Solid restraint of trade key in employment agreements

Written by: Nathan Batts and Craig Tatley
Jan 18 2022

How to prevent damage to your business when employees leave

The scenario is this. You run a popular café and catering business on Auckland’s busy Mount Eden Road which is famous for its secret crème brûlée recipe. It’s just one of many highly regarded dishes you serve.

One morning, the future of your business becomes uncertain when you discover that for months your head chef has been making plans to leave and set up their own catering business in competition to you.

Worse still, you learn they have been talking to existing clients, including several large businesses, who make up the bulk of your client base. You also know they have taken some of your recipes and plan to market these as their own.

It’s enough to make you curdle your crème brûlée. However, there are legal solutions available to mitigate and reduce the impact of an employee becoming a direct competitor, or worse, taking your ideas for themselves.    

First port of call – solid employment agreements

The best way to prevent employees from taking existing clients and your business’s confidential information when they leave is by ensuring their employment agreements contain restraint of trade (or non-solicitation) clauses.

These clauses prevent an employee from contacting and soliciting the business of current clients of your company. They can also extend to prevent poaching of current employees of your business.

They must be reasonable. For example, you cannot prevent an employee from earning an income in the future. If they are not reasonable, they cannot be enforced.

Enforcing the agreements

If your former employee does not follow the terms of their employment agreement, you may have grounds to seek monetary compensation or enforce compliance.

Using the example of a chef, monetary compensation isn’t a satisfactory solution if they left with customers and recipes. In this circumstance a compliance order or an injunction may be required to prevent damage and reduce the impact on your business.

How does a compliance order work?

If we assume the chef’s employment agreement contains the appropriate restraint clauses, and you can prove they contacted your existing clients and took confidential recipes, a compliance order may be the appropriate enforcement option.

A compliance order is made by the Employment Relations Authority (ERA)and requires a former employee to comply with the written term(s) of the employment agreement they have breached.

To get a compliance order, the business owner must show that their company has suffered some harm or prejudice because the former worker breached their employment agreement. Urgent orders can also be sought

Alternative option – an injunction

If our chef has not yet breached their employment agreement, but you have evidence that indicates they are about to take your customers or recipes, then an injunction can be sought.

An injunction is an order by the ERA, or the Employment Court, requiring an individual to do or stop doing something. Unlike compliance orders, injunctions can extend beyond the terms of the employment agreement and can relate to any order the ERA or Court thinks necessary to uphold the employment relationship.

To seek an injunction, you need to show that there is no adequate alternative option (such as monetary compensation) other than an order for the former employee to do (or stop doing) something.

For the café, the payment of compensation would not be adequate because it is hard to quantify the loss caused through taking clients and recipes, therefore an injunction may be a more appropriate solution.

Prevention is best form of defence 

While there are a variety of methods which can be used to enforce the terms of an employment agreement, the number one option is prevention.

A good employment agreement will make it clear to your employees what their obligations are and encourage compliance.

Haigh Lyon can assist with enforcement proceedings regarding restraint of trade issues and other employment matters. We also work with clients to develop clear and robust employment agreements to ensure employees know what their obligations are. Contact Craig Tatley on [email protected] or 09 985 2525 OR Nathan Batts on [email protected] or 09 306 0608.