111 – Workplace Law Newsletter

In this edition:

Restraint of Trade Provisions – when are they Enforceable?

While “restraint of trade” or “non-competition” clauses have long been a feature of employment agreements, their use has become increasingly common over the last few decades as the use of professionally drafted employment agreements has become more widespread.

Such clauses have the purpose of restricting the activities of a former employee and in their most common form prevent an employee from working for a rival in the employer’s trade or engaging in a particular activity when their employment ceases.  Related clauses are also common; in particular, non-solicitation clauses that are intended to prevent a former employee from soliciting or employing former colleagues or from soliciting the business of clients and customers of the former employer.

Are they Enforceable?

The starting point for restraint of trade clauses is that they are unenforceable, unless the previous employer can establish that it has a proprietary interest it needs to protect and that such clauses are reasonable.

Non-Solicitation clauses, on the other hand, are readily accepted and enforced by the courts.

Whether a restraint of trade clause is enforceable is ultimately a question to be determined by the courts and is very fact dependent.  Section 8 of the Illegal Contracts Act 1970 allows the court to delete or modify a restraint of trade provision; and case law shows that they are prepared to exercise this power in appropriate cases.

What is “Reasonable”?

When assessing what is reasonable, the court will take into account the following main considerations:

  • Is there a legitimate proprietary interest (i.e. what is the employer trying to protect)?
  • Whether the particular type of restraint is appropriate to protect the relevant proprietary interest;
  • Duration of the restriction;
  • The geographical scope of the restraint;
  • The nature of the employee’s role;
  • What consideration has been paid; and
  • Whether the parties had equal bargaining power at the time the restraint was agreed.

Proprietary Interests

An employer is not entitled to protection against mere competition on the part of a former employee.  The type of interest properly protected must be some “proprietary interest” of the employers; that is, the claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, the employer’s property.  The most common forms of proprietary interests are trade secrets, or information confidentially obtained, but other interests may also be protected.

Where there is a proprietary interest worth protecting, the key point is that the restraint must be no wider than reasonably necessary to protect that interest(s).  It is often easier to establish that a restraint of an employee in a senior position is reasonable.   This is usually to reflect greater access to protectable trade secrets and client/supplier contact on the part of senior employees.

Caution for Employers

It is worth noting that if an employee is under a restraint of trade and takes up an offer of employment in breach of the restraint, the original employer may bring an action against the new employer as well as a party on the basis that they have incited, instigated, aided or abetted a breach of an employment agreement.

The previous employer may apply to the Employment Relations Authority for an interim injunction preventing the ex-employee from working for the new employer.

In light of the above, if your business includes restraint provisions in its employment agreements, we suggest you review these clauses, keeping in mind what proprietary interests you need to protect and whether the restraint is “reasonable”.

2 Cheap Cars Limited – Too Cheap to pay its Employees

Labour Inspector v 2 Cheap Cars Limited [2017] NZERA Auckland 270

2 Cheap Cars Limited undertakes business as a second-hand car dealer, operating 14 branches across New Zealand and employing around 83 employees.   In early 2015 the Labour Inspectorate, on the basis of media reports regarding 2 Cheap Cars’ compliance with employment standards, undertook an audit of the company.

After taking a sample of the current employees, the Inspectorate found employees were owed $20,835.34 of entitlements.  2 Cheap Cars accepted liability and paid all arrears.

The systemic nature of breaches meant, however, that almost all employees were affected.  2 Cheap Cars were issued with an Improvement Notice in November 2016 to undertake an independent audit of their records, which so far has uncovered an estimated amount upwards of $250,000.00 in arrears.  A second external audit is currently being undertaken, and sets out to ensure all current and former workers have received their correct entitlements.

