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Restraint of trade private member’s bill ready for the parliamentary ballot

12 May 2022

| Author: Diana Clement

As foreshadowed in her maiden speech when she entered Parliament at the 2020 election, employment-lawyer-turned-Labour-list-politician Helen White has drafted her Employment Relations (Restraint of Trade) Amendment Bill. Prepared with the help of Labour minister and former trade union official Andrew Little, the private member’s bill aims to restrict restraint of trade provisions in employment agreements that have the effect of shackling low-paid workers to their current employers.

The bill, if it eventually makes it into law, would amend the Employment Relations Act 2000 to:

  • provide that restraints of trade have no effect wherever an
    employee earns less than three times the minimum wage;
  • limit the use of restraints to those situations where the
    employer has a proprietary interest to protect;
  • require employers to pay half the employee’s weekly earnings
    for each week that the restraint of trade remains in effect; and
  • limit the duration of restraints of trade to no more than six

The bill is not intended to limit or affect the common law duties of confidentiality and fidelity, White says. It will now go into the parliamentary biscuit tin and, if drawn out, could go through the legislative process and become law. White says she is seeking support from the other side of the House – specifically from the Act Party, which would leapfrog the bill onto the agenda. At its heart, restraint of trade (RoT) clauses involve anti-competitive behaviour, she says, which Act and other parties are against. Workplace Relations and Safety Minister Michael Wood and other caucus colleagues are supportive. “I’m just thrilled to see this in the biscuit tin,” she says. “I think, you know, it’s just a really important thing. And when I came to Parliament, this is the one I had my heart set on.”


Chilling effect

But Susan Hornsby-Geluk, managing partner of employment law firm Dundas Street, says while the intent of the bill is good and restraints of trade are often taken too far, it could have a chilling effect on business.  “The intent of the bill in restricting the use of restraints of trade is sound. These types of clauses are commonly included as standard terms in employment agreements and the implications of them are often not discussed,” she says. “The candidate is full of optimism about their new employment and is not focused on what happens when the relationship ends. It is also awkward for prospective employees to question their new employer about these clauses at the beginning of the relationship because this might be seen as demonstrating a lack of commitment to the job.” Hornsby-Geluk says it seems wrong to prevent people from using their skills and experience to seek new employment so restraints which seek to stop a person from working for a competitor should be closely scrutinised. “I also agree with the provision in the bill that restraints should be used only for well-paid employees and in circumstances where there is a legitimate proprietary interest to protect. They should not be allowed to be relied on simply to stop an employee leaving to go to work for a competitor when there is no particular confidential or proprietary information that they have which could be used to damage the business interests of their previous employer.” But the bill goes too far, she says, where it seeks to render unenforceable restraints on employees poaching clients and staff.  “This could have a chilling effect on businesses. Take a law firm, for example. Ideally the partners share clients and encourage lawyers to develop strong and direct relationships with clients, supported by the partners and the business. “If an employee could then leave and take the firm’s clients with them, this could have unintended consequences, including a reluctance to support staff to develop those relationships and have access to clients and opportunities. “She says it does not seem unreasonable for a business to seek to protect its clients and staff from being poached. “This does not stop an employee from resigning to work for a competitor but it ensures a fair balance between the interests of both parties. For this reason, I think the bill needs to be pulled back.”

Fair and reasonable

RoT clauses are common in employment agreements. They prevent employees from working in their field, in the vicinity or for a competitor for a certain period of time after their employment has ended. The clauses are often used without much thought being given to whether they are reasonable in the circumstances or to the consequences for the employee, the employee’s family or for the competition, White says. Employers know that 90% of people will abide by the clauses even if they are not enforceable. Low and medium-paid workers don’t challenge them because they can’t afford to take three or six months off before going to another job if their employer enforces a restraint of trade. “The poorer the worker, the less likely they are to be able to take their case to court,” White says. “Most suffer in silence. That really worries me. That is behaviour that just isn’t fair on hard- working New Zealanders.”

White says employers, lawyers, unions (which don’t allow RoTs in collective agreements) and the public often don’t see the harm these clauses can do. When workers remain in their jobs for fear of an RoT clause, it depresses wages across the board. It also stifles innovation. Clauses stopping employees from jumping ship to a competitor are more common than most people think, she says. Even MBIE has a restraint of trade clause as an option in its standard employment agreement builder tool. “It is in the public interest that lower-paid employees should be free to take a job with a competitor for more money or better conditions, or to use their skills to start their own business,” White says RoT clauses hit the headlines during the drafting process when television journalist Tova O’Brien was held to one by former employer Discovery NZ. Media interviews White gave on the subject led to a range of stories being recounted to her. “For example, one advocate wrote to me to say he was really shocked to see employment agreements with penalties if relatives got a job with a competitor. “And I was interested in some of the stories I heard in the media about people feeling that they left that job on a sour note, even though it had actually been a very positive job.” Employers assume that they [own] the goodwill generated by employees, she says. “I think in a modern world what we have to offer our society is often in our heads. It is actually really important [that] we start to think about whether this is the right balance, whether we shouldn’t be sharing those things and whether they all come from an employer.” The provision limiting RoT clauses in the bill to employees earning more than three times the minimum wage is designed to put a damper on the current situation where even baristas can be subject to RoT clauses. “It means that if you really think that somebody is super- valuable to your business because they have all these connections with customers, then pay them well.”


Similarly, another key provision is the requirement for employers to pay separate consideration when RoTs are enforced. “You have to pay for every second month of employment in the restraint period,” White says. “There’s a maximum of six months. That will really sharpen the minds of people who want restraints as to how valuable they are.” Whether the clauses will be retrospective, if passed, is still up for discussion. “That will definitely be something that the select committee would have to think about and decide upon. But I don’t think you could have it so that restraints that were already in place existed forever. My submission would be [that] you’d have to come up to the standard [that] is in the bill within a timeframe.” White says she managed to include everything she wanted in the bill and, as an added bonus, Little proposed limiting RoTs to six months, which was not in her original plan. The drafting process, she says, was an eye-opener for those involved. “Because we don’t collect the data on individual agreements, they’re all confidential. It was one of those things I don’t think people had noticed as much as you’d expect.

“It was news to a lot of people that the restraints were often 12 months or even two years.” Another surprise to some of those involved was tricky clauses which had fallback options should the first restraint failed. White is especially pleased with the three-times-minimum-wage restriction because it won’t need revisiting whenever the minimum wage rises. “That was my way of doing this in a private member’s bill without a complete rewrite of [the Act]. Unsurprisingly, White expects debate at select committee, should the bill make it that far, to be around this issue. “There will be arguments about groups that feel it’s too harsh in their particular sector. I think we may get some interesting access-to-justice submissions about the way that it’s been for people who’ve had a restraint and have tried to challenge that restraint.” ■

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