Restraint of trade clauses are commonly used provisions in employment agreements that (at a high level) prevent, for specified time periods and within specified geographical areas, ex-employees from working in competing business and/or soliciting or dealing with clients of the ex-employer and/or soliciting of/hiring of employees or contractors of the ex-employer, after the employment relationship ends.
Yesterday, the Employment Relations (Restraint of Trade) Amendment Bill (2022 – No 172-1) was introduced to Parliament by Labour MP Helen White. It proposes to:
- prohibit restraint of trade provisions in employment agreements for employees who earn less than three times the minimum wage (the Bill is not clear on how low base earnings plus high commissions would be impacted);
- only allow restraints of trade in employment agreements for higher income employees after they have been carefully considered by employers, and the restraints found to be appropriate for those particular employees (which should actually be the considerations applying to any restraint of trade clauses now in any event);
- if the employer still wishes to include a restraint of trade, and the employee meets the earning threshold, paying reasonable compensation to the employee of an amount equal to half of the employee’s weekly earnings for each week that the restraint of trade remains in effect (after employment ends); and
- limit the duration of restraints of trade to no more than six months.
As it currently stands, case law provides that for restraint of trade clauses to be enforceable, they must be reasonable and necessary in order to protect the relevant legitimate proprietary interests (i.e. stability of workforce, trade relationships and confidential/commercially sensitive information). Given that, employers should already be putting thought into which restrictions (if any) are put into employment agreements, which legitimate proprietary interests could be at risk when the employment relationship ends, and for how long/in what areas, and then tailoring those restrictions (including durations and areas) to the role in question.
In reality, we see some employers not putting thought into restraint of trade provisions included in all employment agreements despite the role, and/or including onerous clauses as a “deterrent” even if they recognise the restraints are unlikely to be enforceable in reality.
In our view, there is a case to be made for putting in place some limits on the use of restraint of trade restrictions, particularly for low earning employees who may not have the resources to challenge the enforceability of an onerous and unreasonable restraint. However, the limits proposed by this Bill would represent a significant shift, leaving very few employees subject to restraints, and those that would be still being paid post-employment while the restraints were in place.
The Bill is yet to have its First Reading, and if it passes, we would expect plenty of debate, and hopefully re-drafting/clarifying, as it progresses through Parliament. So, for now, watch this space (we certainly will be)!
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