The Employment Relations (Restraint of Trade) Amendment Bill

A restraint of trade in an employment agreement seeks to stop a former employee from carrying out certain activities after their employment has ended. The purpose is to protect the interests of the former employer.

There are two types of restraint of trade provisions that are commonly used. These include:

• Non-competition clauses. These seek to prevent a former employee from being involved with any person or persons in any business that competes or may compete with the business of their former employer.
• Non-solicitation clauses. These seek to prevent a former employee from approaching any person connected to the business of their former employer, including clients, contractors, suppliers and/or employees.

As it stands, restraints of trade are not enforceable straight off the bat and rather, they must be established as ‘reasonable’ to be enforceable. Otherwise, they may act as nothing more than a deterrent. However, since it can be very expensive to challenge a restraint of trade provision in the Employment Relations Authority or a court, many employees in lower paid work choose to abide by the restraint without testing its enforceability first. The Bill suggests that this can result in employees potentially missing out on jobs with competitors with more pay and better conditions, or it can stop them using their skills to start their own business.[1]

Key changes of the Bill

The Bill (in its current form) seeks that a restraint of trade will have no effect unless the employee’s average weekly earnings exceeds three times the minimum wage rate and the employer has a proprietary interest to protect.

Based on the current minimum wage rate, this would mean that an employee would need to earn no less than $63.60 per hour ($132,288 gross per annum) to have a restraint of trade in effect.

The Bill also seeks that:

• Employers must pay an employee at least half of their weekly earnings for each week that a restraint of trade remains in effect; and
• Any restraint of trade will cease to have effect six months following the date on which the employment ends.

Next steps

The Bill will now move into its first reading and no doubt people will be interested in its progress (which you can keep up with here). In any event, this is a timely reminder that the inclusion of any restraint of clause must be carefully considered to ensure enforceability.

[1] The Employment Relations (Restraint of Trade) Amendment Bill.