A restraint of trade is a term in an employment agreement whereby an employee agrees that after his or her employment finishes they will not compete with the employer for a certain period of time. Restraints of trade are many and varied and often ignored by an employee at the end of the employment.
If an employee ignores a restraint it is then up to the employer to attempt to enforce it.
Up until this case the general view had been that in order to have a valid restraint of trade not only did it have to be reasonable the employer also had to pay something for the restraint above and beyond the normal remuneration.
In this case the employer was Fuel Espresso Limited. For those of you that have been to Wellington recently they have an espresso outlet in the Wellington Airport as you come off the plane and run 10 small espresso outlets throughout Wellington City. They employ trained baristas and provide training.
Mr H started on 7 November 2005. He signed a restraint where he agreed not to work in a competing espresso bar within a 100 metre radius of a Fuel Operation or set up a similar competing business within a 5km radius of an existing Fuel Operation. The restraint of trade applied for 3 months from his last day of duty.
Mr H resigned on 7 January 2007 and on 15 January started work as a Barista at a rival cart 70 metres from one of Fuel’s outlets. It was therefore well inside the area covered by the restraint of trade.
The Employment Court found that the law required an “extra payment” to be made by the employer if someone was going to be subject of a restraint of trade. That required payment over and above wages. The Court of Appeal rejected that. They found that the only issue is whether or not a restraint of trade is reasonable.
To decide this the court will look into how long the restraint is for, does it stop an employee from earning a living, how wide is the area. The Court of Appeal found that the restraint was plainly reasonable but noted a case where there was a low salary and a harsh restraint may not have the same result.
This case shows that a reasonably drafted restraint of trade can be enforceable. It is vital therefore that employees seek legal advice before they sign employment agreements. If you go ahead and sign a restraint of trade and leave your employment you may just get a rude shock when you go to work for a competitor.
