Restricting restraints – new bill seeks to limit restraints of trade

Employers have long used restraints of trade to safeguard their business by limiting an employee’s ability to work in their field, within a defined area, or for a competitor after the employment relationship has ended.

On 22 September 2022 MP Helen White introduced the Employment Relations (Restraint of Trade) Amendment Bill (Bill) that aims to severely limit the use of restraints of trade in employment agreements by:

  • providing that restraints of trade have no effect wherever an employee earns less than 3 times the minimum wage;
  • limiting the use of restraints of trade to those situations where the employer has a proprietary interest to protect through the use of the provision and requiring that proprietary interest to be described in the agreement;
  • requiring employers to pay employees who are subject to a restraint of trade provision an amount not less than half of the employee’s weekly earnings for each week that the restraint of trade remains in effect;
  • limiting the duration of restraints of trade to no more than 6 months, after which time it ceases to have an effect (or on any earlier date agreed by the parties); and, notably
  • providing that any restraint of trade provision that does not meet the new criteria would be of no effect.

Using the current minimum wage at $21.20 as an example, this would mean that restraints of trade may not be used for employees earning less than $63.60 per hour (i.e. 3 times the current minimum wage; $132,288.00 gross per year). Taking the same example, if the restraint of trade lasted 3 months (12 weeks) post termination of employment, the employer would need to pay the employee at least $15,264.00 gross (i.e. half the employee’s weekly earnings for 12 weeks). We presume such payments could be provided in the employee’s final pay but that detail is missing in the Bill as it stands.

If the Bill becomes law, these changes would increase the cost to employers wanting to include restraints of trade in their employment agreements. They would also enable a significant number of employees to change jobs more easily without the fear of litigation.

However, this must also be weighed against concerns that restraints of trade are included in employment agreements often without proper consideration of whether they are reasonable in the circumstances and that enforcing restraints of trade is a costly exercise. As the law stands, the mere existence of a restraint of trade within an employment agreement leaves an employee vulnerable to costly litigation. It also leaves the new employer at risk of being joined as a party to the litigation.

The Bill is currently set to have its first reading and is likely to be subject to significant debate. We will update you as it progresses.

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