Law at work: October

Restraints of trade, what are they really worth?

I am often asked by employers whether they can enforce post-termination obligations against a departing employee.

Understandably, many employers feel the need to safeguard the legitimate interests of their business and for that reason will insert restraint of trade provisions into their template individual employment agreement regardless.

However, in truth these provisions rarely are enforceable and serve little or no purpose; the recent Authority decision in Dawsons Catering Ltd v Hawke is no exception.

Dawson's Catering:

In this case the employer sought to obtain an urgent injunction preventing its departing employee (Matthew Hawke) from going to work in a managerial position with one of its main competitors. The employer intended to rely on two fairly standard restraint of trade provisions commonly set out in an employment agreement; a) confidential information; b) non-compete for 12 months post-termination of employment. The Authority was asked to decide whether those two provisions were “valid, reasonable and enforceable” against Mr H which, if so, would prevent him from working for the competitor until July 2017.

In contemplating its decision, the Authority considered key factors such as Mr Hawke's:

Role
  • Level of salary
  • Seniority in the business
  • What consideration had been given
  • Knowledge of trade secrets or intellectual property
  • His degree of influence over customers and colleagues

 

The Authority compared the factual position against those key factors and ruled that Mr H’s role as Café Manager at an on-site café at Auckland University did not pose any substantial threat to the legitimate interests of the employer’s business. In particular, it decided that Mr H had only an operational role in the business rather than perform any managerial duties – he simply organised staff rosters; ensured that catering orders were processed; arranged function rooms and organised events (there was no involvement in preparing business plans, business development or marketing strategies).

Mr H argued that the restraint of trade provisions were anti-competitive and, if enforceable, would prevent him from earning a living for the next year in his chosen field within all of Auckland (where he lived with his family). The Authority agreed. It was made clear that restraints of trade provisions are against public policy and thus on the face of it, unenforceable. Yet, the law does recognise circumstances where an employer may have a legitimate proprietary interest to protect and in those rare instances, a restraint will be enforceable on the strict proviso that it is no wider in scope, duration and/or geographical location than is reasonably necessary. A restriction that merely attempts to limit or reduce competition shall be void from the outset. Similarly, provisions that seek to restrict disclosure of confidential information will only be enforceable if the extent of the information (so restricted) is clearly described, and the restraint is limited to an appropriately short duration.

The Authority also made is absolutely clear that it is the employer who bears the legal burden of proof. It must establish on the “balance of probabilities” that there is a legitimate proprietary interest to protect and that this outweighs any degree of unfairness to the departing employee. Not any easy burden to overcome; this then makes me question whether restraints of trade really are worth incorporating into an individual employment agreement.

In my opinion, there are undoubtedly situations where a restraint is appropriate...

However, all too often I am seeing these types of provisions inserted into agreements with little regard or thought about the validity of that restriction to the proposed employment. Restraints of trade will only be really worth something if they are tailored to that particular employee and his/her circumstances.

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