Wellington Lawyers: Restraint of Trade Clauses: When Is It Legitimate to Use Them?

WELLINGTON, New Zealand - May 15, 2024 - PRLog -- Over the past two decades, the prevalence of restraint of trade clauses in employment contracts has surged. Many companies, perhaps using standard contracts for all employees, including junior staff, routinely incorporate these clauses. However, restraint of trade clauses should be used judiciously and crafted carefully, as they face close scrutiny from lawyers, advocates, and courts if enforcement is attempted.

Purpose of Restraint of Trade Clauses

The primary aim of a restraint of trade clause is to restrict former employees from engaging in specific activities for a certain period, such as working for a competitor. However, these clauses must be justifiable and enforceable, which hinges on two key criteria:

1. Protection of a Legitimate Proprietary Interest
2. Reasonableness between the Parties and in the Public Interest

Legitimate Proprietary Interest

Restraint clauses cannot simply aim to eliminate competition. They must protect a legitimate proprietary interest, which involves safeguarding an advantage or asset that is intrinsic to the business and can be regarded as the employer's property. Common proprietary interests include trade secrets, confidential information, and business connections, such as client relationships.

When evaluating whether an employer has a proprietary interest in an employee's client relationships, the court will consider if the employee had significant influence over clients, potentially enticing them away. This influence is generally not attributed to junior employees.

Reasonableness of the Restraint

Once an employer establishes a legitimate proprietary interest, the next step is to assess whether the restraint is reasonable. Reasonableness is a legal question evaluated at the time the contract is signed. The restraint must not be broader than necessary to protect the employer's interest. Factors influencing this assessment include:

Bargaining Power:

The relative bargaining strengths of the parties when the contract was signed.

Role of the Employee:

The employee's position and responsibilities within the company.

Access to Confidential Information:

Whether the employee had access to sensitive information.

Geographical Scope:

The geographical area covered by the restraint.

Consideration Given:

The specifics of the employment contract, such as its duration, trial period, notice period, and whether the restraint was added later.

Duration of Restraint:

Generally, restraints exceeding 12 months are deemed unreasonable.

Employee's Position Upon Leaving: Whether the employee was placed on garden leave.

Ensuring Enforceability

Engaging a lawyer from the outset to determine the necessity of a restraint clause and to draft it meticulously can help ensure its enforceability. Leading law firms offer fixed-price initial consultations to help clients understand their options and draft robust, enforceable clauses tailored to their specific needs. https://www.corelegal.co.nz