While the Employment Relations (Restraint of Trade) Amendment Bill (“the Bill”) is yet to have its first reading in Parliament, what is apparent on current information is that it could significantly limit the use of employment related restraint of trade clauses in New Zealand, particularly for lower to middle-income earners.
Currently, the starting point with restraints is that they are generally considered contrary to public law, anti-competitive and therefore unenforceable. Nonetheless, restraints can be valid in certain instances, particularly where an employer has what is known as a legitimate ‘proprietary interest’ and can prove that the restraint is no wider than what is reasonably necessary to protect that interest(s). For example, an employer is entitled to protect trade secrets and/or a continuing business relationship, so long as it does so in a reasonable manner.
Over the years however, restraints of trade have been used liberally by New Zealand employers and have not infrequently been included for roles which may not in fact warrant them. In turn, employees have been left in a difficult position when their employment ends, unsure of whether a restraint is enforceable against them and/or if they can or cannot accept a new role which might breach the restraint.
In drafting the Bill, Parliament have recognised a number of issues of public interest, including the two raised above, and has effectively sought to even out the playing field.
- seeking to prohibit the use of restraints for lower and middle-income employees (which would be achieved by providing that such clauses will have no effect if an employee earns less than 3 times the minimum wage); and
- employers of higher income employees needing to carefully consider whether a restraint clause is actually required and to compensate employees appropriately where a restraint is imposed, both during and following termination (i.e. during the restraint period).
If the Bill passes through Parliament and receives Royal Assent, employers will need to work through a number of matters set out in the Bill where they are proposing that a restraint of trade clause apply to a new employee. Employers will also need to turn their mind to whether restraints which apply to current employees will be effective and valid on the termination and the potential implications if they are not.