A restraint of trade clause in an employment agreement attempts to prevent an employee from working or being involved in a certain area of employment for a specified period and in a specific geographical area after leaving your employment.

For example, a clause might prevent a valued salesperson in Lower Hutt from working as a salesperson for another employer in Lower Hutt within a five kilometer radius for three months after ceasing employment with their current employer.

Restraint of trade clauses are potentially valuable tools which give an employer the ability to prevent a former employee from competing against them after they cease employment with the employer.  However, restraint of trade clauses must be enforceable to be effective, and the Courts will not enforce a restraint of trade clause unless the clause is justifiable and reasonable.

The clause is justifiable if it attempts to protect an interest which rightfully belongs to the employer such as trade secrets.

Many factors will be relevant in determining whether the clause is reasonable.  These will include the necessity for the clause, and the duration and geographical scope of the restraint.  For example, a clause where an employer is based solely in Napier and which attempts to prevent the employee from working in the particular field of employment throughout New Zealand for a year after ceasing employment is unlikely to be considered reasonable.  The adequacy of consideration given to an employee under the employment agreement will also be relevant to whether the clause is considered reasonable.

Employers should carefully consider whether a restraint of trade clause will be enforceable before inserting one into an employment agreement, because they may find themselves liable for the costs of attempting to enforce the clause while still not reaping the benefits that they had initially hoped to achieve.

Rainey Collins advises that by far the best time to consider all the issues around restraint of trade clauses is when negotiations are underway to appoint someone, and is happy to consider situations for employers and provide suitably worded restraint of trade clauses.