Overly broad restraint of trade clauses can be used to unfairly limit an employee's ability to pursue their career. Proposed law changes would restrict the use of these clauses, writes Dr Stephen Blumenfeld.
Comment: Restraint of trade clauses are common in employment agreements. Not surprisingly, their use in New Zealand has long been subjected to legal scrutiny. The clauses are typically considered enforceable if they are reasonable and necessary to protect the employer's ‘legitimate interests’, writ large.
Nevertheless, concern among legal experts and employee advocates is now growing that these clauses can be overly broad or restrictive and used to unfairly limit an employee's ability to pursue their career after leaving their employer.
Two recent high-profile cases, one involving the country’s private broadcast media and the other the Government, have refocused attention on the subject.
Last year, in a case involving two broadcast media outlets vying for the morning news audience, the Employment Relations Authority found that a ‘non-competition’ clause in former Newshub political editor Tova O’Brien’s employment agreement was valid.
The ruling meant she had to wait out the remaining seven weeks of an agreed period of three months of her leaving her former job before launching her morning talkback show at MediaWorks. The authority determined that, because the two companies were competitors in the breakfast time slot and that she held a key role, the restraint of trade provision in her employment agreement was reasonable and enforceable.
In the second case, the Government signalled changes aimed at increasing transparency around lobbying at Parliament. A revised Cabinet Manual, set for publication later this month, spells out new expectations regarding ministers’ conduct and decisions in their role when considering future employment. The announcement of these changes comes on the heels of renewed concern over the ‘revolving door’ between government and lobbying brought to the fore in a series of reports by RNZ.
In practice, there is little preventing an employer and employee from agreeing to a restraint of trade provision in an employment agreement. Such clauses are designed to protect a business' commercially sensitive information by restricting the employee's business activities after they cease working for that employer. Although government is not in principle a business, by the same token, efforts to curtail the movement of individuals between the public and private sectors are not markedly different from restraints of trade.
Because they both impose restrictions on the freedom and mobility of individuals, some have drawn parallels between restraint of trade clauses and indentured servitude. While this comparison may seem hyperbolic, the doctrine of restraint of trade was, in fact, once used in New Zealand to prevent workers from quitting their jobs and taking up work elsewhere. Under the Master and Servant Act of 1856, employers had authority to bring criminal charges against workers who deserted their employment and were lawfully permitted to impose harsh punishment on any worker who disobeyed their orders.
Such comparisons also hark back to the bygone days three decades ago when ‘let contracts be contracts’ became the battle cry of employer groups and centre-right politicians. This reflected the view that terms and conditions agreed by employers and their employees were to be considered paramount by all parties. It is perhaps heartening then that, merely three years after the enactment of the Employment Contracts Act, the Employment Court decreed:
It is of paramount importance that the courts should maintain intact the principle that employment contracts must be free from servile elements. The progress of civilisation since the abolition of slavery has been by uncertain and stumbling steps. The courts should not be seen to condone any suggestion of a servile character in a modern employment contract.
In making this statement, the court stressed the importance of upholding the principle that employment contracts must be free from any suggestion of servitude or slavery. Notably, the court did not specifically equate restraint of trade clauses with slavery, but rather underscored the need to ensure that employment contracts do not contain any provisions that are incompatible with the fundamental principle of free and fair employment relations.
Controversy surrounding these clauses has led to calls for greater clarity and transparency about their use, particularly in cases where they are included in standard employment agreements.
To that effect, a bill introduced into Parliament in September by the Labour MP Helen White, a former employment lawyer, would narrow the scope and conditions under which restraint of trade clauses may be applied. If enacted, the law change would nullify restraints of trade imposed on employees earning less than three times the legislated minimum wage. It would also require that a former employee be compensated half their previous pay while a restraint of trade clause remained in effect, a period of no more than six months. The bill has passed its first reading and is in select committee.
This article was originally published on Newsroom.
Stephen Blumenfeld is director of the Centre for Labour, Employment and Work in the School of Management at Te Herenga Waka—Victoria University of Wellington.