Restricting restraints of trade – Bill goes to select committee

28 July 2023

A bill which seeks to impose restrictions on the use of restraints of trade has been tabled in Parliament and will progress to select committee, where members of the public will have an opportunity to make submissions.

The Employment Relations (Restraint of Trade) Amendment Bill had its first reading in Parliament on 26 July 2023. The Bill would prevent the use of restraint of trade clauses for low and middle-income earners, and impose some restrictions on the use of restraints in other situations.

The Bill was introduced to Parliament in September 2022 as a Private Member’s Bill by Labour MP Helen White, a former employment lawyer.

Restraints of trade and the current law

The current legal position is that restraint of trade clauses are unlawful because they are anti-competitive and contrary to the public interest. However, restraint of trade clauses can be enforced by the courts if the employer can show that they are reasonable and no broader than necessary to protect the employer’s legitimate proprietary interests. In practice, the New Zealand courts have been prepared to allow employers to enforce restraints of trade in a wide variety of circumstances.

That said, it can be difficult to predict the likely outcome when the courts are asked to consider enforcement of a restraint of trade clause. The outcome is usually fact-specific, based on the particular circumstances and evidence. 

Courts also have the power to vary a restraint if they consider that there is a proprietary interest that requires protection, but the terms of the restraint are too broad. This occurred when prominent journalist, Tova O’Brien, challenged the enforceability of the restraints of trade in her employment agreement with Discovery NZ in the Employment Relations Authority.1 The Authority found that the restraints were enforceable because there was a proprietary interest to protect, but they were too long. The Authority therefore varied the restraints by reducing their duration. 

Litigation relating to the enforcement of restraints of trade is typically undertaken on an urgent basis, and can be stressful for employees who may not have properly considered the restraint of trade provision in their employment agreement at the start of their employment. Many employees do not have the resources necessary to challenge restraints and may abide by restraints that could be categorised as unlawful or unenforceable out of fear of potential legal action.  

The Bill

The Bill provides that restraint of trade clauses would be unenforceable unless:

  • the employer has a legitimate proprietary interest to protect through the use of the restraint;
  • the employee earns more than three times the minimum wage (based on the current minimum wage, this is equal to $2,724 per week based on a 40-hour week at $68.10 an hour);
  • reasonable compensation (as defined) is paid to the employee for the restraint; and
  • the restraint applies for no more than six months post-termination.

Restraints could no longer be used for low or middle-income employees.  For high income employees, employers would have to pay half of the employee’s average weekly earnings for the period of the restraint.

What types of restraint does it cover?

Three types of restraints are covered by the Bill:

  1. Performing work in a similar field to their former employer’s business (commonly called a ‘non-compete’ restraint).
  2. Contacting or dealing with clients of their former employer’s business (commonly called a ‘non-solicitation’ restraint).
  3. Offering employment to employees of their former employer’s business (sometimes called a ‘non-poaching’ restraint). (This does not currently extend, in the Bill, to the poaching of independent contractors of the former employer).
Possible issues for the select committee to consider

We expect that public submissions will raise a number of practical concerns for the select committee to consider. The Bill would significantly reduce:

  1. the use of restraints of trade, which would be limited to high-income earners only, and
  2. the flexibility of employers and employees to tailor restraints of trade according to specific factual circumstances. 

We have summarised some of the likely concerns below.

The Bill currently applies in the same way to all three types of restraints above. However, these restraints are not equal in practice. Non-compete clauses are generally far more restrictive, as they effectively prevent someone from moving straight to new employment in the same line of work. We expect this to be a hot topic at the select committee stage, where the Bill will be open to public submissions.  

The six-month maximum period of a restraint in the Bill applies from when the employment ends, and does not take into account any period before that which is spent on garden leave (i.e. time spent on pay but not working during the employee’s notice period). However, under current case law, any time spent on garden leave is treated as reducing the maximum enforceable period of any post-employment restraint.

There are also questions about how the restrictions would apply to employees working on a part-time basis, and whether the restrictions on restraints should be extended to cover people working as independent contractors, who can be subject to similar types of restraints.

The proposed maximum duration of restraint (six-months) is less than the restraint periods that are often agreed in practice, particularly in relation to non-solicitation and non-poaching restraints.

The requirement to pay employees during a restraint is contrary to the typical practice in New Zealand at present. Commonly, employment agreements will specify that the consideration provided to an employee during their employment includes compensation for the post-employment restrictions that they have agreed to uphold (whether or not an additional premium has actually been paid). The requirement to pay compensation will potentially produce advantages for employees (who may obtain new employment that is outside their restraint as well as continuing to receive the restraint compensation), and additional cost to employers. 

Finally, we note that the use of an income threshold to determine when a restraint can be used is a blunt instrument for determining who has interests that should be protected. As an example, the Employment Relations Authority has upheld a restraint against a person employed as a hairdresser because they had a vast knowledge of client information that was critical to the employer’s business.  The Authority determined there was a legitimate proprietary interest to protect, regardless of the employee’s seniority or income. However, if the Bill becomes law, an employer in a similar situation (if the employee was below the high-income threshold) may be unable to protect their proprietary interest through the use of a restraint, based solely on the income threshold.

Bigger picture

If the Bill becomes law, employers will need to think carefully about their use of restraints, and whether they are willing to pay former employees during their restraints in order to protect their interests. If restraints can no longer be used for some employees, employers will need to think about other ways to protect their proprietary interests. 

Although on the face of it the Bill appears to be less favourable for employers, the Bill’s proponent, Helen White, suggests that regulating restraints may lead to greater innovation and productivity within the New Zealand workforce and will increase the free flow of labour, based on experiences internationally.  

Because the Bill would impose new requirements for both the use and terms of any restraint of trade, we expect that there would still be significant scope for restraint-related litigation. There may be new complexities for employers and employees to navigate as part of any case testing the enforceability of a restraint.

Next steps

The Bill will likely receive a range of public submissions at select committee stage. The National and Act parties opposed the Bill at its first reading, and should the Labour Government not be re-elected in October, the Bill is unlikely to progress.  

Please get in contact with a member of our national employment and health and safety team if you have any questions about restraints of trade, or if you would like assistance in making a public submission about this Bill.  

[1] O’Brien v Discovery NZ Ltd [2022] NZERA 15.



Disclaimer: This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.