What should I do when I resign if my employment agreement has a restraint of trade clause?
You have resigned and found a promising new job. Then you remember a restraint of trade clause in your employment agreement restricting your future employment. Does that mean you must turn down the role? Not necessarily. A restraint is not automatically enforceable just because it is in your agreement. However, you should not ignore it. Your former employer may take urgent action if it believes you have breached an enforceable clause. The safest approach is to understand the clause early, get advice if needed and deal with any concerns before you start your new job.
What is a restraint of trade clause?
A restraint of trade clause limits what you can do after employment ends. It may apply whether you resign or your employer ends your employment. The two most common types are:
Non-competition restraints: These try to stop you from working for a competing business, starting a competing business or performing certain work within a stated area and period.
Non-solicitation restraints: These may allow you to work in the same industry but prevent you from approaching or doing business with your former employer's clients, customers, suppliers or employees.
Confidentiality clauses are related but different. Even if a restraint is not enforceable, you generally cannot take or misuse your former employer's trade secrets or confidential information.
Are restraint of trade clauses enforceable in New Zealand?
New Zealand law generally recognises that people should be free to earn a living. An employer cannot use a restraint of trade clause simply to prevent ordinary competition. It usually needs a legitimate business interest requiring protection. That interest could include:
genuine trade secrets or highly confidential commercial information,
strong client relationships or business connections developed through your role,
pricing, strategy or other sensitive information that could give a competitor an unfair advantage, or
the stability of a workforce, where a reasonable non-solicitation restriction protects against staff being actively recruited away.
A restraint must also go no further than reasonably necessary to protect that interest. Important questions include:
What work is restricted? A clause stopping you from doing any job for a competitor may be harder to justify than one limited to the services you provided.
How long does it last? A shorter restriction may be more reasonable than one lasting for a year or longer. The right period depends on the industry and the information or relationships being protected.
What area does it cover? A nationwide restriction may be excessive if the former employer operates only in Christchurch. In an online or highly specialised business, however, location may carry less weight.
Which clients are covered? A restriction limited to clients you dealt with may be easier to justify than one covering every client of a large organisation.
What was your position? A senior employee with access to strategy and major clients is in a different position from a junior worker with little confidential information or client influence.
Under section 83 of the Contract and Commercial Law Act 2017, the court can delete or modify an unreasonable restraint and enforce it as changed. An overly broad clause may therefore remain enforceable in a narrower form.
What should you do before resigning?
Check your agreement
If possible, check your agreement before resigning or accepting another job. Problems are easier to manage while you can still negotiate. Read the restraint together with any confidentiality and return-of-property clauses. Take note of how long the restraint lasts, the geographical area it covers, the businesses, clients or activities it restricts, and whether it restricts indirect actions, such as helping another person compete. Do not rely on the heading alone. The exact wording is important.
Notify your new employer
Do not hide the clause from a prospective employer. Give them a copy or accurate summary before accepting the position. It may adjust your duties, clients, territory or start date to reduce the risk. For example, you might temporarily work with different clients, avoid a particular sales area or have no access to certain competitive projects. Ask for these arrangements to be confirmed in writing. A vague verbal promise may not help if a dispute later develops.
Communicate with your current employer
You may be able to ask your current employer not to enforce the restraint against the proposed role. They might consider waiving the clause, reducing the period or identifying clients you must not approach. Any agreement should be written clearly and signed by the appropriate person. It should explain exactly what is being waived and what obligations continue. A waiver of a non-competition clause may not release you from confidentiality or non-solicitation obligations.
Protect confidential information
Do not email company information to yourself, copy client lists, download files or keep documents just in case. Return all property and remove company information from personal devices or accounts through an agreed process. Do not use confidential information to help your new employer. This may include non-public pricing, margins, client plans, renewal dates, business strategies, technical processes or upcoming bids. You can usually use your general knowledge, skills and experience. The difficult line is between your own experience and information that remains confidential to the former employer. If you are unsure, seek advice.
Avoid soliciting clients or employees
If your agreement contains a non-solicitation clause, do not assume that clients can move with you simply because they contact you first. The meaning of “solicit”, “deal with” or “accept business from” depends on the wording.
Avoid announcements or messages designed to encourage clients to follow you. A general update on LinkedIn can still create a dispute if it is targeted at former clients or followed by direct approaches.
Keep a record of any unexpected approach from a former client. Tell your new employer about the restriction so it does not ask you to contact people you are prohibited from approaching.
What could happen if you breach the clause?
Your former employer may first send you and your new employer a warning or demand that you stop the disputed activity. It may ask for information or written promises about your conduct.
If the issue is not resolved, the employer may apply to the Employment Relations Authority or Employment Court for an injunction. An injunction is an order requiring you to stop certain activity. An interim injunction may be sought urgently while the full dispute is still being decided.
This can have an immediate effect. You might be prevented from working for the new employer, dealing with particular clients or using certain information.
The former employer may seek compensation or damages for loss caused by the breach, orders concerning confidential documents or information, legal costs or a contribution towards its costs, and/or enforcement of agreed promises or settlement terms.
Not every threatened claim will succeed. The employer must establish a proper basis for enforcement. However, defending urgent proceedings can be stressful and expensive. Do not ignore a warning letter or legal documents; deadlines in injunction cases can be very short.
Can you challenge a restraint of trade clause?
It is possible to challenge a restraint of trade clause. It may be found that your former employer has no genuine interest requiring protection, or that the restriction is too wide in its duration, location, activities or clients. The employer's own conduct and the circumstances in which employment ended may also be relevant, depending on the facts.
However, it is risky to decide for yourself that a clause is invalid and proceed as though it does not exist. A decision-maker may reach a different view or may narrow the clause and enforce the revised restriction.
An employment advocate can review the agreement, explain the practical risk and assist with negotiation or mediation.
FAQs
Is a restraint of trade automatically valid because I signed my agreement?
No. Signing is important, but it does not make every restriction enforceable. The employer must generally show that the restraint protects a legitimate interest and is reasonable. The exact wording and circumstances matter.
Can my employer stop me from working for any competitor?
Only if the restriction is enforceable on the particular facts. A blanket ban may be difficult to justify if a narrower restriction would adequately protect the employer. However, a decision-maker can sometimes modify an unreasonable clause rather than reject it entirely.
What if a former client contacts me first?
Check the wording. Some clauses prohibit only soliciting clients, while others also prohibit dealing with or accepting work from them. Do not accept the work until you understand what your clause allows.
Can I take a list of contacts that I built myself?
Do not assume so. A client or contact list held by the business may be confidential information or company property, even if you helped build it. Return business records and use only information you are lawfully entitled to use.
What should I do if I receive a warning letter?
Act promptly. Preserve relevant emails and documents, stop any activity that could make the problem worse, and seek advice. Do not make admissions or sign undertakings until you understand their effect.
A restraint of trade clause does not always prevent you from moving to a new job, but it should be taken seriously. Early advice can help you identify the real risk, approach your former or new employer constructively and protect your right to move forward in your career. Mathews Walker can review your employment agreement, explain the restraint in plain language and help you work through the next steps. We may also assist with communication, negotiation or mediation. If urgent court proceedings or specialist legal work is required, we can discuss whether legal advice is also needed. If you have concerns about your restraint of trade clause, get in touch today for a free consultation. MathewsWalker.co.nz | Employment Problems Solved | 0800612355
Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered legal advice. While we strive to keep the information accurate and up to date, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained on the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. For specific legal advice tailored to your situation, please contact a qualified legal professional.
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