Resignation typically marks the swift and hopefully amicable end of an employment relationship, but this is not always so.
What is a Restraint of Trade?
A ‘restraint of trade’ provision is a clause in an employment agreement Intending to prohibit an employee from conducting work in the same field as their employer for a given period, and within a given geographical area, after their employment ends.
Whay are they used?
Employers often include restraints to stop employees being poached by a competitor or setting up a competing business, but this cannot be enforced under the current law. A restraint is only enforceable if it is reasonably necessary to protect the employer’s “legitimate proprietary interests”, and enforcement is in the public interest.
Take for example a lawyer, subject to a restraint of trade provision, who goes to work for a rival law firm. It is reasonable for the old employer to restrain the lawyer from working for his old clients, as the old employer has a legitimate interest in protecting its relationships with those clients (provided the duration and geographical scope of the restraint is also reasonable). But the old employer can’t stop the lawyer from working for the rival firm entirely, as this would be a non-compete clause.
Proposed changes to the law
The Employment Relations (Restraint of Trade) Amendment Bill is currently awaiting its second reading in the House, having been examined by the Education and Workforce Committee, which recommended the Bill does not proceed.
The Bill is proposing to prevent restraint of trade provisions being enforced against employees that earn less than three times the minimum wage. Other employees could still be subject to restraints, but the former employer would need to provide at least half the employee’s average income in compensation for the duration, which would not be permitted to exceed six months.
National opposes the Bill on grounds the current law already prevents enforcement of unreasonable restraints, and additional legislation will not help employees who lack access to legal advice. ACT is opposed on the grounds that large businesses with more resources will be encouraged to poach talent from smaller competitors.
Labour supports the Bill, arguing it will provide employees greater flexibility to advance their careers and seek improved pay, that restraint clauses are often included in the employment agreements of low-income workers who lack the resources to legally challenge their employer, and that restraint clauses undermine the free market.
Given the absence of Government support, it is unlikely the Bill will progress any further. However, it has drawn attention to a complex area of employment law and encouraged reflection on the appropriate extent of post-employment obligations.
If you are tied down by a restraint of trade provision, or worried your employees may wander, do not hesitate to [Enable JavaScript to view protected content] for expert advice.
