Restraints of Trade Back in the Spotlight After Tova O’Brien Decision
Many employment agreements contain restraint of trade clauses. Such restraints aim to restrict a former employee’s right to work in some form. In theory, they are difficult to enforce, but the recent Employment Relations Authority (the Authority) decision concerning TV political journalist, Tova O’Brien, highlights employees need to be mindful when agreeing to them.[1]
What is a restraint of trade?
- The purpose of a restraint of trade clause is to protect a proprietary interest of a business.
- Non-solicitation clauses are the most common type of restraint of trade in New Zealand. These clauses aim to prevent former employees from contacting customers, staff, or suppliers (for example, to encourage them to move to a new employer’s business).
- A restraint of trade cannot merely aim to prevent competition between businesses.
Proprietary interests an employer can seek to protect through a restraint of trade include:
- Business trade secrets;
- Confidential information about products or services;
- Client lists and contact details;
- Relationships with customers, clients, and suppliers;
- Commercially sensitive material (like manuals, strategies, pricing lists, marketing materials); and
- Trained staff.
When are restraints of trade enforceable in New Zealand?
Individuals have the right to use their skills and experience to work in a chosen field. Traditionally, the law stated restraints were prima facie unenforceable on public policy grounds. This is why restraints of trade can be difficult to enforce. However, a restraint will be enforceable if the employer can prove the restraint is reasonable and no more than is necessary to protect legitimate business interests.
The following factors are relevant to whether restraint clauses are reasonable:
- Duration of the restrictions;
- Geographical area covered by the restrictions; and
- Scope of the activities being restricted.
If a restraint clause is found to be unreasonable, the Authority or the Employment Court can modify the clause to make it reasonable.
The circumstances in which a restraint is agreed is relevant. It may be necessary to seek fresh agreement if an employee’s circumstances have changed (for example, they have been promoted into a new role with greater access to confidential information).
The Tova O’Brien decision
Ms O’Brien initiated proceedings in the Authority against her former employer Discovery NZ (which owns TV3’s Newshub).
The enforceability of a restraint of trade clause in Ms O’Brien’s employment agreement was in dispute. The restraint aimed to prevent her from working for a competitor for three months after her employment ended.
The Authority accepted the restraint was protecting a legitimate business interest of Discovery NZ, which included confidential information about business priorities and journalist sources.
The Authority held the restraint clause was enforceable and ordered Ms O’Brien to comply with it. The Authority did, however, modify the clause by reducing the restraint period from three months to seven weeks.
Tips for Employers looking to protect their business interests:
- Specific and carefully drafted restraints are more likely to be enforceable than generic clauses.
- Review and update your employment agreements when things change.
- Restraints should be reasonable, and not broader than what is required in scope, geographical range and time period.
- Consider how the restraint will impact an employee’s ability to work and earn a living.
- Paying an employee for the benefit of restraining them may strengthen the enforceability of a restraint of trade clause.
Key take-aways for Employees:
- Seek advice before you agree to a restraint of trade clause in your employment agreement.
- Ask for the clause to be removed or amended if you are concerned about it.
- Do not assume a restraint will not be enforced, either because your employer or an adviser has said so, or because they did not do so in the past. Even if a restraint is unenforceable, significant costs could be involved to defend a claim.
- If you are ending your employment and are concerned about a restraint clause in your employment agreement, communicate with your employer about your concerns.
Is change on the horizon?
The high-profile nature of the O’Brien decision has highlighted some uncertainties around this area of law. Some practitioners have suggested restraints should only be enforceable if an employee is paid for the time they are prevented from working.
Labour MP Helen White is currently working on a Members’ bill that would ban restraint of trade clauses for low-income workers. Ms White has indicated for higher-paid roles, the bill would require restraints to be reasonable in the circumstances.
[1] Tova O’Brien v Discovery NZ Limited [2022] NZERA 15.
