I am often asked by employers whether they can enforce post-termination obligations against a departing employee.
Understandably, many employers feel the need to safeguard the legitimate interests of their business and for that reason will insert restraint of trade provisions into their template individual employment agreement regardless.
In truth, these provisions rarely are enforceable and serve little or no purpose as supported in the Authority decision of Dawson’s Catering Ltd v Hawke. Here, the employer sought to obtain an urgent injunction preventing its departing employee (Hawke) from going to work in a managerial position with one of its main competitors. The employer intended to rely on two standard restraint of trade provisions commonly set out in an employment agreement – a) confidential information and b) non-compete for twelve months’ post-termination. The Authority was asked to decide whether those two provisions were “valid, reasonable and enforceable” against Hawke which, if so, would prevent him from working for the competitor until July 2017.
Hawke argued that the provisions were anti-competitive and, if enforceable, would prevent him from earning a living for the next year in his chosen field within all of Auckland (where he lived with his family). The Authority agreed.
In contemplating its decision, the Authority considered key factors such as:
- Level of salary;
- Seniority in the business;
- What consideration had been given (if any);
- The extent to which he had been privy to trade secrets or intellectual property (if any);
- Whether he had developed a degree of influence over customers and colleagues.
The Authority ruled that Hawke’s role as a Cafe Manager at Auckland University did not pose any substantial threat to the legitimate interests of the employer’s business. Hawke held an operational role in the business rather than perform any managerial duties – he simply organised staff rota’s; ensured that catering orders were processed; arranged function rooms and organised events (there was no involvement in preparing business plans, business development or marketing strategies).
It was made clear in its judgment by the Authority, that restraint of trade is against public policy and, on the face of it, unenforceable.
However, the law does recognise circumstances where an employer may have a legitimate proprietary interest to protect and in those rare instances, a restraint will be enforceable on the strict proviso that it is no wider in scope, duration and/or geographical location than is reasonably necessary. A restriction that merely attempts to limit or reduce competition shall be void from the outset. Similarly, provisions that seek to restrict disclosure of confidential information will only be enforceable if the extent of the information (so restricted) is clearly described, and the restraint is limited to an appropriately short duration.
The Authority made is clear that it is the employer who bears the legal burden of proof – it must establish on the “balance of probabilities” whether there is a legitimate proprietary interest to protect and if this “interest” outweighs any degree of unfairness to the departing employee.
Not any easy burden to overcome; this then makes us question whether restraints of trade really are worth incorporating into an individual employment agreement. In our opinion, there are undoubtedly situations where a restraint is appropriate. However, all too often we are seeing these types of provisions inserted into agreements with little regard or thought about the validity of that restriction to the proposed employment. Restraints of trade will only be worth something if they are appropriately tailored to that employee.