Post Termination Restrictions (“PTRs”) are an important part of many employment contracts in the Auckland. They aim to protect a business’s interests when an employee leaves, ensuring that their departure does not cause undue damage.
However, their enforceability is subject to strict legal principles and striking the right balance between protecting the business and what is reasonable is essential. In this blog, we explain what PTRs are, the different types that exist, and what both employers and employees need to know when disputes arise.
What are Post Termination Restrictions?
Post Termination Restrictions are clauses in employment contracts designed to prevent former employees from engaging in activities that could harm their former employer’s business. These restrictions come into effect after the termination of employment and often address activities such as competing with the former employer, poaching staff, or soliciting clients.
While PTRs are common, they are not automatically enforceable. To stand up in court, they must:
- Protect a legitimate business interest, such as confidential information, client relationships, or workforce stability.
- Be reasonable in both scope and duration, balancing the employer’s need for protection with the employee’s right to earn a living.
If a PTR is deemed overly restrictive or unfair, the courts may render it void as an unlawful restraint of trade. Employers therefore need to tread carefully when drafting and enforcing these clauses.
Types of Post-Termination Restrictions
Whilst there are several types of PTRs, each tailored to address specific the most common are to cover the following risks to a business:
- Non-Compete Clauses These prevent a former employee from joining a competitor or setting up a competing business. For instance, a sales manager leaving to work for a direct rival may be restricted from doing so for a defined period.
- Non-Solicitation Clauses These prevent former employees from actively approaching the employer’s clients or customers with a view to enticing them away.
- Non-Dealing Clauses These prohibit former employees from working with clients or customers of their previous employer, regardless of whether they made the first approach.
- Non-Poaching Clauses These prevent former employees from encouraging colleagues to leave their jobs and join them in a new venture.
Each of these restrictions must be carefully drafted to ensure they are limited by time and geography. For example, a non-compete clause that restricts a former employee from working for any competitor globally for five years is unlikely to be enforceable.
Legal Framework for Enforceability
In Auckland law, the burden of proof lies on the employer to demonstrate that a PTR is both necessary and reasonable. Courts will consider the following factors when assessing a PTR:
- Legitimate Business Interest: Employers must identify what they are seeking to protect, such as; trade secrets, client relationships, or confidential information.
- Reasonableness: The restriction must not be excessive in scope, duration, or geographic reach. For example, a six-month restriction may be reasonable for a senior employee with significant client contact, but disproportionate for a junior employee.
- Clarity: Ambiguity in the wording of a PTR will usually work against the employer. Clear, precise drafting is critical to enforceability.
- Position and Influence: The seniority of the employee, the nature of their role, and the extent of their access to sensitive information will also impact the reasonableness of a PTR.
Additionally, courts may consider any garden leave periods already served by the employee when determining the restrictive period.
Practical Considerations for Employers and Employees
Given the complexities surrounding PTRs, both employers and employees should proceed with caution:
For Employers:
- Ensure that PTRs are tailored to the specific role and business interest they are designed to protect.
- Avoid overly broad restrictions that are likely to be unenforceable.
- Seek legal advice when drafting PTRs to maximise their chances of being upheld in court.
- Consider alternative approaches, such as garden leave or financial compensation, to mitigate risks.
- Ensure that upon an employee leaving the business that their attention is drawn to the PTRs in their employment contract – remember prevention is always better than cure.
For Employees:
- Review your employment contract carefully before signing, paying close attention to any PTRs.
- Seek legal advice before accepting a role with a competitor if you are subject to restrictive covenants.
- Understand that breaching an enforceable PTR could result in legal action, including injunctions and financial damages.
For New Employers:
- Be mindful of the PTRs that may apply to new hires, as encouraging someone to breach their restrictions could make you liable for damages.
- Obtain legal advice before recruiting employees from competitors, particularly in sensitive or senior roles.
How to Resolve PTR Disputes
Disputes over PTRs can arise when an employer believes a former employee has breached their restrictions. In such cases, the employer may:
- Send a formal cease and desist letter to the ex-employee setting out the alleged breaches and essentially asking them to stop the carrying out the restricted activities
- Seek signed undertakings from the ex-employee confirming they understand the PTRs in their contract and acknowledging that they will not carry out any further breach
- Seek an injunction to prevent the employee from engaging in the restricted activities.
- Pursue a claim for damages for any financial loss caused by the breach.
For employees, defending such claims can be costly and disruptive. It is therefore crucial to seek professional advice early, particularly if the restrictions appear unclear or unreasonable.
In cases where an ex-employer’s claim is unsuccessful, the courts may order them to pay the legal costs of the employee or their new employer. This highlights the importance of carefully assessing the enforceability of PTRs before taking action.
This article is for information only and does not constitute legal/financial advice. Please contact us for advice tailored to your specific position. Some of the content presented on our website has been generated with the assistance of Artificial Intelligence (AI). We ensure that all AI-generated content meets our high standards for accuracy and relevance.
