A little restraint

How far can your current or former employer stop you working for someone else in the same business?

How far can your current or former employer stop you working for someone else in the same business?

There seems little to stop me, for instance, from running off to join a rival paper, but it could well be harder for Computerworld's sales reps.

A few weeks ago, I received a copy of an employment contract from a software developer which appears to stop that person working for anyone with any dealings with their current employer for six months after they left the firm. Is such a contract clause fair and can it be legally enforced?

The law is not as clear as we might hope, with the courts judging each case on its merits.

The Employment Relations Service, the Department of Labour's contract advisory service, says New Zealand law does not specifically address restraint of trade clauses.

“Their purpose is to restrict the liberty of one party to carry out work from one’s immediate employment for the duration of employment or at a future time in order to protect the employer’s commercial and business interests,” says ERD information officer Nicholas Lillywhite.

“Essentially it rests on the circumstances in each individual case. Although an employer has a right to protect its business -- such as clientele, intellectual property or sensitive or confidential information -- a restraint of trade clause must be deemed to be reasonable in order for it to be enforceable by the courts,” he says.

Factors to take into consideration would include the parties’ conduct, the nature of the job, the parties’ relative bargaining position, the time the clause was entered into, the duration of the restraint, its geographical location, the reasons for the employee leaving the firm; and the potential benefits and disadvantages to either party should the clause be upheld, modified or deleted.

The courts believe in “an implied ongoing duty of fidelity to an employer by an employee” during and after the employment relationship, but since each case differs, the ERS recommends both sides seek independent advice. A look at the Employment Relations Act online offers guidelines on how both parties should relate to each other.

Employers & Manufacturers Association advisory services manager Peter Tritt confirms most of this advice but points out other factors.

An employer would have to show what trade secrets, confidential information and other "property” needed protecting. Where an employee had much influence over customers, say a marketing rep "poaching" customers he or she had built up a good relationship with, there might be a good case. But there is no protection against simple competition, says Tritt.

The EMA warns if a person is made redundant or if the person held a junior position, such clauses would be deemed unfair. If it impaired the ability of the former employee from earning a living, that too would make it unlikely to be enforced.

The courts would also look at whether a person was paid in consideration of the restraint. Many top executives often take what is called “gardening leave” when they leave one firm for another. This is usually a period on full pay, say six months, so the new employer won’t immediately gain from the "inside" knowledge of their new executive.

Tritt says firms will have stronger ground in defending their restraints if they have made a payment to cover a period of time after the employee leaves the company. In the recent case Fletcher Aluminium v O’Sullivan, the firm tried to enforce a two-year restraint of trade. The Employment Court cut this to six months but this was overturned by the Court of Appeal. Tritt says the firm had paid the other party $1.7 million for design and patent work covering this period.

“If you [employers] want to make something stick or last longer, have a separate transaction on top of normal wages,” he advises.

Barry O”Brien of recruiters Enterprise says he recently won a case stopping one of his former agents from setting up in competition using a database of clients from Enterprise. “Our restraint is not from working as a recruitment agent, but from dealing with [our] clients. We developed the client base, we owned the client base."

For six months, his former agents have to refrain from using such databases. They can still work with other clients but after the "it’s open slather".

Such court cases are expensive, with O’Brien saying it cost his agency $20,000 to $30,000 to launch and defend the latest case.

Fortunately, for IT workers in general, the large amount of vertical markets means such restraints should not impact on them too greatly, he says, and they should generally be free to move on without such obstacles.

“To stop people working in their industry,” O’Brien says, “That would be unreasonable.”

Greenwood is Computerworld's human resources reporter. Send email to Darren Greenwood. Send letters for publication to Computerworld Letters.

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