How will you protect your client base and confidential information if your employee leaves to go to a competitor, or to set up on their own?

Restraint of trade clauses are regarded by the Courts as contrary to public policy, and will only be enforced to the least extent possible to protect the employer’s business.

In a recent situation two senior employees decided to set up a competing business and copied client lists and contact details before they announced their resignations. They then started contacting clients as soon as they had left, despite provisions in their agreements preventing them doing that.

The employer, luckily, heard what they were up to and was able to show that they had copied the confidential information to their personal computers. Action was taken in the Court and the Court issued orders preventing the employees from using the data they had taken, and also ordering damages for the lost business.

It is very important to ensure that your employment agreement covers all the necessary protections for you because a Court will never increase what is in the agreement, but will often reduce it if it considers the restrictions unreasonable.

An issue that often crops up in disputes is that an employee has not been given adequate reward for entering into the restrictions…so you need to get this aspect right. If a Court can see clearly that the employee got substantial extra benefits and willingly entered into the restrictions it will tend to be a factor in your favour, so you need to have very clear documentation.

Ensure that the restrictions are reasonable as to geographical area, duration and extent of the prohibitions.

Geographical area…For example restricting someone from doing something “in the whole of New Zealand” may be unnecessary to genuinely protect your business…

Duration…Trying to stop a former employee doing some specific things for five years after they leave you may also be quite unnecessary if you could properly take steps to protect your business in six months…

Extent of restrictions…Trying to stop someone working in your industry may be quite inappropriate, even for a short time, if what is really necessary is that they not try to take away customers they have dealt with, or poach key staff employed while they were working for you etc…

A failure to get these restraint of trade provisions right can mean a failure of your business if your employee walks out the door and takes your customers with them. 

This is an area filled with danger and not one in which any significant element of self-help is recommended to employers…especially as each employee’s situation is different.

If you need help drafting or enforcing these provisions please call Alan Knowsley for an initial chat.

If you suspect that your employee has, or will, act in breach of their obligations then you need to act very quickly to prevent or minimise the harm that might be done. Get early advice as to the steps you should take.