What Should Employers Do Immediately After A Restrictive Covenant Breach?

Summary

• Restrictive covenants in New Zealand employment agreements are only enforceable if they are reasonable in scope, duration, and geographic area, and necessary to protect legitimate business interests such as confidential information, client relationships, or workforce stability.
• When a breach is discovered, employers should immediately verify the breach by reviewing the exact wording of the covenant, gather and preserve all relevant evidence before it is lost, assess the financial impact, and seek legal advice promptly as delays can weaken the employer’s position and limit available remedies.
• Enforcement options escalate from a formal cease and desist letter (which resolves many breaches without litigation) through to interim injunctions for ongoing or serious breaches that require immediate court intervention to prevent further harm.
• This article is a guide to responding to restrictive covenant breaches for employers in New Zealand, explaining the immediate steps to take when a former employee breaches a non-compete, non-solicitation, or confidentiality clause.
• LegalVision is a commercial law firm that specialises in advising clients on employment law and dispute resolution matters.

Tips for Businesses

Act immediately upon discovering a potential breach, documenting the date of discovery and moving swiftly through verification, evidence preservation, and legal advice steps. Review all restrictive covenants across your business regularly to ensure they remain reasonable, clearly drafted, and enforceable before a breach occurs. Send a cease and desist letter before commencing court proceedings, as many breaches are resolved at this stage and the letter demonstrates to the court that you attempted to resolve the matter first.

When a former employee breaches a restrictive covenant, whether it is a non-compete, non-solicitation, or confidentiality clause, swift action is essential. These covenants protect your business interests, client relationships, and confidential information.  This article outlines the immediate actions employers should take when discovering a breach, from verifying the violation and preserving evidence to seeking legal remedies that protect your business.

What is a Restrictive Covenant?

A restrictive covenant is a clause in an employment agreement that limits what an employee can do after their employment ends. Employers use these clauses to protect legitimate business interests, such as confidential information, client relationships, and workforce stability. Restrictive covenants aim to prevent former employees from using insider knowledge, business connections, or sensitive information in a way that harms the business.

Common types of restrictive covenants include:

• Non-compete clauses: These prevent a former employee from working for a competitor or starting a competing business for a certain period and within a defined geographic area.
• Non-solicitation clauses: These stop a former employee from approaching or attempting to attract the employer’s clients, customers, or employees. In some cases, they may also prevent the former employee from accepting work from former clients.
• Non-dealing clauses: These go further than non-solicitation clauses by preventing the former employee from having any business dealings with certain clients, even if the client makes the first approach.
• Confidentiality clauses: These prevent a former employee from disclosing, using, or sharing confidential information, trade secrets, or other sensitive business information.

Enforceability in New Zealand

To enforce a restraint of trade clause, such as a non-compete or non-solicitation clause, an employer must show that the restraint is reasonable and necessary to protect a legitimate business interest. Courts will not enforce a restraint simply because an employer wants to prevent competition.

To improve the chances of enforcement, the restraint should:

• go no further than necessary to protect the business;
• apply for a reasonable period of time;
• cover only an appropriate geographic area; and
• protect genuine business interests, such as confidential information, client relationships, or workforce stability.

Immediate Steps to Take When a Restrictive Covenant Is Breached

1. Verify the Breach and Preserve Evidence 

Before taking action, confirm that a breach has actually occurred. Review the employee’s employment agreement to identify the specific restrictive covenants in place and their scope:

• Check the exact wording. Does it cover the employee’s current activities?
• Is it a non-compete, a non-solicitation, or both? 
• Are there confidentiality and intellectual property protections?
• Are you still within the restriction period? 
• What is the restricted area?

After reviewing the employment agreement, the employer should gather clear evidence of the suspected breach. This may include LinkedIn updates showing new employment, complaints from clients who were contacted by the former employee, evidence that confidential information is being used, or reports from current staff about attempts to solicit clients or employees.

Employers should secure and preserve all relevant evidence before it is deleted, changed, or lost. This may include:

• the employment agreement and any relevant policies;
• email correspondence with the former employee;
• client lists and contact records;
• evidence of client contact, solicitation, or lost business;
• social media posts and professional networking profiles;
• financial records showing the commercial impact of the breach;
• witness statements from clients or current employees; and
• evidence that the former employee accessed confidential information, client databases, or sensitive business records before leaving the business.

2. Act Quickly

Time is critical when enforcing restrictive covenants. The longer a breach continues, the more damage occurs to your business and the harder it becomes to remedy. Document the date you discovered the breach and move swiftly through the enforcement steps.

3. Seek Legal Advice Immediately

Contact your lawyer as soon as you identify a potential breach. Your lawyer will assess whether your restrictive covenant is enforceable and advise on the strength of your evidence and the most appropriate course of action based on the severity of the breach and potential damages.

4. Assess Damages

Calculate the financial impact of the breach. Have you lost clients? Has confidential information been misused? Are other employees being solicited? This assessment helps determine whether to pursue damages in addition to injunctive relief and informs your overall strategy.

5. Send a Cease and Desist Letter

Before commencing court proceedings, consider whether sending a formal cease and desist letter to the former employee would be an effective first step. This letter should:

• Identify the specific breached restrictive covenant
• Detail the evidence of the breach
• Demand immediate cessation of the prohibited activities
• Set a deadline for compliance 
• Outline the consequences of continued breach, including legal action

Many breaches are resolved at this stage, saving time and legal costs. The letter also demonstrates to the court that you attempted to resolve the matter before litigation.

6. Consider Interim Injunctions

If the breach continues after your cease and desist letter, or if the breach is causing immediate serious harm, consider whether applying for an interim injunction is required. This court order requires the former employee to stop the prohibited activities whilst the full case proceeds. 

Interim injunctions can be obtained quickly, making them a powerful tool for stopping ongoing breaches. However, they can be costly exercises and you should seek legal advice on whether it is an appropriate course of action. 

Future Mitigation: Review Your Restrictive Covenants

Use this experience to review restrictive covenants across your business. Are they clearly drafted? Are the restrictions reasonable? Strengthening your covenants now can prevent future breaches and assist in enforceability.

Key Takeaways

When an employer discovers a possible breach of a restrictive covenant, they should act quickly and strategically. Restrictive covenants are not automatically enforceable, so the employer must take active steps to enforce them through the proper legal process. Acting early can improve the chances of protecting confidential information, client relationships, and other legitimate business interests.

Key steps include:

• acting quickly after discovering the breach, as delays can weaken the employer’s position and limit the remedies available;
• reviewing the employment agreement to confirm the restrictive covenant applies and that the employee’s conduct falls within its scope;
• gathering and preserving evidence, including emails, social media activity, witness statements, and records of client contact;
• assessing the commercial and financial impact of the breach to help determine the appropriate response;
• considering the available legal options, such as a cease and desist letter, an interim injunction, or court proceedings; and
• reviewing existing restrictive covenants across the business to ensure they remain reasonable, enforceable, and fit for purpose.

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Frequently Asked Questions

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.