Diana Clement
Former employment lawyer-turned-MP Helen White is preparing a bill to reform restraints of trade law, saying it is long overdue in the employment jurisdiction.
White, who entered Parliament last year on the Labour Party list, told a recent New Zealand Employment Law conference that while she had alluded to a private member’s bill in her maiden speech to Parliament, she now intends to lobby to get her bill on the government’s policy agenda.
Helen White
In her view, restraint of trade (RoT) clauses in employment contracts have the effect of keeping workers poor by limiting their options to change employers or start businesses. This can also stifle innovation, White says.
RoT clauses are common in the sale and purchase of businesses and are designed to protect the vendor from competing directly with the purchaser within a specific geographic limit and for a specific time.
Likewise, in employment law, RoTs often find their way into the contracts of key employees who might have access to intellectual property considered critical to their employer’s business, such as trade connections and secrets. As well as walking out the door and taking valuable knowhow to the opposition, RoT clauses are designed to stop employees poaching customers, suppliers or fellow staff when they move jobs or set up on their own.
They must be balanced against the employee’s right to earn a living and are upheld by the courts if they are found to be reasonable.
Speaking at an ADLS CPD seminar last month, barrister Deidre Watson said RoT clauses are a useful commercial device whereby employers, franchisors, shareholders and businesses generally can protect their legitimate interest.
“Some restraints are very healthy from the commercial point of view. They can drive an economy [and] drive business. You need to have that balancing act.”
But White says the concept was originally designed for 19th century workplaces. RoT clauses crimp the rights of low-paid workers and some franchisees, who often cave in rather than ignore an unreasonable clause in their employment agreement.
What’s more, she says, workers sign these agreements at the beginning of their employment but are held to them at the end. “They’re stuck with what’s in the agreement and the agreement is one-sided. When they want the job, they may not have much choice.”
Consideration
A major issue with RoT clauses in the 2020s is that employees often don’t receive any consideration for the restraint.
White cites Fuel Espresso Ltd v Victor (Chi-Huan) Hsieh [2007] NZCA 58 as an example of employees not receiving consideration for giving away their rights. Hsieh’s employment contract as a low-paid barista for a coffee van company included an RoT clause that prevented him for a period of three months from working in a competing espresso bar, café or coffee company within a 100-metre radius of a Fuel’s operation or from setting up a competing business within 5 km.
When Hsieh left to start work at another cart 70m away, Fuel sought an injunction that he cease working for the cart for the three-month period set out in his agreement.
The Employment Court found in favour of Hsieh because of a lack of valuable consideration but the Court of Appeal disagreed. The Court of Appeal determined it was not the job of the courts to inquire into the adequacy of consideration although it could be relevant in some circumstances, such as where a group of like employees are paid the same but only one has a restraint of trade provision.
The problem with the Fuel case, says White, is that a barista’s skill and personality drive customer loyalty. The ability to use those attributes to earn $5 an hour more at the employer across the road is a barista’s way out of a low-wage job. “It’s keeping down wages by stopping the competitive power.” She adds: “There’s a degree of alienation in [a judge] making a decision like that.”
Other issues that come into play with cases such as this are the employer’s or franchisee’s proprietary interests, legitimate interests, geographical region and an appropriate timeframe for a restraint. The courts also consider the public interest factor, says employment law barrister Helen Gilbert.
On the geographical front, no one yet knows how restraint over cyber businesses will play out in the courts here. Gilbert recommends reading The Restraint of Trade Doctrine in the Era of Digital Markets by David Thorpe, a lecturer at the University of Technology in Sydney.
The effects of RoTs on low-paid workers fly under the radar, White says.
“Connecting restraints of trade with the gap between rich and poor is something that [unions] have to grapple with. You are catching the very people who you want to be free to move up in wages – your low-paid workers.”
RoT clauses affect the collective wellbeing of union members because they push down wages. “Yet [an RoT] is not something that unions see because they would never in a million years have it in a collective agreement,” she says.
Bark or bite?
RoT clauses have been described as being like a dog whose bark is bigger than its bite because prima facie they are not enforceable unless they can be proved reasonable. The courts will be reluctant to stop people earning a living with their skills and knowledge.
Gilbert says the clauses aren’t always well drafted. They may cover too wide a geographical area, too long a time period or have other issues around the proprietary or legitimate interest the employer is seeking to protect.
