Restraint of trade clauses appear in a large proportion of New Zealand employment agreements, frequently in roles where they serve no purpose. Both parties often assume the clause means what it says. The legal position is considerably more nuanced, and it favours neither side automatically.
The starting point is unenforceability
Restraints of trade are contrary to public policy and unenforceable unless the party seeking to enforce can show the restraint is reasonable, both between the parties and in the public interest.
The burden sits on the employer. It is not for the employee to prove the clause is unfair; it is for the employer to prove it is reasonable. That allocation matters, because it means a broad clause drafted without thought is a weak clause.
There must be a legitimate proprietary interest
An employer cannot restrain an employee simply to avoid competition. There must be a proprietary interest genuinely worth protecting, and the recognised categories are narrower than employers assume:
- Confidential information and trade secrets — genuine ones, not general know-how the employee acquired by becoming better at their job.
- Customer connection — relationships the employee holds that are properly the employer’s, typically where the employee was the face of the business to those customers.
- Stability of the workforce — supporting non-solicitation of staff, within limits.
An employee’s skill, experience and general industry knowledge belong to the employee. A restraint aimed at those will not be enforced.
Reasonableness is assessed on scope
Three dimensions determine whether a restraint is reasonable, and they interact:
- Duration. How long is genuinely needed to protect the interest — typically the time for a successor to establish the customer relationship. Six months is commonly defensible; three years rarely is.
- Geography. Must relate to where the business actually operates and where the employee actually worked. Nationwide restraints on a regionally-based employee are routinely struck down.
- Activity. Must be limited to work genuinely competing with the employer’s protected interest, not to an entire industry.
A clause reasonable in one dimension may still fail because of another. The test is applied to the clause as a whole and at the time it was entered into.
Courts can modify, but do not always
The Employment Relations Authority and the courts have power to modify or delete an unreasonable restraint rather than simply striking it out. This is sometimes read by employers as licence to draft broadly on the basis that it will be narrowed if challenged.
That is a poor strategy. Modification is discretionary, and a clause drafted so broadly that it appears to be an attempt at intimidation may attract less sympathy. It also creates cost and uncertainty for both parties, and can affect how the wider dispute is viewed.
Consideration and timing
A restraint agreed at the start of employment is supported by the job offer itself. A restraint introduced during employment needs its own consideration — something of value given in exchange. Simply issuing a new agreement with a restraint added and asking for a signature is vulnerable.
Payment during the restraint period is not required in New Zealand, but it strengthens an employer’s position considerably. A restraint the employer is paying for looks materially more reasonable than one imposed at no cost.
Practical guidance
For employers: use restraints only where there is a real interest to protect, draft to the minimum that protects it, review clauses when roles change, and consider whether a confidentiality and non-solicitation clause achieves what you need without a full non-compete. Standard clauses copied into every agreement dilute your position in the cases that matter.
For employees: restraints are negotiable, particularly before you accept an offer, and they are far easier to narrow at that point than to fight later. If you have signed one and are considering a move, get advice on the specific clause before resigning rather than after.
General information only, not legal advice. Restraint disputes turn heavily on their facts — take advice on your own agreement.
