Restraint of Trade in Employment and Business

Friday 20 February 2015

Restraints of trade are used in contracts in two main situations.

First, they are used by employers to protect the value of their business where senior employees leave, potentially to a competitor.

Second, they are used in sale of a business or shares situation. The purchaser will pay for the business based on the value of the customer client base associated with the business. Often in order to protect the value, a purchaser will require the seller of the business not to be involved in a similar business in the area for a period of time. Similarly, when a shareholder sells shares in a company, they may be required to be involved in a similar business to the company’s for a period of time.

Under New Zealand law, a restraint of trade must be reasonable to be enforceable. A restraint of trade can have impact on a person’s ability to make a living, it is important for it to be reasonable and not unfairly restrictive. It is also against the law to be anti-competitive.

What is reasonable often depends on the legal context and the value received by the person being restrained. In employment law, restraints of trade are only enforceable if you have a senior employee. In the employment context, restraints allowed are often only for six months to a year and not much beyond that, unless there are exceptional reasons. 

In the sale of business context, the extent of the restraint allowed is dependent on the value the purchaser pays for the client base of the business. If there is a high value, longer and more restrictive restraints are allowed.

A related issue is the ownership of client information. It is important to note that an employee is not entitled to take any client or other information with them when they leave unless their employer agrees otherwise. Similarly, a shareholder leaving a company or the seller of a business cannot take any information associated with the business or the company with them unless agreed otherwise by the other party.

Restraints of trade and protection of client base is a complex area. It is important to take advice when you have questions to ensure that you put in place the best protection. As an employee or a seller, it is important to know what is a reasonable restraint of trade before you sign the contract.

If you require legal advice, contact Teresa Chan at Teresa Chan Law Limited, Level 3, Westpac Building, 106 George Street, Dunedin 9016, ph. 477 1069, or email teresa@tchanlaw.co.nz  If you are a Mandarin speaker, please ring Jack Liu at (021) 0233 1168.

Note: The information in this article is general only. You should seek advice for specific situations.