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The ins and outs of Restraint of Trade clauses in Employment Agreements

Restraint of trade

The world of business is increasingly competitive. Employer business clients are increasingly focused on securing and safeguarding information (such as trade secrets and profit margins) and client relationships that sustain their business.  In addition to specific clauses dealing with the protection of confidential information and intellectual property in employment agreements, employers often consider including of a restraint of trade clause as a safeguard against employees leaving their employment and using sensitive information or relying on relationships developed while in employment to the former employer’s detriment.

What is a restraint of trade clause?

A restraint of trade clause is designed to protect a business’s interests to or over which its employees may have access or influence . Restraint of trade clauses prohibit or limit an employee from working in a certain field of expertise in a designated geographical location for a specified period of time.   To be enforceable, all of these elements must be reasonable (i.e. the restraint must be no more extensive in scope, duration or location as is necessary to protect the employer’s actual interest).  Restraint of trade clauses are different to ‘non-solicitation’ clauses (which are notoriously hard to enforce).

Consideration

There must be consideration for a restraint of trade.  For a new employee the offer of an employment relationship is sufficient.  For an existing employee, an employer is advised to consider offering the employee consideration such as an increase in wages or salary.

Practicalities to consider

A restraint of trade clause does not automatically protect an employer. The Courts take a careful approach when making determinations about restraint of trade clauses.  The starting point is that restraint of trade clauses are unenforceable from the outset due to public policy considerations (i.e. it is contrary to public policy to prevent people from earning a living).

Where a dispute arises, the Courts examine all aspects of the restraint of trade clause, paying particular attention to whether the conditions are reasonable in order to protect the employer’s interests, relative consideration or compensation, as well as the reasonableness and practicality of the conditions imposed upon the employee.

The Courts may consider the following factors when considering the enforceability of a restraint of trade clause:

  • Whether the former employer has a proprietary interest that is capable of being protected; (for example, did the employee have access to confidential information or having built up a strong customer/client/supplier relationships);

  • Whether it is reasonable to restrict the employee’s employment options/activities;

  • Whether period of the restraint is reasonable;

  • Whether the geographical limits of the restraint are reasonable.

Before including a restraint of trade clause in an employment agreement  it is vital to understand what is the interest or the purpose of the restraint of trade clause; what reasonable parameters may be imposed in order to achieve that purpose; and in return whether fair consideration or compensation been offered to the employee.

Restraint of trade clauses can be very beneficial for employers, especially if a business is reliant on securing and safeguarding its interests critical to the successful running of the business. It is essential to understand all aspects of a restraint of trade clause before including one in your employment agreement, as finding the right balance in a restraint of trade clause is vital to ensure that it is enforceable. We are available to help draft and discuss such terms.

For employment law advice contact:

Lower Hutt:   Mike Gould P: 04 916 6302 mike.gould@gibsonsheat.com
Wellington:    Claire Byrne P: 04 916 7483 claire.byrne@gibsonsheat.com
Masterton:     Julie Millar P: 06 370 6478 julie.millar@gibsonsheat.com