When The Employee Becomes The Competition

15 December 2014

Whatever the size of your business, there can be benefit in using ‘restraint of trade’ clauses in employment agreements for your staff. A number of issues should be borne in mind when considering including such a clause in those agreements.

Firstly the clause must be drafted so that the restraint is actually enforceable. It needs to be reasonable and fair to your employee/s.

Secondly, you don’t need to limit a restraint of trade clause to your senior managers or employees. Any of your employees who have knowledge of your trade secrets or the like could be subjected to a reasonable restraint of trade.

Just having a restraint of trade clause in an employment agreement does not provide you with unlimited protection. The clause is only enforceable to the extent that it’s reasonable.

A restraint of trade clause may be unreasonable on the basis of its scope, duration or the type of work under restraint. What is considered reasonable will require an assessment of the particular circumstances at hand and a court won’t enforce a restraint that simply makes an employee unable to earn a living. A restraint of trade clause should not be punitive against an employee, but rather protect the proprietary interest(s) of the employer such as goodwill and trade secrets.

If a clause is found to be unreasonable, a court may simply declare the clause void. Alternatively, courts may consider how the clause can be modified. In the recent case of Continental Car Services Ltd v Joyce case the Employment Relations Authority reduced the duration of the restraint from six months to three months, as this was deemed to be the minimum period of restraint necessary in the circumstances, including the nature of Mr Joyce’s role with Continental Cars.

In the Continental case the Authority also confirmed that if the clause is introduced after employment has commenced there’s a requirement that some compensation be made to support the restriction to which the employee has agreed. This compensation may come in the form of a pay rise for the employee or perhaps some kind of corresponding restriction on the employer. However, if the restraint clause exists in the contract from the outset, there is no need for further compensation of this kind.

For less senior employees who have gained specialised knowledge of your business and could influence your customers to change allegiance, the court may enforce a restraint as was shown in the 2007 case of Fuel Espresso Limited v Hsieh.

In the Fuel case, Mr Hsieh was a barista working at Fuel who had been trained in the Fuel modus operandi. His employment agreement contained a restraint which prohibited him from working in a business that competed with Fuel within a 100 metre radius of a Fuel operation for three months following termination of his employment. When Mr Hsieh starting working as a barista in the “Beangrinding Cart” within 70 metres of a Fuel espresso bar immediately after leaving Fuel, he was in breach of this restraint.

In the absence of a restraint of trade clause employees are free to compete with their former employer - as soon as the employment relationship ends. When drafting a restraint of trade clause you need to strike a balance between your business needs and what is reasonable and therefore enforceable.


Dan Moore is a partner of Norris Ward McKinnon.  Information in this article should not be a substitute for legal advice. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.