Restraint of Trade: Can I Work for a Competitor?

In a competitive business landscape, employers often use restraint of trade clauses to protect their commercial interests, particularly in industries where confidential information, customer relationships, and trade secrets are crucial.  

However, such clauses can significantly impact employees’ ability to seek new opportunities, especially when they want to work for a competitor. 

In this article, we’ll explore restraint of trade clauses, their enforceability, the rights of employees, and the avenues available if an employer seeks to restrict employment with a former competitor. 

 

What is a Restraint of Trade Clause? 

A restraint of trade (ROT) clause is a contractual term that limits an employee’s ability to work for a competitor, or start a competing business after leaving their job. These clauses aim to protect the employer’s interests, but must be reasonable and legally enforceable under New Zealand employment laws. 

There are different types of restraint of trade clauses, including:

Non-competition clauses – Prevents an employee from working for a competitor or setting up a competing business.

Non-solicitation clauses – Restricts an employee from contacting or poaching former clients, customers, or colleagues.

Non-dealing clauses – Prevents an ex-employee from dealing with former customers, even if the customer approaches them first.

Confidentiality clauses – Requires an employee not to disclose sensitive business information to competitors.

 

Are Restraint of Trade Clauses Enforceable? 

The law treats restraint of trade clauses with skepticism because they can unreasonably restrict an individual’s right to earn a living.  

Under the Contract and Commercial Law Act 2017 and common law principles, these clauses are only enforceable if they are:

Reasonable in scope – The clause must not be too broad in its restrictions.

Necessary to protect a legitimate business interest – The employer must prove they need protection from unfair competition.

Limited in time and geographic area – The restrictions should not last too long or cover an unnecessarily wide area.

Courts generally do not uphold ROT clauses unless they are justified, and narrowly tailored to protect the employer’s business. 

 

What Happens if you Breach a Restraint of Trade Clause? 

If an employer believes an ex-employee has breached a restraint of trade clause, they may take legal action by seeking: 

An injunction – A court order stopping the employee from working for a competitor. 

Damages – Financial compensation if the employer can prove actual business loss. 

Negotiation or mediation – Some disputes are resolved through discussions rather than court proceedings. 

However, an employer must prove that the breach caused them real harm. 

 

What Should you do Before Accepting a Job with a Competitor? 

If you are considering working for a former competitor but have a restraint of trade clause in your contract, take the following steps:

1. Review Your Employment Contract
  • Carefully examine the wording of the clause. 
  • Identify the duration, geographic restrictions, and specific limitations. 
  • Check whether the clause is reasonable based on your role and industry. 

 

2. Seek Advice
  • An employment relations specialist can assess the enforceability of the clause. 
  • If the clause is too broad or unreasonable, you may have grounds to challenge it. 

 

3. Negotiate with your Employer
  • Some employers waive or modify the clause, especially if enforcement is unlikely. 
  • A negotiated settlement can prevent legal disputes. 

 

4. Consider the Risks of Taking Action
  • If you proceed with employment despite the clause, your former employer may take legal action. 
  • Weigh the likelihood of enforcement before making a decision. 

 

Challenging a Restraint of Trade Clause in New Zealand 

If you believe a restraint of trade clause is unfair or unenforceable, you can challenge it by:

1. Raising the Issue with your Employer: Employers sometimes withdraw clauses when challenged.

2. Filing a Personal Grievance: You can claim that the clause is unreasonable, and constitutes an unjustified disadvantage.

3. Taking Action: The Employment Relations Authority (ERA) or Employment Court can declare the clause unenforceable. Courts can also modify the clause to make it fairer.

 

Conclusion 

If you’re unsure about whether you can work for a former competitor, reviewing your contract and seeking guidance is essential to ensure you don’t face unexpected consequences. 

While restraint of trade clauses are common, they are not always legally binding. You should carefully assess whether the restriction is fair, and if necessary, challenge unreasonable clauses to safeguard your right to work. 

Mahi Law can Help! 

Unsure of the ROT clauses in your contract? 

We’ll help you understand your employment rights, and pursue resolution (including compensation) through various channels, such as: Without prejudice negotiations, mediation, the ERA, or Employment Court if required. 

We also work on a no-win, no-fee basis – if we win your case, your employer covers the costs. 

Get in touch for a free consultation! You can fill out this form – or contact us at admin@mahilaw.nz, or 0800 450 032. 

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