In September 2022, the Employment Relations (Restraint of Trade) Amendment Bill (Bill) was introduced to Parliament by a private member (Labour Party). If passed, it would introduce radical changes to existing New Zealand case law.
Compared to approaches taken overseas, however, the proposed changes would be relatively mild. In USA, the Federal Trade Commission has proposed a complete ban on new employment restraints and rescinding of existing restraints1.
The Australian Government has recently directed the Australian Competition and Consumer Commission to investigate the effects of employment restraints on wage growth and determine whether the Government ought to take action2. Other jurisdictions have already banned employment restraints outright3.
Considering global approaches, the idea of restricting an employers’ reliance on restraints of trade is therefore not new or unusual.
This article addresses current legal principles for restraints of trade and how those principles would be altered by the Bill.
What are the current principles?
Restraints of trade are post-employment obligations on employees to not, within a certain time period:
- compete with the employer, which will also typically include a geographical limit (i.e, within a certain region); and/or
- solicit employees to leave the employer; and/or
- solicit/deal with clients/customers/suppliers of the employer.
Broadly speaking, a restraint of trade may be enforceable if:
- there is a proprietary interest (such as intellectual property, confidential information or know how, or goodwill/relationships) that justifies a restraint;
- the time-period and geographical area are no more than are reasonably necessary to protect the employer’s interest; and
- it is in the public interest to uphold the restraint.
The Courts have developed a cautious approach to upholding restraints of trade. However, as there is currently no legislation that provides clear parameters, all restraints (regardless of reasonableness) are capable of being litigated. This can feasibly result in lower paid workers adhering to restraints that may be unlawful, solely to avoid litigation costs and stress.
What would the Bill change?
In its current version, the Bill proposes the following key principles that would apply to restraints of trade:
- Restraints will have no effect unless all of the following apply:
- The employee must be paid more than 3 times the minimum wage, which currently would be $68.10 an hour (based on the current $22.70 minimum wage) or circa $132,795 as a salary (based on working 37.5 hours per week).
- The employer must have a valid proprietary interest that is described in the employment agreement and justifies the necessity of the restraint (which is more or less a codification of existing case law).
- The employment agreement must include “reasonable compensation” for the restraints, to be paid at termination of employment. This is calculated as 50% of the employee’s Average Weekly Earnings for each week of the restraint.
- The reasonable compensation would need to have been paid, before the employer seeks to enforce the restraint.
- Restraints will only be effective for up to 6 months post termination of employment.
We note the Bill does not propose to amend current principles as to confidentiality and fidelity or business sale restraints.
If the Bill is passed, it will come into effect the day after royal assent. This means any new agreements will be subject to the new provisions. Employment agreements in force at the commencement of the provisions, however, will be subject to lead times for compliance:
- For collective employment agreements, the provisions will only apply to any replacement collective or individual employment agreement.
- For individual employment, employers will have 6 months from commencement of the provisions to amend contractual terms to be compliant.
What does this mean for businesses who need to protect their interests?
Employees below the wage/salary threshold
In its current form, the Bill’s wage/salary threshold would exclude a large portion of employees from being subject to restraints, many of which would be in positions of influence that may have otherwise justified the necessity for restraint. The Bill defines restraints of trade as including non-competition, non-dealing and non-solicitation restraints. Employers will likely be concerned as to how they will mitigate the risk of influential competing, and poaching staff and customers.
The first measure against this risk is to ensure contractual terms are drafted in a careful manner to protect intellectual property and confidential information. The Bill does not propose to limit an employer’s ability to have enduring terms regarding these two issues. Provided the relevant terms are sound, employers will have redress should an employee use relevant information in their post-employment endeavours. Employers ought to review relevant contractual terms and ensure they are:
- purpose-built for their particular business;
- certain as to what information is considered confidential and/or intellectual property; and
- express as to what will be considered a breach of the term (i.e. retaining, using and disclosing information).
Another contractual measure is to draft in the ability to place an employee on gardening leave, at the employer’s discretion, during the employee’s notice period. During this period of gardening leave, the employee would still be paid their usual remuneration, but could be excluded from the workplace and their access to company systems would be revoked. Again, it is important to ensure the relevant contractual term captures the extent of exclusion in express terms.
Employers may also include negotiating longer notice periods for more senior employees coupled with gardening leave clauses. While the employee would be paid for an extended time for not working, the mitigation offered by a restraint would be essentially replicated for the duration of the gardening leave.
Employees above the wage/salary threshold
For employees that are paid above the threshold, the Bill would allow restraints to be in place. However, employers will need to ensure that any such clauses meet the provisions of the Bill.
Employers will need to put pen to paper in identifying a proprietary interest. This is particular to each employer and employee, and therefore should not be approached carelessly. Careful consideration needs to occur in identifying what the employee will have access to to in the course of their employment, that is not publicly available or trivial, that the employer can justifiably protect.
Employers will also need to ensure that:
- the term of the restraints operate for no longer than 6 months after the termination date, which is the employee’s last day of employment (not the date they hand in, or are given, notice of termination);
- upon termination and before any attempts are made to enforce the restraint, they pay the employee compensation (50% of the employee’s Average Weekly Earnings for each week of the restraint); and
- they amend their employment agreements, for applicable employees, within the lead times referred above.
Next steps
It’s unclear whether the Bill will ever pass into law, and what changes could be made along the way, particularly considering we are in an election year. If passed, it will result in significantly reducing employer utility of restraints. However, it would provide clear parameters for restraints and make employers think carefully before incurring the cost of restraining applicable employees, potentially resulting in widespread release of restraints for employees.
The Bill is likely to be amended and refined before it’s passed, if it is indeed passed.
Special thanks to Associate Matt Hutcheson for preparing this article. Our Employment Law team will provide updates as the Bill progresses through Parliament.
[1] Non-Compete Clause Rulemaking | Federal Trade Commission (ftc.gov)
[2] Wages growth: Non-compete clauses in government’s sights to get wages rising (smh.com.au)
[3] California (California Business and Professions Code § 16600); Malaysia (Malaysian Contracts Act 1950, s 28); India (Indian Contract Act, s 27).
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
