How the TV3 case changed the game

TV3 journalist Tova O’Brien was recently told she couldn’t break a restraint of trade clause. What does this mean for employment agreements?

In October last year, TV3 journalist Tova O’Brien quit her job to help launch Mediaworks’ new breakfast show, but soon things went awry.

The ‘restraint of trade’ clause in her employment agreement said she had to wait three months before working for a competitor – and the Employment Relations Authority determined that her restraint of trade was enforceable.

In the past, many people wrongly thought restraints of trade weren’t worth the paper they were printed on, and few employers bothered to take legal action if they were broken.

But in this case, TV3 went to the Employment Relations Authority so O’Brien had to delay the start of her new breakfast radio show for several weeks.

Does this mean that restraints of trade in employment agreements will always be enforceable? Let’s take a closer look.

What’s a restraint of trade?

A restraint of trade clause stops a former employee from carrying out certain activities after they’ve left their employment, to protect the interests of the former employer.

It allows the former employer time to safeguard their business, for example by introducing customers to others in the business so they can keep their custom.

Media commentary on the O’Brien case has focused on the non-compete aspects of the restraint.

But, in fact, employment agreements will often cover several restraints and may not always prohibit competition.

These are the types of restraints commonly covered in employment agreements:

1. Non-compete: This is the most restrictive restraint and stops a former employee from working for a competitor or setting up a business competing with them for a period of time. This applied to O’Brien.
2. Non-solicitation: A non-solicitation restraint prohibits a former employee from approaching and soliciting customers, suppliers, or employees of their former employer. It’s intended to stop the “poaching” of former co-workers and customers.
3. Non-dealing: A non-dealing restraint goes further and prohibits a former employee from providing products or services to a former customer or client, even if there has been no active solicitation.

How does a restraint work?

A restraint of trade clause needs to cover the following:

1. The activities prohibited: They could be competition, soliciting or dealing with customers, employees, or suppliers of the former employer. However, it must be reasonable when you consider the type of role and its seniority. For example, it’s unlikely a restraint will be enforceable against a junior who has little access to customers or commercial secrets.
2. Area: It says where the employee is restricted from carrying out certain activities. This is particularly relevant to non-compete restraints. The area of the restraint must be reasonable, too. Say the former employer’s business only operates in Auckland, it wouldn’t be reasonable to extend the non-compete restraint to cover the whole country.
3. How long: It says how long the restraint applies after the employee leaves. It can’t last longer than is needed to protect the former employer’s interests. In the O’Brien case, the Employment Relations Authority cut down O’Brien’s non-compete restraint from three months to seven weeks.
4. Compensation: For the restraint to be enforceable, the employer must have paid the employee adequate compensation in return for the employee agreeing to the restraint.Typically, employment agreements will say that the employee’s initial wage or salary is sufficient compensation for the employee being bound by the restraint.

Are non-compete restraints fair?

The idea of preventing someone from earning a living in their chosen field for a period of time sits uneasily with many New Zealanders.

After all, this is a small country, and there are few workplace options in some industries.

But increasingly, our courts are saying that reasonable non-compete restraints can be enforced.

This is because employees were free to negotiate the terms of their employment before they signed an employment agreement with a restraint in it.

If you’re writing the clause

There is no ‘standard’ restraint of trade clause.

Employers should consider which restrictions are right for their business and the role they’re hiring for.

If you’re signing the employment agreement

Employees would be wise to take note of such clauses now.

The commonly held misconception that restraints of trade provisions are not worth the paper they were written on is simply not true.

The O’Brien case gives both employers and employees a timely reminder that restraints should be properly drafted and negotiated before the employment agreement is signed, because employees may be held to them.