Mary Breckon, Senior Associate and Melissa Lo, Solicitor at Simpson Grierson, share their insights on restraints of trade, including the key takeaways from a recent high profile case. 
In early 2022, New Zealand watched closely as Tova O’Brien publicly fought against her restraint of trade with Discovery NZ when she moved to MediaWorks. In that case, the Employment Relations Authority (Authority) determined that the restraint was enforceable (albeit, the Authority considered the restraint too broad and modified the restraint).
It doesn’t seem like a surprise to see another media company (ironically, MediaWorks in this case) is embroiled in an employment dispute with an employee moving to a competitor with a restraint of trade clause in place.
What are Restraints of Trade?
Restraints of trade exist to protect employer’s proprietary interests, trade secrets and business connections.
The default legal position is that restraints are unenforceable, and employers need to prove that the restraint is necessary to protect their tangible proprietary interest, without unreasonably restricting their employee’s ability to make a living, or preventing competition in the market. In determining enforceability, there are multiple considerations including the seniority of the employee, the nature of the industry they are in, and the level of confidential information or the trade contacts they have access to.
MediaWorks v Chun
Fast forward one year since the O’Brien case and it is MediaWorks attempting to enforce a restraint of trade on a former employee, Dae Chun. MediaWorks sought an interim injunction from the Authority, preventing Mr Chun from acting in breach of his restraint by working with GO Media.
The Authority ultimately decided not to grant the interim injunction, determining that:
- There was an inequality of bargaining power between MediaWorks and Mr Chun, and it would be unlikely that MediaWorks could show sufficient consideration had been exchanged for introducing a restraint of trade;
- MediaWorks did not provide sufficient evidence it had a legitimate proprietary interest that is capable of being protected (in relation to the client relationship and confidential information it sought to protect) and that the restraint was reasonable;
- Mr Chun returned all MediaWorks property and the only information he retained was already in his head;
- MediaWorks failed to adequately explain why it needed the restraint of trade clause in addition to the confidential information clause;
- Mr Chun provided detailed and specific undertakings that protected the confidential information MediaWorks claimed was the subject of its proprietary interest, which meant there was no need for any restraint of trade clause; and
- Like the O’Brien case, the time periods were different for the non-solicitation and non-compete clauses in the restraint, and MediaWorks did not adequately explain why the time periods needed to be different.
The Authority notably stated that MediaWorks should not assume that the Authority will automatically modify an unreasonable, illegal and unenforceable restraint. It determined that based on the available evidence presented to the Authority, it would be unlikely to modify Mr Chun’s restraints if they were held to be unreasonable.
Key Takeaways
A lesson from this case is to avoid the assumption that employers’ restraints can be modified in the Authority should enforceability become an issue. The Authority has made it quite clear that this assumption is unfounded and that employers should be wary of simply including ‘standard’ restraint clauses in employment agreements.
Restraints of trade need to be tailored to specific employees and only used where there are genuine proprietary interests, trade secrets and business connections that need to be protected. The restraint periods also need to be tailored to the employee, ensuring that it is a reasonable and necessary timeframe that can be justified in protecting proprietary interests.
Employers will also need to keep up to date on the Employment Relations (Restraint of Trade) Amendment Bill (Bill), introduced into Parliament in September last year. The Bill aims to prohibit the use of restraints of trade in employment agreements for lower to middle income employees, and will require employers of high income employees to carefully consider whether a restraint is appropriate. For example, the Bill will limit the duration of restraints to no more than 6 months and will require employers to pay employees subject to a restraint an amount equal to half of the employee’s weekly earnings for each week the restraint remains in effect post-termination.
Despite being introduced into Parliament in September 2022, the first reading is yet to occur. It will be very interesting to monitor the progress of the Bill and if it is passed into legislation in its current form, it will have a significant impact on the use of restraints going forward.
Mary is a senior associate in the employment law group. She is experienced in all aspects of employment law and health and safety. Her expertise includes advising on all matters concerning employment including, human rights and privacy, disciplinary matters, employment investigations, restructures and performance management. Mary also provides advice on workplace obligations under the Health and Safety at Work Act 2015, officer duties, WorkSafe investigations, and notifiable events. Mary regularly attends mediations and has appeared in the District Court, High Court, Employment Relations Authority, and Employment Court. Mary provides timely, commercial and pragmatic advice on employment law issues to clients in a range of sectors, including health, education, banking and finance, building, engineering and manufacturing, retail, and forestry. Connect with Mary via LinkedIn.
Melissa Lo is a solicitor in our Employment and Health and Safety team. Melissa regularly advises on a range of employment matters, including personal grievances, the Holidays Act, restructures, medical incapacity, investigations and disciplinary processes, employment agreement reviews, as well as preparing documents and appearing at mediations or Employment Relations Authority proceedings. Melissa also assists with providing comprehensive and pragmatic health and safety advice, including obligations under the Health and Safety at Work Act 2015, WorkSafe investigations and prosecutions, and the intersection with mental health in the workplace. Connect with Melissa via LinkedIn.
