Restraint Of Trade

Many bosses nowadays, instead of going to a lawyer, simply download model employment agreements from the Department of Labour website. It’s a beauty. Simple, free and so widely used that Employment Court rulings have made interpretations of its suggested terms and conditions pretty clear. It’s all part of simplifying the law that requires every worker to be given a written employment agreement, whatever the job.

If you go to the website http://dol.govt.nz/Tools/EmploymentAgreementBuilder you will find a suggested Restraint of Trade clause. This is legal jargon to stop an ex-employee setting up in competition, or working for a competitor, against an old boss.

Let’s have a look at this, as a Judge recently observed “the days have gone when the general view was Restraint of Trade provisions weren’t worth the paper they were written on”.

The Labour Department website suggested clause reads:

The Employee agrees that for a period of [insert period] following the termination of their employment for whatever reason, they shall not, either personally, or as an employee, consultant or agent for any other entity or employer, carry on business in competition with the Employer within a radius of [insert number] kilometres from the Employer’s premises.

Two issues arise here; where, and for how long can an ex-worker be reasonably stopped from competing with their previous boss.

Take Moana for example, a 21 year old skillful hairdresser, great with gossip who attracts clients into Petra’s Hutt salon. In fact, she did her apprenticeship with Petra. Moana has had a tiff with Petra over pay and her boyfriend has access to funds that could let her start out on her own. Retail space on the opposite corner of High Street to Petra’s salon has become available. Moana reckons she will set up there, but she has a Restraint of Trade in her employment agreement that says she can’t work within a kilometre of Petra’s salon for three months. Is this reasonable?

So let’s work through this fictional example to get some handle on what a Restraint of Trade means. It goes without saying that a New Zealander has the right to use their work skills and public policy favours competition between businesses.

Once Petra got wind of the salon across the road idea, she could contact Moana and remind her about the Restraint of Trade agreement. If Moana gave in and got temporary work in Wellington to wait out the three months before starting up that would likely end the matter. However, Moana might dig her heels in and say “ Hey, you didn’t pay me anything extra for stopping me competing for three months and I got to live sorry, I am starting-up my salon.”

Petra then has the option to file in the Employment Relations Authority for a $70 fee to uphold the Restraint of Trade. It is likely the parties are directed to mediation with a Department of Labour mediator to help sort things out voluntarily. If that does not work the matter would go to a Employment Relations Authority hearing under urgency. Lawyers or advocates may become involved.

The Employment Relations Authority Member has the tricky job of weighing up the issues of: if there was consideration (extra pay) for Moana’s restraint, the nature and location of her competition and how long it is reasonable to stop her hairdressing nearby. They have power to modify a Restraint of Trade under s 8 of the Illegal Contracts Act 1970 if judged too tough.

The fact that Petra did not pay Moana extra for the Restraint of Trade is unlikely to have much influence. This arises as Petra took the job knowing about the restraint and in return was supported through her apprenticeship. The Authority Member is likely to have in the back of his mind the 2007 case of Fuel Espresso stopping an ex-employee starting Beangrinding in Tory Street 70 metres away from its premises. Here the Court of Appeal ruled that as they had provided training for the barista there was no need to pay more than the modest $11.70 hourly wage to restrain their old employee competing nearby.

The next vexing issue is that of stopping competition. This introduces the legal concept of “proprietary interest”. A boss cannot protect herself from simple competition or an ex-worker exercising their skills and/or experience gained whilst in their employ elsewhere. The Authority Member would likely to pay particular attention if Moana has a close relationship to Petra’s business and can influence her clients away. That Moana was a pretty junior employee, there are unlikely to be trade secrets to protect, and perhaps evidence that locals shop around hairdressers to get their latest colour perm done would weigh on the decision makers mind. It would be a different story if Moana was a highly paid executive in a competitive technical business and planning to break her reasonable Restraint of Trade obligations to join a big competitor.

The next issue is location. There would probably be debate that the one kilometre radius restriction was too tough. For instance, evidence might show that High Street and its parallel street had three different hairdressing salons all within 500 metres of each other. Moana might argue she had no intention of finding work outside the Hutt, as she needed to be close to an ailing mother. Hard to say how the Authority Member might rule on this aspect.

Finally, there is issue whether three months is unreasonable. The case law the Authority Member is likely to be referred to surprisingly shows that three months is not that unusual to restrain hairdressers or indeed ordinary salespeople from competing with their previous employers.

So a Restraint of Trade is not black or white. A boss is thinking of restraining employee needs to think through how reasonable is the restraint proposed. A good way of doing this is to put oneself in the workers shoes and think is it really fair. The worker on the other hand, if asked to sign A Restraint of Trade should talk around, research the Internet and get advice. Technical looking gobbledegook clauses in employment agreements should not be passed over lightly – however humble the job.

Maybe if Moana’s case was real – rather than dreamt up – she could have been stopped from opening her salon for three months.

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