A contract that cannot be enforced is largely pointless and that is just as true for employment agreements as any other. The breadth of issues that can arise under an employment agreement, and the statutory framework overlaying the contractual relationship, make delving into the topic of enforcement long and multi-faceted. Nonetheless, there are some brief points that can be made which can help elucidate the matter.
Most often, enforcing an agreement during the employment relationship will start with a disciplinary process. Employment agreements would ordinarily set out a disciplinary process which should be followed. But aside from that, the core requirements are that an employer initiating a disciplinary process should follow a fair and good faith process, and have a reasonable basis for their decision.
When the agreement cannot be enforced using only internal processes, mediation is the next port of call. Failing that, or if there are failures to comply with the settlement that results from mediation, the Employment Relations Authority (ERA) can issue Compliance Orders requiring compliance with employment agreements, the Employment Relations Act 2000 (Act), and a mediated settlement agreement, amongst other things. Penalties for non-compliance with Compliance Orders include up to three months’ imprisonment, property sequestration, and fines up to $40,000.
Penalty clauses in employment agreements and settlement agreements are not enforceable, due to the foundation of the ERA’s and Employment Court’s jurisdiction in equity and good conscience. But the Act provides statutory penalties for breaches of employment agreements, the Act, and settlement agreements. Penalties up to $10,000 for an individual and $20,000 for a corporation can be imposed, depending on factors like the seriousness, deliberateness and consequences of the breach, vulnerability of the employee, and remorse of the breaching party.
There are also other times when enforcement of employment agreements is required during the course of employment. Terminating employees for medical incapacity is a good case study on how to approach enforcement. Employers do not have to tolerate incapacity indefinitely, but they must consult with the employee, rely on medical evidence for justification when making their decision to terminate, use up sick leave entitlements first, and be careful not to discriminate on the basis of the employee’s disability/sickness. In other words, the employer must walk the tightrope of activating its own interests for its business, and acting fairly, in good faith, and on the basis of objective evidence.
An area where enforceability remains somewhat controversial is restraints of trade. Restraints are prima facie unenforceable. They are generally considered to be contrary to public policy as, in some forms, they can be a limit on the employee’s right to earn a living. Courts will only enforce a restraint if the employer proves that it is reasonable and only to the extent necessary to protect the employer’s proprietary interest. Restraints that prevent competition are not generally considered to be reasonable. All restraints must be in exchange for sufficient consideration, although usually this consideration is employment and salary/wages. However, if a restraint is entered into as a variation, then additional consideration will likely be required.
Non-solicitation clauses are more likely to be enforceable because they tend not to prevent the employee from earning a living, and are clearly protecting an employer’s proprietary interest, such as customers or employees.
Like restraints, confidentiality clauses must be no more restrictive than required. Sometimes, a confidentiality clause might not be enough, where there is a risk of innocent or inadvertent disclosures, in which case, a restraint might be necessary as well. Without an express clause in the employment agreement, the confidentiality obligations arising from fidelity and good faith will only carry on beyond the end of the employment relationship in a limited manner. Ongoing enforceability will be better protected by an express clause imposing an ongoing duty of confidentiality. However, when it comes to intellectual property, Court have continued to firmly protect employers’ interest in inventions made during the course of employment.
There are many instances in which these restraints, confidentiality and IP clauses need to be enforced both during and after employment ends. It is best to get legal advice on these steps which may include urgent injunctive relief. However, there are various other options for enforcing these requirements.
At the end of the day, enforcement starts with a well drafted employment agreement, which makes the process of enforcement much easier.
Amanda Douglas leads the Employment and Health and Safety practice at Wynn Williams. She acts for employers and employees on a variety of Employment Law matters, with a particular focus in the dispute resolution area. This includes disciplinary steps, claims through the ERA and Employment Court, negotiations, and mediation. Amanda also provides advice on employment agreements and organisational restructuring. Amanda has the skills and experience to obtain a pragmatic negotiated outcome to many disputes. Where resolution is not possible, she presents a well-considered case to the ERA or Court. Connect with Amanda Douglas via email or LinkedIn