What does restraint of trade mean? Can it be enforced against me?

Shine Lawyers New Zealand - Right Wrong

Leaving an old job for a new one can be an exciting time. However, when taking the next steps, there may be important legal implications – particularly if your previous role provided you with access to important company information. This could be anything from trade secrets to a client list.

In order to protect the company’s interests, your former employer may have included a restraint of trade clause in your contract.

Here, we take a look at what this term means and whether an employer can stop you from working with a competitor in New Zealand.

What is restraint of trade?

Restraints of trade are common in certain industries and executive roles. They may also be known as restrictive covenants. Often they are contentious and the subject of legal dispute.

Employers may be concerned about the misuse of confidential information by their former employees. Other issues include former employees going on to compete against them, attempting to hire former colleagues from that employer, or luring former clients with them to their new venture.

In New Zealand restraints of trade need to meet certain legal criteria, otherwise, they will be unenforceable.

Restraint of trade must be seen as reasonable from three points of view:

  • the employer’s,
  • the employee’s,
  • and the general public’s.

Merely protecting from the competition is not enough. To be reasonable, it must protect from more than that.

Employees have a right to earn a living, unencumbered, and usually, the courts err on that side. However, if an employer can justify that the restraint of trade is legitimate, it may be upheld.

One key point is that the restraint of trade cannot be a blanket restriction – it must not go wider than what is reasonably necessary.

Restraint of trade in employment contracts

You may not have paid attention to the fine print of your original contract, but there may have been a restraint of trade clause included. This can cause complications when trying to move to your new role.

It’s important to note that there are different types of restraint of trade clauses that mean different things.  

Non-compete clause

Firstly, a “non-compete” clause aims to stop you from hopping straight to a rival company or starting your own company in direct competition with your old one.

Non-compete clauses may also restrict you by time or location. For example, you may need to wait a certain amount of months post-termination before you can work for a competitor.

Geographic restrictions

Others may have geographic restrictions – for example, it may mean that you can work for a competitor in another city, but not for one in the same area.

Non-poach or non-solicitation restraints

A “non-poach” to “A “non-poach” or “non-solicitation” restraint, however, is all about whom you take with you.” Such a clause may attempt to stop you from poaching clients you used to work with, or staffing your new company with colleagues you worked with.

Confidentiality clauses

The most crucial restraint of trade, however, is one that is in respect to confidential information. Financials, client lists, intellectual property, and trade secrets are all highly contentious areas that most companies vigorously defend. This is a particularly risky area, and it is important to seek prompt legal advice.

Restraint of trade in partnership

Restraints of trade don’t just apply to employer/employee relationships. They are also common in the case of partnerships – and are more enforceable in this situation since both parties are on more equal footing.

Partnership deeds will often contain restraints of trade to stop former partners from setting up in competition with each other.

Is restraint of trade enforceable?

When you leave a role, it can be very daunting to receive a letter of demand from your former employer. It may seem completely unfair that your old job is trying to block your new career path, and their restrictions may seem unreasonable, especially if you are in a smaller industry with fewer job options. The good news is that if the restraint of trade is unreasonable, the courts will not uphold it.

To be seen as reasonable, the employer will need to demonstrate they have a legitimate interest to protect. Additionally, any restraint of trade must not last longer or extend wider than is reasonably needed in the circumstances to protect that interest.

To understand how likely it is that the courts would uphold a restraint of trade, an employment law expert can provide valuable advice based on the specific wording of your contract. This can give you peace of mind as you move into your new role.

Contract dispute? Shine Lawyers can help.

If your former partner or employer is claiming that you have breached your contract, it is important to seek legal advice or representation as soon as possible. This is a risky and complex area of the law.

When considering a new role or contract, it’s prudent to get advice from the outset. Our expert employment law team can advise you before the fact, or handle negotiations with a disgruntled past employer after the fact. We recognise the need for discretion with executives and senior managers and are highly experienced with this area of employment law.

Contact us today to find out more.

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