilton. She has clients across the North Island, and her employer has clients all around the country. As Billie is in a senior role and has access to commercially-sensitive information, such as customer and supplier lists, a restraint of trade would be justifiable, but it would have to be specific to her role and only restrict her ability to work as an Account Manager for a rival coffee company or roastery in close proximity to Hamilton (say, a 30km radius) for 3 months (not 6).

If you are in any doubt about the validity of your clauses, get an expert to look at them. Contact MyHR for a full review or any general employment advice.