Restraints of trade—”not worth the paper they are written on”?
Including restraint of trade provisions in employment agreements has become commonplace—but are they enforceable?
As a matter of law restraint of trade provisions are void (both unlawful and unenforceable) unless they can be established as reasonable.
Restraint of trade provisions are a creature of contract. In the employment context they represent a bargain reached between two parties as to how an employee will conduct themself after their employment has ended. In terms of the law, usual contract law principles apply, rather than many of the unique employment-related provisions of the Employment Relations Act 2000.
To justify a restraint of trade it must be reasonably necessary to protect a proprietary interest of the employer. Commonly an employer may have a legitimate proprietary interest in things such as its confidential information, its business strategy, and its customer relationships.
Even with such a proprietary interest a restraint of trade must be no wider than is reasonably necessary to protect that interest. If it is wider than is reasonably necessary it will again be unenforceable.
The Court (or Employment Relations Authority) has a limited ability to modify restraint of trade provisions under the Contract and Commercial Law Act 2017. Such modifications will usually be to the scope, duration, or geographical area of the restraint of trade provision.
Making restraints enforceable
Employers will best place themselves to enforce restraint of trade provisions by doing the following:
- The employer has genuinely turned their mind to what their legitimate proprietary interests are.
- Reference the proprietary interest in the text of the restraint of trade provision, and explain how the provision is necessary to protect that same interest.
- Ensuring the restraint provision does not simply prevent an employee from competing with the employer, nor from simply using the employee’s skills, experience, general knowledge and know-how.
- Make the duration of the restraint shorter rather than longer. This again depends on what is reasonably necessary to protect those interests. In some circumstances no more than 3 months will be appropriate, whilst in others 12 months can be justified.
- Set the geographical limits of the restraint by linking it to the proprietary interest. Employers should consider where their customers are based, and the market they actually operate in.
- The employer turns their mind to different roles within their business and determines which ones it genuinely should contract for restraints with.
- If a restraint of trade provision is negotiated during the employment (rather than in bargaining for the terms of the employment agreement) then separate consideration (such as an increased monetary payment) is paid in exchange for the employee agreeing the restraint.
Former employees are more likely to disregard a broadly worded restraint that purports to stop them from working for a competitor for a lengthy period of time. Such a former employee may also be given general advice that “restraints are not worth the paper they are written on”.
That advice will be right in some circumstances, and wrong in others.
If you want your former employees to do what they agreed to by complying with restraints, you need to make sure what you have agreed is reasonable in the first place.
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This article was included in Edition 12 of our employment newsletter – Employment News which you can read here.