Tova, Discovery and the enforceability of employment restraints of trade

24 Jan 2022
Author: Andrea Twaddle
 

In a world where business is increasingly competitive, it is unsurprising that employers are focused on securing and safeguarding information and client relationships that sustain their business. However, there appears to be a common misconception that restraints of trade in employment are unenforceable. A spotlight has been shone on the issue, with Journalist Tova O’Brien recently challenging the enforceability of the restraint of trade in her employment agreement with her former employer (Discovery). It’s a timely reminder of the how business interests can be protected following an employee’s departure.

The case of Tova, Discovery and MediaWorks

Broadly, O’Brien was a political editor for TV3 (owned by Discovery) and intended to move to a new breakfast show for competitor MediaWorks. However, her employment agreement with Discovery (entered into in 2018) included a restraint of trade. Discovery made clear its intention to enforce the restraint, which would delay her ability to start work with the new show.

What are restraints of trade?

Restraints are a clause in an employment agreement intended to prevent an employee from working in a way that could impact the former employer’s business. There are different types of restraints:

  • Non-competition clauses attempt to prevent the employee from working for a similar business to the former employer (whether as an employee, or establishing a business in competition). 
  • Non-solicitation clauses attempt to prevent the employee from contacting clients or co-workers and trying to attract them to joining the new business/place of work. 
  • Non dealing clauses attempts to stop a former employee from dealing with former clients/customers.

Well drafted restraint of trade provisions are critical to whether they will be enforceable. If challenged, the starting point is that restraints are unlawful as being anti-competitive and against public policy. This is because they limit an individual’s ability to contract freely with whoever they choose in order to earn a living following the end of their employment. They also attempt to restrict competition in the market. A restraint will be upheld only where the former employer has a genuine proprietary interest to protect. For example, trade secrets, pricing, client, or other confidential information.

Restraints can’t be used to try to simply prevent competition, or from an employee using their knowledge, skills and experience. 

Factors that may be considered in assessing whether a restraint is reasonable will include factors such as the duration of the restraint and geographic limitations.

Is a restraint enforceable for an employee on minimum wage?

For a restraint to be enforceable, at the time it was entered into, ‘consideration’ must be paid in exchange for the limitation on the employee in the future. This will usually be stated to be additional benefits/remuneration (over and above minimum entitlements) paid to the employee. For this reason, employees working on or close to minimum wage would rarely be justifiably restrained. 



Can a restraint be offset by a period of garden leave?

A period of garden leave can be a useful consideration alongside restraints of trade. During a period of garden leave, the employee will still owe all obligations to the employer, but may not have access to the employer’s clients, systems, confidential information and IP. 

In Air New Zealand v Kerr, the Employment Court declined to enforce a six month non-competition clause following a six month garden leave period. The employee (Mr Kerr) was General Manager of Air Nelson. His employment agreement contained a six month notice period and a six month non-competition restraint of trade. He accepted a job with Jetstar to start six months after his resignation. Air New Zealand sought to enforce the restraint of trade, by applying for an injunction preventing him from starting the role in breach of the restraint. 

The Court took an ‘off setting’ approach, and concluded that Air New Zealand had received the protection it needed to safeguard its confidential information while the employee served his garden leave period. Confidential information that he had previously been able to access, by that time, had likely become stale. 

There is a risk in relying on this decision as a proposition that a period of garden leave will automatically reduce a period of a non-competition restraint. However, it will be a relevant consideration when considering the reasonableness of a restraint. 

Enforcing or challenging a restraint of trade

When seeking to enforce a restraint, the former employer may seek orders from the Employment Relations Authority to prevent the employee breaching the agreed terms in the employment agreement. Remedies may include seeking damages from any loss suffered because of the breach, and penalties against the employee. 

An employee seeking to challenge a restraint of trade, could ask for the Employment Relations Authority to make a determination that the restraint is unreasonable and therefore unenforceable, or, that the Authority modify the restraint to terms that are more reasonable. 

Any party looking to enforce or challenge a restraint of trade needs to act swiftly, because timing is crucial to successfully upholding restraints. This includes direct discussions at the time of the employee resigning about their plans for the future and whether they intend to move to a competitor. 

Irrespective of the outcome of the ‘O’Brien – Discovery’ litigation, the case is a timely reminder that:

  • restraints must be tailored to the individual circumstances; and
  • restraints will only be enforceable when they go no further than necessary to protect the employer’s genuine business interests.  


The specialist team at DTI Lawyers are experienced in drafting and assisting clients with the enforcement of restraints of trade. The team can be contacted on 07 282 0174.



 
 
 
Tova, Discovery and the enforceability of employment restraints of trade
About the Author
Andrea Twaddle
Andrea is an experienced specialist employment lawyer and Director at DTI Lawyers. She advises on contentious and non-contentious employment law issues, including privacy, and health and safety matters. Andrea is AWI-CH qualified, and undertakes complex workplace investigations. She is a former Council Member at the WBOP District Branch of the Law Society, and Coordinator of the WBOP Employment Law Committee. Andrea is a regular commentator on employment law issues and is frequently sought as a presenter at client and industry seminars, as well as for the provision of advice to other lawyers, professional advisors and leadership teams. You can contact Andrea at andrea@dtilawyers.co.nz