A new private members’ bill is set to limit who may be subject to a restraint of trade, and under what conditions they may be imposed.
The Employment Relations (Restraint of Trade) Amendment Bill was introduced in September 2022, and is currently making its way through Parliament.
What is a restraint of trade?
Restraint of trade clauses can take on several forms in an employment agreement;
· A non-competition clause prevents the employee from working similar field to their employer’s former business. These clauses often pertain to a specific geographical area.
· A non-solicitation clause will instead prevent a former employee from contacting or dealing with employees or clients of their former employer’s business.
The clauses are designed to protect the interests of an employer when an employee in an influential position, or holding commercially sensitive information or trade secrets leaves the business.
In practice, the courts have been reluctant to enforce restraints of trade unless the employer has a genuine interest requiring protection, and the limits (including time or geographical limits) applying to the restraint of trade are reasonable.
It can also depend on whether the employee intends to work for a competing employer, or is looking to set up their own business in competition with the original employer. Judges have previously demonstrated more sympathy towards the former rather than the latter.
The Bill aims to codify some of the law surrounding restraint of trade, while also prescribing additional requirements as to how a restraint of trade may be formulated.
What does the Bill change?
The Bill will prohibit use of restraint of trade clauses in employment agreements for employees who earn less than three times the minimum wage.
Other requirements include that:
- Restraints of trade are restricted to situations where the employer has a proprietary interest to protect through the use of the provision, and the interest is described in the agreement;
- Employers must pay employees subject to the restraint of trade clause an amount equal to half of the employee’s weekly earnings for each week the restraint of trade is in effect; and
- The duration of restraints of trade are limited to no more than 6 months.
The Bill is heavily catered towards employees. It ensures lower to middle-income workers are free to work for a competitor or start their own business without interference. The Bill also reduces the likelihood an employee will feel pressured to abide by unfair restrictions under a restraintof trade clause, even when it is unlikely to be enforced by a court.
By extension, parties will have better certainty as to whether a restraint of trade clause will be enforceable if the clause is drafted in accordance with the Bill.
However, the new restrictions limit the power of both parties to freely negotiate an employment agreement to meet their needs. It may be that some people are happy to abide by further restrictions in exchange for other benefits in a more flexible arrangement.
The Government is yet to indicate when the Bill is likely to be passed. Some of the draft requirements may change throughout the legislative process, so be mindful if you are likely to be affected.
If you have any questions about the upcoming Bill or your current obligations please contact Director, Brigitte Morten
