[DUNCANCOTTERILL] BREAKING THE CHAINS: ANTICIPATED CHANGES TO EMPLOYEE RESTRAINTS OF TRADE
In September 2022, the Employment Relations (Restraint of Trade) Amendment Bill (Bill) was introduced to Parliament by a private member (Labour Party). If passed, it would introduce radical changes to existing New Zealand case law.
Compared to approaches taken overseas, however, the proposed changes would be relatively mild. In USA, the Federal Trade Commission has proposed a complete ban on new employment restraints and rescinding of existing restraints1.
The Australian Government has recently directed the Australian Competition and Consumer Commission to investigate the effects of employment restraints on wage growth and determine whether the Government ought to take action2. Other jurisdictions have already banned employment restraints outright3.
Considering global approaches, the idea of restricting an employers’ reliance on restraints of trade is therefore not new or unusual.
This article addresses current legal principles for restraints of trade and how those principles would be altered by the Bill.
What are the current principles?
Restraints of trade are post-employment obligations on employees to not, within a certain time period:
- compete with the employer, which will also typically include a geographical limit (i.e, within a certain region); and/or
- solicit employees to leave the employer; and/or
- solicit/deal with clients/customers/suppliers of the employer.
Broadly speaking, a restraint of trade may be enforceable if:
- there is a proprietary interest (such as intellectual property, confidential information or know how, or goodwill/relationships) that justifies a restraint;
- the time-period and geographical area are no more than are reasonably necessary to protect the employer’s interest; and
- it is in the public interest to uphold the restraint.
The Courts have developed a cautious approach to upholding restraints of trade. However, as there is currently no legislation that provides clear parameters, all restraints (regardless of reasonableness) are capable of being litigated. This can feasibly result in lower paid workers adhering to restraints that may be unlawful, solely to avoid litigation costs and stress.
What would the Bill change?
In its current version, the Bill proposes the following key principles that would apply to restraints of trade:
- Restraints will have no effect unless all of the following apply:
- The employee must be paid more than 3 times the minimum wage, which currently would be $68.10 an hour (based on the current $22.70 minimum wage) or circa $132,795 as a salary (based on working 37.5 hours per week).
- The employer must have a valid proprietary interest that is described in the employment agreement and justifies the necessity of the restraint (which is more or less a codification of existing case law).
- The employment agreement must include “reasonable compensation” for the restraints, to be paid at termination of employment. This is calculated as 50% of the employee’s Average Weekly Earnings for each week of the restraint.
- The reasonable compensation would need to have been paid, before the employer seeks to enforce the restraint.
- Restraints will only be effective for up to 6 months post termination of employment.
We note the Bill does not propose to amend current principles as to confidentiality and fidelity or business sale restraints.
If the Bill is passed, it will come into effect the day after royal assent. This means any new agreements will be subject to the new provisions. Employment agreements in force at the commencement of the provisions, however, will be subject to lead times for compliance:
- For collective employment agreements, the provisions will only apply to any replacement collective or individual employment agreement.
- For individual employment, employers will have 6 months from commencement of the provisions to amend contractual terms to be compliant.
What does this mean for businesses who need to protect their interests?
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Penny Varley
Payroll Administrator