An analysis of the new amendment bill before parliament
In the constantly evolving employment sector, a bill currently before parliament is set to limit who can be subject to a Restraint of Trade (RoT) and what conditions can be imposed.
A RoT is a provision in an employment agreement that stops an employee from working in their field or for a competitor after their employment has ended. However, the current starting point is that RoTs are unreasonable and unenforceable against an employee unless the employer seeking to enforce the restraint can point to some proprietary interest that requires protection.
For employers, RoTs have advantages as they can be used to protect a proprietary interest that employees might have access to or might use. This includes confidential information, special knowledge or a process that comes from working in a particular industry and or relationships that have been established with clients over time by virtue of the persons’ employment.
The Employment Relations (Restraint of Trade) Amendment Bill, drafted by Labour list MP Helen White who was an employment lawyer before entering politics, follows a high-profile RoT case which saw prominent journalist Tova O’Brien wait months between jobs at rival news agencies.
The Bill would amend the law to:
- Prohibit the use of RoTs in employment agreements for lower and middle income employees
- Require employers of higher income employees to carefully consider whether a RoT is appropriate in relation to those employees and if the employer insists on a RoT, the employee should be compensated for it
- RoT’s having no effect if an employee earns less than three times minimum wage
- Limit the use of RoTs to those situations where the employer has a proprietary interest to protect through the use of the provision
- Require employers to pay employees who are subject to a RoT an amount equal to half of the employee’s weekly earnings for each week the RoT is in effect
- Limit the duration of RoT’s to no more than six months
Some factors to consider if the Bill becomes law
The salary threshold of three times the minimum wage for applying a restraint of trade is a high cut off. On 1 April 2023 the minimum wage will be increased to $22.70 per hour, or $908 per 40-hour week in terms of the Minimum Wage Act 1983. As an annual salary, this threshold is $141,648 making it a significant salary and reflective that under the proposed Bill, RoT’s will only apply to senior staff.
The requirement to pay at least half an employee’s average weekly earnings for the period of the RoT (for a six month RoT, this is at least a quarter of a year’s salary) is an onerous requirement, especially for smaller businesses.
The Bill is currently before parliament and is awaiting its first reading. It will be very interesting to monitor its progress and if it is passed into legislation it will have a significant impact on the use of the RoT in the employment context.
In its current form the Bill will eliminate the use of a RoT for a large number of employees. Employers will have to consider how to protect client relationships and other proprietary interests. If you wish to discuss any elements of the current RoT legal issues or the potential impact of the proposed legislation please let us know.
Haigh Lyon can assist with restraint of trade issues, developing clear and robust employment agreements, and other employment matters. Contact Holly Whitney on 09 985 2534 or @email or Ben Molloy on 09 306 0625 or @email