The issue for determination in this case was the quantum of penalty in respect of the employment law breaches.  The Authority applied the four step approach as set out in Borsboom v Preet PVT Ltd [2016] NZEmpC 143, where the full Employment Court identified the factors for imposing a penalty for breach of minimum employment standards.   The four step approach is as follows:

  1. Identify the nature and number of the breaches and the maximum penalty available;
  2. Assess the severity of the breaches;
  3. The financial circumstances of the employer; and
  4. Apply the proportionality or “totality” test.

Having gone through the above approach, and taking into account submissions from parties, the Authority ordered 2 Cheap Cars pay a penalty of $70,000.00 to the Crown in recognition of its wrongdoing.

2 Cheap Cars will also be placed on a 24 month stand down from recruiting migrant workers as a consequence of not having complied with employment standards.  


2017 Election – The Parties’ Stances on Immigration

With the final decision yet to be made as to the makeup of our next Government, we review where the parties stand with regard to Immigration issues, and the potential changes which migrants may be facing over the next three years. With New Zealand First holding the balance of power, its conservative immigration policies will likely prove to have a curbing effect on National’s policies, or a more restrictive approach in conjunction with Labour’s proposed policies.

The National Government recently implemented some significant changes to the Essential Skills Category and the Skilled Migrant Category (SMC).   It was also indicated that the National Government would also undertake reviews of the Hospitality, Aged Care and Primary Industry Sectors by the end of this year, and undertake a review of the Regions by mid-2018. However, if National enters into a coalition with New Zealand First, then we may see a more conservative approach to immigration as a result, especially so if the recent changes implemented on 28 August have not resulted in a reduction in the number of visa approvals under the SMC (which we are expecting).

The Labour party has a more conservative attitude to immigration than National. Labour has proposed an overall net migration reduction of 20,000 to 30,000, and this is likely to be higher if Labour’s proposed policies are introduced.  If it enters into coalition with New Zealand First it is possible that their approach to immigration may see the net migration reduction pushed even further.

We anticipate that under a Labour-New Zealand First coalition, proposed policy changes are likely to be implemented for Students and Post-Study migrants, such as more stringent English Language requirements being imposed.  It is important for employers to note that New Zealand First’s aim is to reduce migrant worker exploitation.

Since immigration did not appear to be one of Labour’s major policy platforms for the election, changes to the sector may not be introduced as quickly.  However, in combination with New Zealand First, a conservative approach to immigration is likely. Policy shifts under a Labour-led government would also likely see the recruitment processes become more onerous for employers, with a significant reduction in options available to lower-skilled migrants.

On a positive note, Labour has made a commitment to ensuring that genuine skill needs in the market are met. The indicated intention of Labour is to facilitate the flow of skilled migrants into roles where a genuine need exists. Highly skilled migrants may therefore feel less impact than their Student and Post-Study counterparts, as long as New Zealand First are in agreement with Labour on this issue.

Time will tell whether we will have a National-New Zealand First coalition or a Labour-New Zealand First one. Whichever the resulting Government, there will be changes impacting on migrants to New Zealand and also the employers who recruit migrants. Increased complexity around migration and tightening of eligibility criteria for your employees will be best navigated with professional assistance.

Workplace Law Team

If you have any queries in respect of the above, or any other workplace law issues, please contact a member of Lane Neave’s Workplace Law Team:

Employment: Andrew Shaw, Fiona McMillan, Siobhan Rastrick, Gwen Drewitt; Hannah Martin; Holly Struckman; Anna Needham
Immigration: Mark Williams, Rachael Mason, Nicky Robertson, Hetish Lochan, Daniel Kruger, Julia Strickett, Rita Worner, Lavinia Shanks, Winnie Chen, Caroline Edwards, Ken Huang, Laura Hamilton
ACC: Andrew Shaw
Health and Safety: Andrew ShawFiona McMillan, Gwen Drewitt

Disclaimer: Our aim is to assist our clients to be proactive in ensuring statutory compliance and best risk management in the area of employment law. This publication is, however, necessarily brief and general in nature. You should therefore seek professional advice before taking any action in relation to the matters dealt with in this publication.