Legal Updates

Restraint of Trade Clauses in Employment Agreements – Enforcement remains available to employers.  

The Employment Relations Authority (“the Authority”) decision O’Brien v Discovery New Zealand Ltd issued a firm reminder that properly drafted restraint of trade provisions can and will be enforced against employees seeking to jump ship.

Former Political Editor for NewsHub, Tova O’Brien (“Ms O’Brien”) sought to end her employment with Discovery (Newshub’s parent company) at the conclusion of her three month notice period and immediately commence a new position with MediaWorks Radio (“MWR”). However, Ms O’Brien’s employment agreement contained restraint of trade provisions – non- competition, non-dealing and non-solicitation. These restraints were to survive the employment relationship by three to six months.

Ms O’Brien sought a determination from the Authority that the restraints of trade were unreasonable and unenforceable so she could immediately start in her new role with MWR.


Restraint of Trade clauses “prima facie unenforceable”

Restraint of trade clauses are frequently included terms in employments agreements. However, typically such clauses are haphazardly drafted, ultimately rendering them unenforceable against employees seeking to pursue other opportunities.

For the most part, the relationship between an employer and an employee ends when an employee resigns or is terminated. Obligations between the parties such as the duty to act in good faith and fidelity end simultaneously with the relationship. As a starting point, restraint of trade provisions, which survive the length of the employment agreement, are considered unlawful and unenforceable. The public policy reasoning for this presumption is understandable – they place unreasonable restrictions on a person’s right to work and earn a living.


Unless restraints reasonably protect legitimate proprietary interest

As Ms O’Brien discovered, this presumption of unenforceability can be displaced if an employer can show the restraints it seeks to enforce are reasonable. An employer needs to demonstrate it has a legitimate propriety interest that the restraint protects, and the restraint is to be no wider than reasonably necessary to protect that interest.

After a multi-day hearing, the Authority found Discovery did have legitimate proprietary interests it sought to protect with the restraints of trade: confidential information (being editorial priorities, confidential sources and team salaries), business relationships, in particular its relationship with a particular polling agency; and goodwill, attributable to Ms O’Brien’s reputation.

The Authority concluded the restraints Discovery sought to impose against Ms O’Brien to protect its interests were reasonable. The three month timeframe for the non-solicitation clause set the parameters of the other restraints – the Authority found if Discovery’s proprietary interests could be protected by a non-solicitation clause of three months, then the same can be said for the non-dealing and non-solicitation clauses (these clauses were drafted in the agreement as six months). The non-competition clause was further reduced by five weeks, meaning Ms O’Brien may start with her new employer sooner than the restraints anticipated.

The Authority also found the New Zealand-wide geographical limitation on the restraints of trade was appropriate, as both roles were performed at national level.

A Compliance Order was made against Ms O’Brien for enforcement of the restraints of trade.

By way of counterclaim, Discovery argued that Ms O’Brien’s conduct during her notice period breached her employment agreement and the implied duty of fidelity. While Ms O’Brien was still employed by Discovery, she approved a quote for MWR to include in a press release announcing her appointment to MWR and allowed her image to be videoed for a promotional video. The Authority found Ms O’Brien’s conduct amounted to a prima facie conflict of interests and breached the implied duty of fidelity as her conduct undermined the trust and confidence between herself and Discovery. Ms O’Brien was ordered to pay Discovery $2,000 compensation.

Key points:

  • Restraint of trade provisions are prima facie unenforceable
  • The presumption can be displaced where properly drafted, and where an employer can demonstrate it has a legitimate proprietary interest it seeks to protect with the restraint
  • The restraints must be limited in geographical scope and duration to protect that interest for it to be considered reasonable
  • Where restraints of trade provisions can be justified, they can be enforced against the employee
  • Duties of fidelity under the ERA are reciprocal and parties who breach their obligations may be liable to pay reparations. 

If you have questions or would like to discuss restraint of trades, please contact Jaesen, Ruth, Jordan or Caylee.