Restraint of Trade in New Zealand

A restraint of trade is a clause often found in employment contracts. It aims to stop an employee from using confidential information or competing with their former employer after they leave a job. In simple terms, it limits what someone can do for a certain period and within a certain area after their employment ends.

For New Zealand businesses, a restraint of trade helps protect sensitive information, client relationships, and business reputation. However, it’s a fine balance; too much restriction, and the clause could be unenforceable under New Zealand employment law. The Employment Relations Authority (ERA) and courts only uphold restraints if they’re reasonable and necessary to protect legitimate business interests.

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Many small to medium-sized businesses in Auckland have faced issues where a former employee joined a competitor or started their own company using client contacts gained during their previous job. Having a clear and fair restraint of trade clause can help avoid these disputes.

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In this guide you’ll learn:

• What restraint of trade means in New Zealand
• The types of restraint clauses and how they work
• When a restraint is enforceable
• Examples of restraint clauses
• How to manage disputes or get advice on restraint issues

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What Is a Restraint of Trade?

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A restraint of trade clause is a legal agreement that limits what an employee or contractor can do after leaving a business. It’s designed to protect the company’s commercial interests, not to stop someone from earning a living.

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Under New Zealand law, restraint of trade clauses must be reasonable in scope, duration, and area. They should only go as far as needed to protect the employer’s legitimate interests, such as confidential information or client connections.

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Types of Restraint of Trade

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There are several types of restraint clauses, and each serves a different purpose:

• Non-Compete Clause - Prevents a former employee from working for or starting a competing business within a specific period or region.
• Non-Solicitation Clause - Stops an employee from contacting or poaching clients, customers, or colleagues after leaving.
• Confidentiality Clause - Protects sensitive business information from being shared or misused.
• Independent Contractor Restraint - Applies to contractors rather than employees, ensuring they don’t use client lists or trade secrets gained during their contract.

These clauses can appear together in one restraint of trade contract or separately, depending on the nature of the business and role.

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Restraint of Trade Enforceability in New Zealand

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A restraint of trade is not automatically enforceable. The Employment Relations Authority or courts will only uphold a clause if it meets three key tests:

1. Legitimate Interest: The employer must show the clause protects something valuable, such as trade secrets or client relationships.
2. Reasonableness: The clause must be fair in terms of time (restraint period), area, and type of restriction.
3. Public Interest: The restraint shouldn’t unfairly prevent someone from working or earning an income.

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Restraint Period Meaning

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The restraint period is the time during which the restriction applies. In most cases, this ranges from 3 to 12 months, depending on the role and level of responsibility.

For example:

• Junior employees may have shorter restraint periods (3–6 months).
• Senior roles with access to strategy or client data may have longer restraints (up to 12 months).

Anything longer than that usually faces scrutiny from the ERA.

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Key Takeaways for Employers and Employee

• A restraint of trade protects a company’s business interests but must be fair and reasonable.
• Clauses that are too broad or long are often unenforceable.
• Always define the restraint period, geographical area, and type of restriction clearly.
• Seek advice before adding or agreeing to a restraint clause.
• A well-drafted restraint of trade clause supports fair competition and helps maintain trust between employers and employees.

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