Your rights: Restraint of trade dilemma

By Rani Amaranathan of DLA Phillips Fox

Q. I have just been given a new employment agreement from my employer. It says I now get four weeks holiday. But it also includes a "restraint of trade" clause. This says I can't compete with my employer in the Auckland region for six months after I leave or solicit any customers or staff from my employer. My friend says restraint of trade clauses are not enforceable. Do I have to sign?

A. The short answer is no, you do not have to sign if you are already employed and the restraint of trade clause is new. This sort of change to your terms and conditions of employment can only be made if you agree to it. The employer also needs to give you "consideration" (something in return) for a restraint of trade clause.

That said, your friend is not quite right. Assuming a restraint of trade clause is unenforceable could be very risky. If the employee gets it wrong and the restraint is enforceable, the employee might be liable to the employer for damage done to the employer's business by breaching the restraint. In some cases, employees have been required to pay tens of thousands of dollars because they ignored a restraint of trade and took their ex-employer's clients to a competitor's business.

The starting point for restraint of trade clauses is that they are not enforceable because they can prevent fair competition and prevent employees earning a living.

But restraint of trade clauses are lawful, and enforceable, if they are "reasonable". Employers are allowed use a "reasonable" restraint to stop employees taking unfair advantage when they leave. So the key question is what is a reasonable restraint of trade clause?

There is no simple answer to this. It very much depends on the circumstances. This can cause a lot of confusion about whether restraint of trade clauses are enforceable. Often the courts (or Employment Relations Authority) are asked to determine their enforceability.

Factors that determine the reasonableness of a restraint include:

1. Is it for a reasonable duration and covering a reasonable geographic area? Basically, the longer the restraint of trade applies for and the bigger the geographic area it applies in, the less likely it is to be enforceable. Your restraint covers a fairly narrow geographic area (Auckland), but could prevent you working for a fairly long period of time (six months).

2. What consideration was provided for the restraint? Was there something offered in return for your agreement to it? In your case, the employer appears to be providing no consideration. There is no incentive for you to agree. At the outset of employment, the promise to employ you and pay you might amount to sufficient consideration. But after employment has started, something more must be provided in return for an employee's agreement to a restraint of trade clause. If your employer is particularly keen for you to sign a restraint of trade clause, you could ask to be paid your salary for the duration of the restraint so you will not be "out of pocket".

3. Does the employer have a "legitimate proprietary interest" to protect? The proprietary interest could be a trade secret or business relationship. The restraint should only restrain you for long enough to give the employer time to take steps to protect the proprietary interest. For example, long enough to cement and strengthen the business relationship or protect the trade secret. The nature of the employer's business and the particular role you have in the business will be relevant.

4. How wide is the restraint? For example, does it stop you from working for anyone within a whole industry sector? (This is less likely to be reasonable.) Or does it limit the restraint to a specialised industry the employer is operating in? (This is more likely to be reasonable.) Are you prevented only from "soliciting" (basically, taking) customers you dealt with directly? Or are all customers of the business "out of bounds".

All this means restraint of trade clauses depend on the particular employment relationship they apply to. They should be tailored to the nature of the employer's business and the nature of the employee's role, if they are to be reasonable.

In summary, restraint of trade clauses are enforceable if they are reasonable. What is reasonable depends very much on the circumstances. Restraining a part-time casual worker, who knows no trade secrets and has no customer relationships, is unlikely to be enforceable. But at the other end of the scale, restraints against key salespeople in competitive and specialised industries, who have strong relationships with key clients, are more likely to be enforceable. Employees who are concerned about restraint of trade clauses should take legal advice about their enforceability.

* Rani Amaranathan is a solicitor in the employment team of transtasman law firm, DLA Phillips Fox.

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