Non-Compete Clauses

Non-compete clauses are contractual restrictions that limit your ability to engage in competing activities after your employment ends. These restraints can take various forms, including prohibitions on working for competitors, soliciting customers, or starting competing businesses within specified timeframes and geographic areas.

The legal foundation for these clauses lies in the restraint of trade doctrine, which recognises that while everyone has the right to work and trade freely, this right can be limited by reasonable contractual agreements. The challenge lies in determining what constitutes 'reasonable' in each specific situation.

Common types of restraints include non-compete clauses (preventing work with competitors), non-solicitation clauses (preventing approaches to customers or staff), and non-dealing clauses (preventing business with former customers). Each type serves different purposes and faces different enforceability standards.

It's important to understand that the mere existence of a restraint clause in your contract doesn't make it enforceable. New Zealand courts take a protective approach to employees' rights to earn a living and will scrutinise these clauses carefully.

For a non-compete clause to be enforceable in New Zealand, it must pass a three-part reasonableness test. First, the restraint must protect a legitimate business interest of the employer, such as confidential information, customer relationships, or trade secrets. General competition is not considered a legitimate interest worth protecting.

Second, the restraint must be reasonable in scope, duration, and geographic area. A six-month restraint might be reasonable for a sales role, while a two-year restraint could be excessive. Similarly, a nationwide restraint might be appropriate for a national role but unreasonable for someone working in a single city.

Third, the restraint must not be contrary to the public interest. Courts consider factors like the employee's ability to earn a living, the impact on competition in the market, and whether the restraint serves any genuine protective purpose beyond stifling competition.

The burden of proving reasonableness lies with the employer seeking to enforce the restraint. If any element of the test fails, courts will typically refuse to enforce the entire clause, though they may sometimes 'blue pencil' or modify obviously excessive terms.

If you believe a non-compete clause is unreasonable, you have several options for challenging it. The most direct approach is to seek a declaration from the Employment Relations Authority or High Court that the restraint is unenforceable. This provides certainty before you take any action that might breach the clause.

Alternatively, you can proceed with your intended activities and defend any enforcement action brought by your former employer. This approach carries more risk, as you might face interim injunction applications seeking to stop your activities immediately while the case is resolved.

Key factors that strengthen a challenge include overly broad geographic scope, excessive duration, lack of legitimate business interest, minimal access to confidential information in your role, and disproportionate impact on your earning capacity. Documentation of these factors is crucial for building a strong case.

Consider also whether the restraint was properly incorporated into your contract, whether you received adequate consideration for agreeing to it, and whether your employer's conduct has undermined their right to enforce it. Sometimes technical defects can invalidate otherwise reasonable restraints.

Restraint clauses are often negotiable, both at the start of employment and when leaving. During contract negotiations, you can seek to narrow the scope, reduce the duration, or obtain compensation during any restraint period. Employers may be willing to compromise to secure your services or ensure a smooth departure.

When leaving employment, restraints can sometimes be waived or modified as part of settlement discussions. Employers might agree to reduce restrictions in exchange for extended notice periods, comprehensive handovers, or stronger confidentiality undertakings that address their real concerns.

Garden leave arrangements, where you're paid during a notice period but don't work, can sometimes replace post-employment restraints. This approach protects the employer's interests while ensuring you continue to receive income during the restricted period.

Consider proposing alternative protections that address the employer's legitimate concerns without unduly restricting your career. For example, specific customer non-solicitation might replace a broad non-compete, or geographic limitations might be narrowed to areas where you actually worked.

Different industries face varying approaches to restraint clause enforceability. In technology and professional services, where client relationships and intellectual property are crucial, courts may be more willing to enforce reasonable restraints. However, the specific nature of the role and access to genuinely confidential information remains key.

Sales roles often involve customer relationship restraints, but these must be limited to customers the employee actually dealt with, rather than all company customers. The duration and geographic scope must also reflect the realistic period needed for customer relationships to transfer to other staff.

Senior executive roles may justify longer and broader restraints, given their strategic knowledge and influence. However, even executives cannot be subject to restraints that effectively prevent them from working in their field of expertise anywhere in the country.

In rapidly changing industries like technology, lengthy restraints may be unreasonable because the competitive landscape and relevant skills change quickly. What constitutes confidential information or competitive advantage may have a shorter lifespan than in traditional industries.

When employers seek to enforce non-compete clauses, they typically apply for injunctive relief to stop the alleged breach immediately. These applications can be heard urgently, sometimes within days, and may result in interim orders preventing you from working while the full case is determined.

Employers must demonstrate that they have an arguable case for enforcement, that damages would not be an adequate remedy, and that the balance of convenience favours granting an injunction. They must also show they acted promptly upon discovering the alleged breach.

If a restraint is found to be enforceable and breached, remedies can include permanent injunctions, damages for losses suffered by the employer, and account of profits made by the employee from the competing activity. However, these remedies are only available if the restraint is actually reasonable and enforceable.

Employees facing enforcement action should respond quickly, as delay can be interpreted as acceptance of the restraint's validity. Immediate legal advice is crucial to assess the strength of the employer's case and develop an appropriate response strategy.

If you're subject to an enforceable restraint, careful planning can help you comply while minimising career impact. Start by understanding exactly what activities are prohibited and for how long. Many restraints are narrower than they initially appear when read carefully.

Consider whether your intended new role actually competes with your former employer's business. Competition must be real and substantial, not theoretical. Working for a company in the same industry doesn't automatically constitute competition if the businesses don't actually compete for the same customers or markets.

Document your compliance efforts and seek clarification from your former employer if the restraint's scope is unclear. Sometimes employers will confirm that specific activities don't breach the restraint, providing you with protection against later enforcement action.

If the restraint period is short, consider whether temporary alternative employment or consulting work might bridge the gap. Some employees use restraint periods for professional development, further education, or exploring different career directions.

Seek legal advice before signing any employment agreement containing restraint clauses, especially if they appear broad or lengthy. Early advice can help you negotiate more reasonable terms or understand the practical implications of what you're agreeing to.

If you're planning to leave your job and are subject to restraints, get advice well before your departure. This allows time to assess enforceability, explore modification options, and plan your next career moves within any legitimate restrictions.

Immediate legal advice is essential if you receive any communication from a former employer alleging breach of a restraint clause, or if you're served with court proceedings seeking enforcement. The urgency of potential injunction applications means delay can significantly prejudice your position.

Consider legal advice if you're offered a new role that might conflict with existing restraints, or if you're planning to start your own business in a potentially competing field. Professional guidance can help you structure activities to minimise enforcement risks while pursuing your career goals.