Many employers have information, trade secrets, and processes that enable them to be competitive in their field. Protecting this information is often vital to the success of their business. A restraint of trade clause protects employers from having their business affected by an employee trying to share sensitive information or processes with a similar business.
There are rules in place to ensure a restraint of trade clause is reasonable and does not affect an employee’s ability to find a new job.
Due to the complex nature of a restraint clause, it is recommended to seek independent legal advice before trying to enforce a restraint clause against an employee who joins a competitor or starts a competing business.
Types of restraint trade clauses
Below are the two most common types of restraint clauses in NZ:
- Non-Competition: prevents a former employee from working for a company that conducts work that is similar to their former employer’s business.
- Non-Solicitation: allows a former employee to work for a company in a similar field or industry. However, they are not allowed to contact clients from their former employer about the new business.
Each business has their own specific limitations and restrictions. For example, a restraint clause may prevent an employee from working a secondary job in a business similar to their current job. Alternatively, a restraint clause may state the employee is unable to work with former clients for a certain period of time.
Things to include in a restraint clause
A restraint of trade clause can only be enforced if the conditions are reasonable and the employer has a specific business interest to protect. Fear of competition is not a reasonable excuse to enforce a restraint of trade clause. It is also unreasonable to enforce a clause that makes it hard for the employee to find employment in their field of work.
Business interests that can be reasonably protected include:
- specialised knowledge about processes, methods and techniques
- confidential information
- strong connections with existing customers and clients
- trade connections
Most restraint clauses last for a few months or can be up to 12 months. It is not standard for a restraint clause in NZ to last longer than 12 months, but there may be an exception under special circumstances.
These clauses can also place limits on who and where a former employee can work. However, the conditions must be reasonable in relation to the geographical area and population. For example, a restraint clause may prevent former employees working a certain distance from their former employer or working with a certain group of people.
Challenging a restraint clause
An employee who believes they are subject to an unreasonable restraint clause may escalate this to the Employment Relations Authority (ERA). Depending on the circumstances, the ERA may work with both parties to develop more reasonable terms.
Breaching a restraint clause
There are ways for employers to stop business activity that breaches a restraint clause. They may be able to ask the ERA to step in and inform the employee to stop the activity. The ERA may also impose penalties and recover lost business or the cost of damage as a result of the employee’s breach.
Using confidential information
Not all skills and knowledge gained from an employee are considered confidential. This will depend on the information and how it has been applied in the employee’s new position.
In each industry, there is the potential for certain processes, knowledge, and trade secrets to be considered the sole property of an employer. Whether or not information is the confidential property of an employer depends on several factors:
- is the information a trade secret that relates to the creation of a carefully guarded product, recipe, or the way a service is offered?
- is the information highly sensitive to the business or confidential?
- did the employer make it clear to the employee that the information was highly sensitive or confidential?
- was the information gained directly from the employer, or did it come from another source?
If the employee is using a general skill learned from a former employer that is common knowledge in the industry, this would not be considered a breach of clause. However, if the skill or technique was specific to processes performed by their former employer, the court may consider the information to be confidential.
To avoid potential confusion and later conflict, employers should make it clear to employees whether or not the skills, techniques or information they learn are confidential or not. Some employers add a confidentiality clause to employment agreements to protect their business. This clause can help to explain what information is considered confidential.
If you include a confidentiality clause, when your employee leaves remind them that the confidentiality clause continues after they have stopped working for you.
Steps you can take to protect IP
There are steps that employers can take to protect their intellectual property and ensure your information remains secure.
Limit access to any customer database and change passwords regularly
Don't put any confidential information on public websites
There is copyright in software code and database structures and interfaces. Ensure ownership of all forms of copyright is clear around your app or software code
Check your sales agreement to ensure your vendors and suppliers are legitimate
Make sure all employees and third parties sign relevant agreements and documents
Trademark your business or trading name, logo, and advertising with IPONZ
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This article is for general information purposes only and does not constitute as business or legal advice and should not be relied upon as such. It does not take into consideration your specific business, industry or circumstances. You should seek legal or other professional advice regarding matters as they relate to you or your business. To the maximum extent permitted by law, Peninsula Group disclaim all liability for any errors or omissions contained in this information or any failure to update or correct this information. It is your responsibility to assess and verify the accuracy, completeness, and reliability of the information in this article.