Why employers need to be reasonable with restraints of trade
Putting together an enforceable restraint in an employment agreement can be tricky, whether in terms of non-competition or non-solicitation, or both.
The comments below only scratch the surface of the issues that can arise.
The basic legal principles are simple – even first-year law students could recite them. However, those principles camouflage the complexities that can arise.
The position is not helped by repeated statements by judges and academics that restraints of trade are prima facie void as being against public policy.
It is true that restraints have to be justified, but the business reality is that a restraint is likely to be enforceable if it is reasonable.
And there’s the rub – what is reasonable? In a very recent case, restraints were watered down or held to be unenforceable.
What can be said with some certainty in the employer-employee context includes the following:
- An employer has to show they have a legitimate proprietary interest that the law recognises as being deserving of protection and the protection must be no more than is reasonably necessary.
- One type of restraint is unlikely to be appropriate for all employees – what will be reasonable will depend on what the particular employee does. For some, any form of restraint may be inappropriate.
- Longer restraints are less likely to be enforceable than shorter restraints. For most employees, the maximum restraint of trade period will be about six months, but for many the appropriate period may be anywhere between one and three months. On the other hand, for some very senior and influential employees a period of up to 12 months or more may be able to be justified. But even here, this will depend on all of the circumstances.
- Where a geographical restriction is appropriate in relation to non-competition, the restriction must be no more than reasonably necessary to protect the employer's legitimate interests.
- Restraints against soliciting or dealing with employer clients/customers should generally be restricted to those with whom the employee has had dealings and/or who the employer may be reasonably expected to be able to influence.
- A reasonable restraint may be enforceable even where there is a confidentiality clause in the employment agreement.
- Where non-solicitation clauses will adequately protect an employer, a restraint of trade in addition may be unreasonable.
- It is not necessary to pay the employee something specific for any restraint agreed to, but doing so may increase the chance of the restraint being enforceable.
- It is best to have restraints agreed to at the outset, when the employee is employed.
Even if a restraint is enforceable, where an ex-employee will not co-operate the legal costs of seeking an injunction to restrain the employee from acting in breach of the restraint can be a formidable hurdle (particularly for a very small business).
Still, the courts will enforce reasonable restraints and employees who breach them flagrantly can face significant liability, especially where this results in loss of business for the employer.
These comments are not legal advice. For that, you need to see a commercial or business lawyer.
Steve Dukeson is principal of Dukeson's Business Law, Auckland