A restraint of trade clause is a clause that can be included in an employment agreement for the purpose of protecting commercially sensitive information of a business by restricting the business activity of former employees.

There are two main types of restraint of trade clauses.

Non-competition restraint of trade clauses are where a former employee is not permitted to work in the same or similar field of business as that of their former employer.

Non-solicitation restraint of trade clauses are where a former employee can take another job in a similar field, but is prevented from contacting clients of their former employer about their new business or employment.

Restraint of trade clauses are not always enforceable as they can be seen to restrict business competition. This goes against the public policy consideration of a competitive market. More information as to how courts determine whether these clauses are enforceable.

An example of an unenforceable restraint of trade clause is from a case in the Employment Relations Authority. It was decided that a restraint of trade clause included in two employment agreements was unenforceable.

Under the clause, the employees were prohibited from working in a similar field as their previous place of business for a period of two months. The employees decided to initiate proceedings at the Employment Relations Authority as they felt that the clause was solely for the purpose of minimising competition to the employer’s business.

The Authority agreed with this argument, stating that there were not legitimate reasons for the clause to be in the employment agreement, other than to prevent competition from other businesses and rejected the enforceability of the restraint of trade clause.

Of course, if a restraint of trade clause is considered to be reasonable by the Court, it will be enforceable. An example of this was found in the Employment Relations Authority where a restraint of trade clause was upheld after a former employee sought to get the clause revoked.

In deciding whether the clause was enforceable, the Authority considered a number of factors. The clause was clear, and was necessary to protect the employer’s proprietary interests.

Additionally, the employees had freely signed up to the agreements, and were bound by them. Finally, the three month time period was not seen to be an unreasonable length of time.

The Authority enforced the clause and the employee was unable to work at a competing business for three months.

When implemented correctly, a restraint of trade clause can be a useful tool in the protection of sensitive business information from business competitors. If there is confusion surrounding whether a restraint of trade clause is enforceable, it is wise to seek advice from a professional with experience in the area.

 

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Gianna Menzies and Mathew Binnie