Stop me if you can: employee restraints

Andrew Scott-Howman, Partner | Wednesday 9 May 2007

First published in The Independent, 9 May 2007.

The legal profession, like many others, often seeks to shroud itself in mystique.

One view is that the law is often a means to legitimise concepts which seem to defy common-sense.  "The law is an ass" is an expression which undoubtedly captures the concept.

A restraint of trade is one of those things that would seemingly be easy to explain, but which at law is difficult to define with any certainty.  Let me explain.

An employee inevitably develops personally and professionally by working for a particular employer.  The employee may be exposed to confidential information in the course of his or her job and the employer has a legitimate right to assert an ownership over such things (and to prevent an employee from taking confidential information with them if they leave to work for another employer).

But can the employer legitimately prevent the employee from transferring his or her personal skills for the benefit of a competitor?

Here is where the law is confusing.

Under New Zealand law restraints of trade are as a matter of principle, illegal.  But they are enforced by the courts, in so far as they are "reasonable".

So what does that mean?

It is relatively common for New Zealand employment agreements to contain a provision whereby the employee agrees not to compete against the employer for a period of months following termination of employment.  The precise wording of restraint clauses vary but can include such things as an agreement not to solicit clients or co-workers, or more generally not to compete against the employer in any way.

The problem is of course that it cannot be guaranteed that the clause will be enforced by a court (or the Employment Relations Authority) to its full extent.  An analysis must be performed, taking into account the circumstances of the employee and the nature of the employment to determine whether the restraint agreed upon at the outset of employment is in fact "reasonable" at the time of purported enforcement.

A number of factors can be taken into account in that exercise, such as the length of the restraint, the extent of its geographic scope, whether the employer provided any particular consideration in exchange for the restraint and the practical effect upon the employee (ie whether he or she can "earn a crust" if the restraint is enforced to its full extent).

This weighing exercise is, of course, difficult.  It may produce different answers depending upon particular circumstances and the particular timing of the employee's departure from work.

Or put in plain English it is impossible for anyone to provide definitive advice about the enforceability of a restraint of trade.

The Courts have been asked to consider restraints and their enforceability on a couple of occasions in recent times.  In Fuel Expresso Limited v Hsieh (Unreported, Court of Appeal, 9 March 2007), a coffee retailer sought to restrain a former employee from operating a coffee cart which was located less than a 100 metres from its head office.

The employee had agreed to a three month restraint which would have prevented him from working at the competitor’s coffee outlet.  Despite this, he started working there just over a week after his resignation from Fuel.

The former employer sought an injunction effectively to allow for argument about the reasonableness of the restraint.  In determining that question, one of the key considerations was whether there was an arguable case that the employer had provided consideration for the restraint.  It had not paid a specific fee to the employee in exchange for the restraint but argued that payment of salary included some form of consideration for it.

The employer's argument failed in the Employment Court, but succeeded in the Court of Appeal. It was granted a injunction, preventing the employee from working for the competitor.

An injunction was also granted n the case of Mike Pero (New Zealand) Limited & Anor v Exact Solutions Limited & Anor (High Court, Wellington, 17 April 2007).  That case involved a former employee who had worked for Mike Pero Limited and who was said to have agreed to a restraint preventing him from working in a similar industry for a period of two years after termination. 

Again, the matter was argued in the context of an injunction (so that no final conclusions were reached about the reasonableness of the restraint).  In essence the central issue for the High Court was around the contractual certainty of the restraint.

The Court concluded that the evidence sufficiently established that the employee appreciated the effect of the restraint and the injunction was granted accordingly.

These cases illustrate some of the difficulties associated with enforcement of restraints of trade.  It is an area which on any view is accompanied by uncertainty. 

Let the former employer beware!