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 contact)
- 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 employer.
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 proprietary interests.
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 consideration.
- 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 circumstances.
- 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 employee.
Enforcement against new employers
Former employers are increasingly taking action against competitors who engage employees who are subject to a restraint of trade.
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 business.
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 that restraint.
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.