Restraints of Trade – Are they enforceable?
A common question that we get asked is – how enforceable is the Restraint of Trade provision within the employee employment agreement?
This is most commonly questioned when a valuable employee has recently resigned to take up a similar position in a nearby or competing industry. To answer this question, we need to understand the intent of the ‘blanket restraint’ provisions that are frequently included in most Employment Agreement templates. This is generally comprised of two separate but interlinked clauses – the first being a Restraint of Trade and the second being a Non-Solicitation Clause.
The ’general’ restraint provision will usually define a period for which the employee is not to work for a competitor organisation (typically 6 – 12 months after termination) and may also include a geographical boundary to which the restriction applies (often stated as being as little as 5kms or as much as all of New Zealand).
The Non-Solicitation provision has a dual focus – (1) the departing employee will not seek to entice away any current employees of the employer to join them in the new business and (2) they will not seek to entice away any existing clients of current employer or encourage them to trade with the new company.
The ‘blanket’ restraint provision is generally seen as a disincentive only and has little enforceable power. Case Law reinforces that, where Restraints of Trade have been enforceable, the employer has been able to demonstrate what proprietary interests they are seeking to be protect. This may include client lists, company financial data or pricing information and what inconvenience (lost or disruption) may be incurred as a result of this information being transferred to another business. The purpose of the restraint provision to provide a degree of protection to the current employer while they either seek to sure up their client relationships or put in place other measures to protect their intellectual property.
The Non-Solicitation provision is inherently difficult to enforce as employees have free choice as to how long they will continue within their current employment, and who they may elect to work for in the future. It is therefore extremely difficult to prove that a recent employee has enticed another employee to leave their current employment in favour of becoming employed within the new company. Similarly, the existing employer has little ability to prevent an existing client from transferring their work requirements over to any other business. Obtaining proof that an ex-employee has been instrumental in these decisions can however be extremely difficult.
So, is there a way to make restraints more enforceable?
Yes – where the employer believes that, due to the nature of the role undertaken by the employee, there is general risk and liability (inconvenience and proprietary) the employee can be asked to sign a ‘Specific Undertaking’ letter in addition to their employment agreement. The Specific Undertaking will state what is sought to be protected, the specific restraint territory and also state a quantifiable consideration (financial value) assigned to the restraint provision. Where a Specific Undertaking is signed, in addition to the IEA, this will have considerably greater enforcement value.
If you have employees who you believe could create significant risk to your business if they were to depart and secure employment within a competing organisation and believe that you need to ‘plug this gap’ through a more specific undertaking, please feel free to contact us as we have a number of template documents that will enhance your enforcement capabilities.