There are two words that every employer fears from a key
employee, "I'm leaving." The situation is
only made worse when you find out that your key employee is leaving
to join a competitor!
This issue is particularly relevant in the current employment
market in Canterbury. Industries which are directly or indirectly
contributing to the rebuild will be placing increasing reliance on
their key staff.
Retaining key staff and protecting your business if they leave
to work for a competitor is important. But the problem is not
limited to post-earthquake Canterbury. Employees going to work for
competitors is a long standing issue.
One of the key mechanisms in an employer's arsenal is a
carefully drafted restraint of trade in an employee's
employment agreement. Broadly speaking, there are four main types
of restraints that can be placed on employees:
Non-competition (preventing the employee from competing with
their previous employer)
Non-dealing (preventing the employee from dealing with clients
or suppliers of their previous employer regardless of who initiates
Non-solicitation (preventing the employee from soliciting
clients, employees or suppliers of their previous employer)
Confidentiality (prevent the employee from using confidential
information of their previous employer)
This article will concentrate on the first type of restraint
preventing an employee from competing with their previous
Enforcement against former employees
Restraints of trade cannot protect you from mere competition
from a former employee. You must be able to prove you have a
legitimate proprietary interest that needs to be protected, such as
trade secrets or confidential client lists. Restraints must also be
reasonable and go no further than is necessary to protect your
The Employment Relations Authority or Courts will usually
consider the following factors when deciding whether they should
enforce a restraint against a former employee:
Has the employer given the employee something in return for
agreeing to the restraint? If the restraint is included in the
employment agreement that the employee signed when they started
work, the employee's pay will be considered sufficient
Is the geographical area covered by the restraint reasonable? If
the employer's business is limited to the Canterbury region, a
nationwide restraint preventing the employee from working anywhere
in New Zealand is unlikely to be considered reasonable.
Is the duration of the restraint reasonable? Generally,
restraints of up to 12 months may be considered reasonable but what
is reasonable will be dependent on the particular
What effect will enforcement of the restraint have on the former
employee? Factors to consider may include the employee's
history of employment, nature of the employer's industry, the
employee's seniority and any potential impacts on the
Enforcement against new employers
Former employers are increasingly taking action against
competitors who engage employees who are subject to a restraint of
A claim may be brought in the Employment Relations Authority
against the new employer if they were aware the employee was
subject to a restraint of trade and employed the employee to
undertake work in breach of that restraint. If successful, the new
employer may be required to pay a penalty of up to $10,000 in the
case of an individual or $20,000 in the case of a company.
The former employer may also bring a claim against the new
employer in the High Court seeking an injunction to prevent the
employee from continuing to work for the new employer during the
restraint period and/or the payment of damages.
What can you do?
It is important to consider what protections are needed for each
employee at the commencement of employment. A restraint of trade
clause should be tailored to the role that each employee has in the
You should also review the restraint as the employee's role
develops and as they are promoted within the business. Any
restraint sought during the employment relationship will require
some additional payment in compensation for the employee providing
If you would like us to review your employment agreements or
discuss what form of restraint may be appropriate for your
business, please contact a member of our Employment Law team.
We can also assist with any enforcement action if you suspect a
departing employee may be in breach of their restraint of trade. It
is important you act quickly to prevent the use or disclosure of
proprietary information to a competitor.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Long experience representing many of Australia's leading employers has taught us that in employment litigation the identity of an employee's representative is a major factor in how employee litigation runs.
This WHS decision clarified the interpretation of s 19 of the Work Health and Safety Act 2011 (NSW).
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).