Post-employment restraints – potential proposed legislative reform

  • Legal update

    17 October 2022

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On 22 September 2022, Labour MP Helen White introduced the Employment Relations (Restraint of Trade) Amendment Bill (Bill) to Parliament. The Bill seeks to amend the Employment Relations Act 2000 (ERA 2000) to include a restraint of trade provision that will “prohibit the use of restraints of trade in employment agreements for lower and middle income employees”.

The ERA 2000 is currently silent on restraints (save for a brief reference in the secondary employment provisions). Instead, the law on post-employment restraints is governed by New Zealand and overseas case law which has largely been applied and unchanged for many years. At a high-level, the accepted position is that restraints are prima facie unlawful and will only be enforceable to the extent they are considered reasonably necessary to protect an employer’s legitimate proprietary interests (e.g. client relationships or confidential information) and where they are in the public interest. There is currently no income threshold.

The Bill proposes to overhaul the historic tests and relevant factors under established case law by:

  • defining a “restraint of trade provision” as a provision in an employee’s employment agreement that:
    • operates after the employment ends; and
    • prohibits or restricts the former employee from one or more of the following:
      • performing work in a similar field to their former employer’s business;
      • contacting or dealing with employees or clients of their former employer’s business; and/or
      • offering employment to employees of their former employer’s business
  • stating that a restraint of trade provision has no effect unless:
    • the employee’s average weekly earnings (the Bill sets out a formula) exceed the threshold weekly rate (three times the minimum wage); and
    • the provision requires the employer, at the time that the employment ends, to pay reasonable compensation (half of the average weekly earnings for each week the restraint applies) to the employee for the restrictions imposed by the provision.
  • limiting the duration of a restraint of trade provision to six months
Our view

In our view, it isn’t clear what mischief the Bill is attempting to address and resolve that is not able to be adequately dealt with by the courts. We consider that, if passed as introduced, the Bill would create more issues than it is attempting to resolve. For example:

  • the Bill does not appropriately address scenarios where lower paid employees will have access to an employer’s confidential information (i.e. in a start-up business). In this scenario, an employer will be unable to protect their proprietary interests because of the statutory income threshold (and this would apply regardless of whether the lower paid employee has shares/equity in the business or other value);
  • the Bill protects lower paid employees from the less onerous non-solicitation and non-dealing restraints, which may be reasonable and necessary in some circumstances; and
  • the Bill may still lead to the time-consuming and costly litigation that it is seeking to limit. For example, whether a restraint is covered by the proposed statutory definition will no doubt be the source of litigation.

If the Bill becomes law, this will be the first time that New Zealand’s employment legislation has included such a provision. Across the ditch in Australia, there is no equivalent legislation, nor in the United Kingdom where we commonly draw on case law precedent. The only legislation dealing with restraints in employment appears to be New South Wales’ Restraint of Trade Act 1976, which enables a court to read down or delete a restraint that is against public policy (which is similar to our Contract and Commercial Law Act).

If the Bill passes its first reading, we expect there to be significant debate about the Bill. For more information about the Bill or if you would like your restraints of trade provisions reviewed, please get in touch with a member of the team.

This article was co-authored by Eloise Callister-Baker, a senior solicitor in our Employment team.