News
Employee restraints: this time it's WAR
First published in the Independent, 7 November 2007.
Goodwill is difficult to define - especially in a commercial context.
When considering the value of a business, it is a relatively easy exercise to consider the value of its buildings and possessions.
The real value of an ongoing business is, of course, the connections that it has to its clients, customers and its marketplace. And that is something which is altogether more difficult to value.
Part of this value is made up of the company's intellectual property - things like products or services that it has developed, or pricing arrangements which give it a particular edge in the market. These things generally fall within the ambit of "confidential information", and are the property of the company. A departing employee cannot use any of this type of information in a new job.
But what if an employee leaves the company who, through longevity and personality, has particular connections with customers and a specialist knowledge of the particular marketplace. Surely, these relationships and expertise are personal to the employee?
The simple answer is that these types of things do, in the ordinary course, belong to the employee and can be taken with him or her to a new job. For this reason, the company can try to protect itself from the employee's competition by including one or more restrictive covenants in the employment agreement.
In essence, a restrictive covenant prevents an employee from competing against the employer (whether it be by soliciting clients, other employees, or simply by providing his or her services to a competitor) for a defined period - and usually within a defined geographical area.
Curiously, the general rule of law is that such restrictive covenants are illegal. However, restraints such as this are enforceable under New Zealand law to the extent that they are reasonable.
So what constitutes a "reasonable" restraint? And what happens if an employee acts in breach of one?
The recent case of Rodwil Enterprises Limited v Dominguez & Nirvana (Unreported, Employment Relations Authority, Auckland, 3 September 2007) provides a colourful illustration.
Dominguez is a hairdresser of some note. For just under a year he worked at a salon called "WAR Hair Design". Evidently, he was a popular stylist, and won the loyalty of a number of the salon's clients.
Dominguez's employment agreement contained restrictive covenants which, amongst other things, said that if he left WAR Hair Design he could not, for a period of three months, solicit any customers that he had dealt with, or work for a competitor within a three kilometre radius.
In June 2006 Dominguez had a disagreement with one of the owners of WAR Hair Design which culminated in a decision to resign. Within two weeks of this resignation, Dominguez succeeded in obtaining a job with rival salon Nirvana, which was situated just 50 metres down the road.
Perhaps understandably, the owners of WAR were concerned to learn about Dominguez's new employment arrangements. Some correspondence was exchanged between lawyers which culminated in an acceptance that Dominguez could work for the competitor on the basis that he provided an undertaking that, for a period of three months, he would not solicit customers from WAR, nor would he deal with any customer who he had serviced while a stylist at his previous job.
But Dominguez could not adhere to the terms of this undertaking. The Authority accepted that WAR could demonstrate that Mr Dominguez had served a number of previous customers at his new salon.
The Authority assessed the money which Dominguez had earned from these clients (being money which War had been deprived) and ordered Dominguez to reimburse his former employer by this amount.
A number of key aspects can be taken from this case.
First, it illustrates the Authority's acceptance of restraints and, so long as they are reasonable, their sanctity. An employee that flouts a restraint does so at his or her own risk.
Secondly, it represents a helpful example of the way in which the Authority will punish breach - by requiring the employee to pay back money earned in breach of the restraint. One can imagine that, in this case, being required (in effect) to refund money earned to a former employer was a bitter pill for Mr Dominguez to swallow.
Thirdly, with these things in mind, the case offers a guide to employees about how to approach future employment opportunities in the face of a restraint. It is probably sensible for an employee to disclose the fact of a restrictive covenant to a new employer - perhaps so the new employer can seek some advice about potential consequences for it as well as for the new employee.
