2023 Employment Law Updates

Restraint of trade clauses recent cases

We are getting a lot of queries about restraint of trade and non-solicitation or non-dealing clauses in employment agreements.  These clauses seek to restrict the employee after the employment relationship has ended from working for a competitor, soliciting or dealing with the company’s clients, suppliers, or staff.

These clauses are prima facie unenforceable in Court. To be enforceable in certain circumstances the company needs to prove it has a legitimate proprietary interest which the restraint is reasonable to protect.   The Courts will look at the length of time and scope of the restraint, and whether the restraint is no wider than is reasonably necessary to protect the interests of the business. 

The type of interests that business seek to protect include confidential information and trade secrets, trade connections and established client relationships, however the Courts will closely scrutinise any claim that information is confidential and if it is publicly available information.  For example if customer lists, suppliers and pricing are public knowledge then confidentiality cannot be claimed.  The company would need to show a particular aspect of the information was in fact closely withheld from the public domain,[1] for example future sales or marketing strategies or product developments.  Employees will usually have a post-employment obligation not to disclose the business’ confidential information, regardless of whether there is a restraint of trade or non-solicitation clause.

In a recent case Tova O’Brien contested a restraint of trade clause in her employment agreement with Discovery, which would prevent her from launching her new breakfast talk radio show at Media Works for a period of three months.  The Employment Relations Authority (the Authority) found Discovery had legitimate business interests in:[2]

• Confidential information as to editorial priorities and future plans, identities of confidential sources and team salaries
• Business relationships with its polling agency (in which Ms O’Brien had a working relationship with)
• Goodwill with respect to Ms O’Brien’s reputation in the New Zealand media market (in which Ms O’Brien acquired through her employment with Discovery)

In terms of the length of restraint, the Authority noted that Discovery had the option to put Ms O’Brien on garden leave for her 3 month notice period which is a relevant factor in considering whether the additional 3 months restraint period was reasonable.  The Authority found it reasonable to reduce the length of the restraint to 7 weeks.  The Authority also considered that the 6 month non-solicitation and non-dealing restraints with clients or suppliers was too long, and it was reasonable these should be limited to be the same as the non-compete being 3 months.  

In another recent case involving a senior insurance broker, the Authority considered that Ms Watts had effectively already served her 2-month restraint period when she had been placed on garden leave for 2 months, therefore the restraint period was reduced by 2 months.[3]  The Authority also reduced the non-solicitation and non-dealing with clients from 24 months to 12 months, on the basis that 12 months was a sufficient time for the company to train up a replacement employee to the same level and for them to establish the necessary business relationships with clients in that timeframe.

Our Employment team has noted the broadening scope of these restraint clauses from non-solicitation, to non-dealing with, or non-interference with, which may also preclude an employee from dealing with these clients even if they are approached by the client rather than the employee approaching the client.  This is a complex area which is evolving, particularly where many senior employees have for example LinkedIn connections to a wide range of clients of the company which many continue post-employment.

Late last year the Employment Relations (Restraint of Trade) Amendment Bill was introduced which seeks to amend and codify this area of law, in particular to prohibit the use of these clauses for low and middle income earners, and also to ensure any senior employees are  adequately compensated for any restraints.

It is important for employers to consider the appropriateness of restraint clauses for each individual employee, the Courts are less likely to enforce a restraint if standard template clauses have been used for all employees without consideration of suitability for each employee.[4]

Our Employment Law specialists can assist you with drafting and negotiating suitable restraint clauses in an employment agreement.  We can assist employers and senior employees in negotiating post-employment obligation terms in an exit arrangement, and represent either party at mediation or Court should the dispute not reach resolution.  We strongly urge senior employees to get legal advice in respect of any restraint clauses prior to signing an agreement, and also prior to negotiating any exit package.

Directors’ personal liability for company breaches of employment law

In the last few years there have been an increasing number of contractors challenging their contractor status in cases before the Employment Relations Authority, some of whom have been found to be employees and therefore entitled to employee rights including wage arrears and accrued annual leave, as well as the personal grievance procedures under the Employment Relations Act 2000 (the ERA).

Where a company is liable for such outstanding entitlements and penalties, directors can also be found liable pursuant to clause 142W and 142Y of the ERA where they are “involved in” the breaches. In 2021 the Court of Appeal found that even though the directors genuinely believed the taxi drivers in that case were contractors and not employees, the directors could be held personally liable for penalties because they were knowledgeable of the primary facts relating to the case that led to the finding of the taxi drivers being held as employees.[5]

Since this case, there have been a number of cases where the directors have been held personally liable for breaches of employment law including:

• A baker business owner ordered to pay $158,000 personally for penalties relating breaches of minimum employee entitlements;[6]
• In December 2022 a person who held significant influence over the management or administration of the defendant companies trading as liquor store operators, but was whom neither a director or shareholder, was ordered to pay $415,800 personally in penalties, and was also subject to a three-year banning order restraining him from employing any person or being an officer of a company.  He had been personally involved in the significant breaches of employment minimum standards.  In total the group of companies was ordered to pay over $1.55 million of penalties.[7]

The personal exposure for company directors and other officers in management positions is significant.

If you have any concerns regarding potential breaches of minimum employment standards, including any questions regarding contractor or employee status of workers, please call our Employment Specialists team who can assist you.  We strongly recommend businesses take the time to discuss which form of contract is the most suitable.

Catherine Pendleton – Principal – Employment law team (click here to contact)

[1] Donovan Group NZ Limited v Reid [2020] NZHC 3367
[2] O’Brien v Discovery NZ Limited [2022] NZERA 15
[3] Watts v Crombie Lockwood (NZ) Limited [2021] NZERA 528
[4] Telfer Electrical Nelson Ltd v Trotter [2017] NZHC 3155.
[5] A Labour Inspector v Southern Taxis Ltd [2021] NZCA 705
[6] Labour Inspector v Samuel and Ors [2021] NZERA 470
[7]A Labour Inspector v Samra Holdings Limited T/A Te Puna Liquor Centre [2022] NzEmpc 234