Skip to main content

Restraint of trade

Restraint of trade clauses prevent employees from working in similar businesses in a way that may affect their former employer’s business.

An employer and employee may agree to include a restraint of trade clause in their employment agreement. These clauses are designed to protect a business’ commercially sensitive information by restricting the employee‘s business activities when they finish working for that employer. They are usually limited to a specific geographical area and only last for a specific period of time after the end of the employee’s work.

The two main types of restraint of trade clause

The two main types of restraint of trade clause are:

  • non-competition - where a former employee is prevented from working in a similar field to their former employer’s business
  • non-solicitation - where a former employee is allowed to take another job in the same or similar industry, but is restricted from contacting their former employer’s clients about their new business.
  • Restricting a former employee from working with former clients for a set period of time.
  • Restricting an employee from working in the same industry for a period of time to protect trade secrets.
  • Restricting an employee from working a secondary job in the same industry while still in their primary job.
  • Preventing an employee from working in another job in the same industry within a reasonable distance of their former employer.

If you intend to operate or join a business in competition with a former employer, it is strongly recommended that you get your own independent legal advice as to whether a restraint of trade clause might apply to you.

Enforcing a restraint of trade clause

For an employer to enforce a restraint of trade there must be a specific restraint of trade clause in the employment agreement.

Even if there is such a clause in the employment agreement, it may not be enforceable. It is very important for the conditions of the clause to be reasonable.

If you want to enforce a restraint of trade clause it is strongly recommended that you get your own independent legal advice.

Deciding whether a restraint of trade clause is enforceable

Some factors to consider whether a restraint of trade clause is enforceable include:

  • whether the former employer has a business interest that should be protected. Restraints of trade cannot simply protect the employer from competition. They must have a serious business interest that needs to be protected such as:
    • trade connections
    • secret processes
    • confidential information
    • strong influence over former clients, etc.
  • whether it is reasonable for the stated activities to be restricted. The restriction must not unreasonably prevent the employee from earning a living in their field of work
  • whether the time period of the restraint is reasonable:
    • usually restraints of trade last for a few months
    • it is unusual for any period longer than 12 months to be reasonable, although there may be exceptions
    • the courts may also take into account the length of the work when deciding whether the time period is reasonable
    • time periods may also include any period that an employee has spent on ‘garden leave’.
  • whether the geographical or population limits of the restraint are reasonable. Restraints of trade may be limited to a particular area, or a group of people (eg former clients). For example, a restraint of trade clause may limit an employee from working within a 50km radius of their former employer, or may prevent an employee from working with or trying to attract former clients
  • the employee’s position. The employee must have held a relevant position to have access to the information necessary to make up the business interest
  • why the employee’s job is ending, for example, if the employee has been unjustifiably dismissed, a restraint of trade clause may no longer apply. If an employee has been justifiably dismissed, a restraint of trade clause may still apply, depending on the wording of the clause
  • whether fair consideration or compensation has been given to the employee.

What happens if a restraint of trade clause is unreasonable

If the restraint of trade clause is unreasonable, the Employment Relations Authority or Employment Court may state that the clause cannot be enforced so the employee does not have to comply with it.

The courts also have the power to modify contracts to make restraint of trade clauses reasonable.

Using confidential information from a previous job

Even if an employee’s employment agreement did not contain a specific restraint of trade clause, their employer may be able to prevent them from using certain highly confidential information in such a way that it may affect the employer’s business.

Generally there will be nothing wrong with using details that are unconsciously memorised, but employees should not write down and deliberately memorise business information for use in other jobs. General skills may also not be confidential skills, but if the employee has learnt a particular skill or technique specific to the employer, that may be confidential.

The courts will look at whether the information could be reasonably considered to be the confidential property of the former employer. These factors may help to work out whether information is confidential information that should be protected:

  • whether the employee used confidential or sensitive information in the course of their employment
  • whether the information counted as a trade secret or other highly confidential information
  • whether the employer made the employee aware that the information was highly confidential
  • whether the information can easily be separated from other knowledge the employee may have gained during their employment.

Examples of confidential information that has been protected:

  • customer lists
  • detailed accounting information
  • lists of customer details
  • ideas of what customers want
  • customer survey results
  • promotional information
  • product formulas
  • financial information.

What happens if an employee breaches a restraint of trade clause

If an employee breaches a restraint of trade clause or misuses confidential information, the employer may be able to apply to the Employment Relations Authority for an injunction restraining the employee from continuing such activities.

The employer may also be able to ask for damages to cover any loss they may have experienced as a result of the breach, and penalties for the breach of contract or a breach of the duty of good faith.

Still haven't found what you're looking for?