This week’s Employment Relations Authority decision has reignited the discussion and debate about the enforceability of restraints against departing employees.

In this FYI we offer insights to employers following the highly publicised dispute. We share our view on two surprising aspects of the decision and some tips for employers to ensure the enforceability of restraints that are negotiated with senior employees.

Restraint of trade clauses

A restraint of trade is only lawful to the extent it protects a reasonable proprietary interest that the employer has (such as confidential information, good will and vital customer or employee relationships). The law does not extend to preventing competition in general. Therefore, the Authority or Employment Court will only enforce restraint of trade provisions to the extent that they are reasonable in scope, duration and geographical limit.

Where the Authority or Employment Court finds that a restraint is wider than reasonably necessary it can delete or modify a provision. This was the case in the dispute between former TV3 political editor Tova O’Brien and her former employer Discovery NZ in respect of Ms O'Brien's new role as a talk back radio show host at MediaWorks^[1].

While restraints are presumed unlawful and against the public interest, senior executives should exercise caution in departing from terms that they have negotiated and agreed. Where an employee is well-remunerated, has business acumen, equal bargaining power and a restraint is agreed after negotiation and an opportunity for advice, there is case law that supports that agreements are made to be kept^[2].

The decision

The background

Ms O’Brien resigned from her position as political editor with Discovery on 21 October 2021 after accepting an offer to host a new talk back radio show at MediaWorks.

Following completion of her three-month notice period, her employment with Discovery ended on 21 January 2022. Ms O’Brien intended to begin employment with MediaWorks on 25 January 2022.

However, Discovery claimed that the terms of Ms O'Brien’s employment agreement restrained her from working for MediaWorks, as a competitor, for three months after her employment with it ended and also claimed that this restraint, as well as restraints of non-dealing and non-solicitation, were reasonable and enforceable.

Ms O'Brien opposed this and sought a declaration from the Authority asserting that the restraints were unreasonable and unenforceable given that her new role was "fundamentally different" to her role at Discovery. She further claimed Discovery was seeking to "punitively enforce the restraints in an anti-competitive manner".

Are the restraints of trade enforceable?

Despite Ms O’Brien’s claim that MediaWorks’ radio show would not compete with Discovery’s television broadcasts, the Authority was satisfied that MediaWorks and Discovery are media competitors in the broad sense.

The Authority was also satisfied that Discovery had legitimate proprietary interests to protect, given Ms O’Brien was employed in a “key role” and was privy to confidential information (including confidential sources) and business relationships within the newsroom.

The Authority also considered the scope and geographical ambit of the non-compete restraint were reasonable, noting that the wording agreed by the parties in Ms O'Brien's employment agreement was clear that a departing employee’s involvement in any capacity with any business or activity in competition with Discovery, within New Zealand, is to be restrained.

In our view there were two surprising aspects to the decision:

Annual leave/garden leave

Firstly, the Authority noted that Discovery had the ability to require Ms O'Brien not to work all or part of her three-month notice period, thereby creating a potential six-month period of the restraint. The Authority was of the view that the total period of a restraint should include the notice period where the employer has the ability under the terms of the employment agreement to put an employee on garden leave. The Authority therefore exercised its discretion to modify the duration of the three-month non‑compete restraint to seven weeks finding that Ms O'Brien could have been placed on garden leave once Parliament adjourned on 19 December 2021 and a new political editor was appointed on 21 December 2021.

While this finding appears specific to the facts of this particular case, we note that there will be many cases where an employer may not wish to place an employee on garden leave and, the fact that they do not, should not in our view impact on the enforceability of the post-employment restraint.

In addition, if an employer does place an employee on garden leave this may be taken into account in determining the reasonableness of a restraint, but there is no automatic rule that garden or annual leave will be off-set against the restraint.

Treatment of different types of restraint

The second surprising aspect is that the non-solicitation and non-dealing restraints in Ms O’Brien’s employment agreement were reduced in duration to align with the non-competition restraint. The Authority found that they were wider than reasonably necessary and would be enforceable if shortened from a duration of six months to three months. This was on the basis that it was not clear why these restraints were twice the length of the non-compete clause.

Again, this seems specific to the facts and the evidence before the Authority. Generally speaking, the three different types of restraint (non-dealing, non-solicitation and non-competition) can have very different purposes and we envisage that there will be a number of scenarios where it is reasonable to impose a longer period preventing an employee from poaching staff/clients/customers but during which time they can work for a competitor.

Legislative change?

Labour MP Helen White has indicated that she has started work on a private members’ bill that would see restraint of trade clauses prohibited for low income workers and require that they are “reasonable” for higher-paid roles.

Commentary

While at this stage it is uncertain what the bill may look like, the Authority in its determination against Ms O’Brien offers insight into this area of employment law that will be of interest to many employers, including:

• Restraint of trade clauses in employment agreements may be enforced even in circumstances where the employee has shifted to a role that is not necessarily “like-for-like”. The test is whether the employer has a legitimate proprietary interest to protect and that the restraint is no wider in scope, duration and geographical limit than is necessary to protect the proprietary interest.

• By enforcing the non-compete provision, the Authority determined that Discovery had proprietary interests worth protecting and ultimately required Ms O’Brien to honour the terms (albeit shortened in duration by five weeks) of the employment agreement that were negotiated and agreed by her at the time the agreement was entered into.

• Where multiple restraints (such as non-compete, non-dealing and non-solicitation) are included in an employee’s employment agreement, employers should ensure that any differences in duration, scope or geographical limit between the restraint provisions are justifiable.

Tips for employers

• Employers should ensure that restraints are carefully drafted, tailored to the role and that they are no wider than reasonably necessary.

• Employees continue to be bound by duties of good faith and fidelity during a notice/garden leave period. This includes an obligation to be ‘responsive and communicative’ and not to mislead or deceive their employer. This provides an opportunity to ask careful and direct questions to ascertain the employee’s future plans and to take informed steps to protect the employer’s business. If an employee chooses to answer questions of this nature, the employee has an obligation to provide honest and full answers, and could potentially be liable for a penalty for breach of good faith if they mislead their employer^[3].
• While garden leave and annual leave may be options available to an employer, we consider that whether these should be off-set against the restraint will be specific to the facts.

If you would like advice on restraint of trade clauses, or any other aspect of employment law, please get in touch with one of our team.

Special thanks to Phillip Leaupepe-Nickel for his assistance in drafting this article.