Parties to an individual employment agreement, or an independent contractor agreement, may agree to include clauses in the agreement that are designed to protect a business’ commercially sensitive information and/or proprietary interests.
There are two main types of restraint of trade clause:
- A non-competition restraint: this prevents the former employee or independent contractor from working in a similar field to the former employer or principal’s business, either by way of setting up their own business or working for a competitor.
- A non-solicitation restraint: this prevents the former employee or independent contractor from poaching the business’ customer/clients, suppliers, employees, and/or independent contractors.
An agreement may also include:
- A non-disparagement restraint: which prevents the employee or independent contractor from making disparaging (i.e.: negative) comments about the business.
- A non-dealing restraint of trade: which prevents the employee or independent contractor from dealing with the business’ customers after the employment ends.
The general rule is that a restraint of trade clause is ‘prima facie’ void as being contrary to public policy. However if there is a legitimate proprietary interest to protect through a restraint of trade agreement, and the restraint is reasonable in the circumstances between the parties at the time the contract was entered into, the restraint is enforceable at common law.
Importantly, the legal principles for determining whether a restraint is enforceable are different for an independent contractor than an employee. Ultimately, it is easier to enforce a restraint against an independent contractor than an employee. This is due to public policy reasons which relate to the need for a person to be able to use his or her skills in employment and to protect the free movement of labour and promoting competition in the provision of services in the economy. There is also an inherent power imbalance between an employer and an employee, as opposed to an independent contractor and principal which are considered equal parties.
The legal principles for determining whether a restraint of trade is enforceable are summarised as follows:
- Whether the employer/principal has a genuine business interest that should be protected (for example, confidential information or trade secrets or connections).
- Whether the period of the restraint is reasonable. This will require an examination of the interest the employer/principal is trying to protect.
- Whether the geographical limits of the restraint are reasonable.
- The wording of the clause in the employment agreement/contract.
Two recent cases illustrate the enforceability of restraints against employees and independent contractors.
In Re Malborough Mortgages Ltd t/a Mike Pero Mortgages – Marlborough v Nichols the employee worked in a clerical/administrative role for a mortgage company and then moved to a bank as a consultant. The employer argued that the employee had breached her restraint of trade as she was providing “the same or similar services”.
The Employment Relations Authority found that the restraint of trade, which was in place for a period of six months, was unreasonable because there was no risk that the employee would endanger the proprietary interest the company sought to protect. The employer was mainly concerned that its clients would be enticed away to a competitor. However, the employee posed little danger in this regard since she had only had an administrative role and little influence over the customers. Her new role was different. Further, there was no general industry practice in terms of restraints of trade for administrative employees with mortgage brokering organisations. Therefore the covenant of restraint of trade was not reasonable for the protection of the employer’s proprietary interests and accordingly no order for compliance or penalty for breach was made.
In Redcoats Ltd v Day Mr Day – an independent contractor and real estate agent – applied to the High Court to set aside an interim injunction that was granted to Redcoats on the basis that Mr Day had ignored his restraint of trade obligations during the three month restraint period.
Redcoats’ position was that the restraint was intended to protect the company’s good will. This was well-established for the company, and it had a market presence, which Mr Day benefitted from as he achieved a very high profile and income while working for Redcoats. Redcoats therefore considered that it had an ability to protect its goodwill in the interim time it took to recruit and promote people to replace Mr Day. Mr Day argued that the restraint of trade clause did not protect any proprietary interest, and that it was punitive and anti-competitive.
The High Court considered there was a serious question to be tried as to whether the restraint was enforceable and its preliminary view was that – subject to substantive proceedings, Mr Day appeared to have acted in clear breach of the contract. The application to set aside the interim order was therefore declined.
The enforcement of restraints of trade can be costly. Given the Courts’ reluctance to enforce them it is crucial to ensure that any restraint is carefully worded to only protect a proprietary interest for a reasonable period of time. If you have a query regarding the enforceability of a restraint of trade, or you would like advice regarding drafting a restraint clause, please do not hesitate to contact our Employment Team.
 BYOF Holdings Pty Ltd v Bencho Ltd  NZHC 1560.
 Herbert Morris Ltd v Saxelby  1 AC 688 (HL)
 Tam Dental Group Ltd v Chang  NZHC 2873 at 
 Stenhouse Australia Ltd v Phillips  AC 391,  1 All ER 117 (PC) at 400, 124.
 Byrne v Coverstaff Recruitment Group LTD  NZERA 549 at .
 Employment Relations Act 2000, section 3(a)(ii).
 Redcoats Ltd v Day  NZHC 1502.