Blanket clauses covering all employees or groups of employees often don’t work. “Employers will put restraints of trade across the board – the same restraint for every single employee. I think it’s appropriate for senior people. I agree in relation to the low-paid workers that there really should be some legislation prohibiting restraints of trade for those low-paid workers.
“There has to be that connection between what the employee does and what the restraint is trying to protect,” says Gilbert. Even so, employers and franchisors may not care because they know nine times out of 10 people will do what’s in the contract.
Deirdre Watson
Watson says it’s a mistake to assume RoTs are not enforceable. “I think there is a widespread misunderstanding out there around where the restraints are binding. I’ve had many experiences of people who are subject to restraints, saying, ‘well, this is a restraint, but everyone knows restraints of trade clauses aren’t binding’.”
Those assumptions can come back to bite. In Zeald New Zealand Ltd v Bernard [2013] NZERA Auckland 402, Bernard (the employee) was ordered to pay his former employer $50,000 for RoT breaches of provisions in his employment agreement. Bernard had solicited three former colleagues and 41 of Zeald’s customers. The ERA im posed a high penalty to set an example over the flagrant conduct.
Franchisors, in particular, are often willing to come chasing, Watson says. They have the legitimate interest in their brand and systems they need to protect, along with the wider interests of other franchisees who will be watching from the wings.
“The cost of pursing a breach of a restraint of trade obligation will often not be a factor. Often, the franchisor won’t care at all what it costs. They just need to take action to stop the conduct and they need to act quickly.
“They have very sound commercial reasons why they need to stop people breaching the restraints. Very often, where there is one ex franchisee at war with the franchisor over a restraint, half a dozen other franchisees will be sitting on the fence just watching and waiting and quietly talking amongst themselves to see what happens.”
Stifling innovation
RoT clauses affect more than just the individuals and the businesses involved. One of the downstream effects is that they can stifle innovation, White says. RoTs emerged when an employer owned all employee inventions, wherever they were created. “They also used to give you a job for life.”
“So now our new capital is our inventive power and ….we, without even thinking, are giving this to an employer because it’s standardised in our old agreements. It shouldn’t be. Why, if somebody invents something, even in their workplace, shouldn’t they get a piece of the profit out of that?” If people’s inventive power is restrained, so too is innovation, White says.
Silicon Valley
RoT clauses have caused serious issues in the heart of Silicon Valley. Apple, Google, Intel and Adobe Systems were subject to antitrust litigation by the United States Department of Justice and a class action in relation to “no cold call” agreements in which the companies were accused of conspiring to prevent the hiring of each other’s employees. Workers claimed the agreements limited opportunities and bullied them into toeing the line.
In the past three years, several state legislatures, including Maryland, Virginia and Washington DC, have followed Oregon and moved to ban non-competition clauses in employment agreements for low-wage earners.
Research by Evan Starr of the University of Maryland found the argument for why non compete clauses are bad was pretty clear.
He cited the case of a low-wage worker, earning US$12 an hour, who was offered US$15 an hour at a competitor. “A noncompete could prevent them from making those sorts of moves that are going to enhance their social and economic mobility,” says Starr.
Oregon banned noncompete clauses in 2008 and Starr’s research found that the data showed low-wage workers benefited from the ban, earning higher wages and changing jobs more frequently.
On average, he wrote, hourly workers’ wages grew by 6% after the ban had been in force for five years. The positive wage effects were across the board and in all age groups and education levels. The researchers also found workers’ job mobility rose by 17% overall, with 79% of this increase in mobility driven by an increase in moves within an industry. “Exactly the kinds of moves that a noncompete would prohibit,” Starr says.
Noncompete agreements also stifle the wider economy and hamper entrepreneurial activity, according to Jessica Jeffers of Chicago’s Booth School of Business.
She mined LinkedIn data on people working in high-tech sectors and found that when noncompete clauses became easier to enforce, 12% fewer workers left their companies to take other jobs within the same industry. Likewise, fewer employees left for more senior positions and the numbers of employees leaving for start-ups dropped. On the other hand, she found the noncompete clauses significantly boosted investment at large existing companies.
Private member’s bill or policy?
White has a private member’s bill in the ballot about bankruptcy, which she says is important in its own right. If she were to go down the private member’s bill route with RoT, she would have to replace that bill.
The bankruptcy bill is a simpler piece of work and more appropriate to a private member’s bill, she says, because it’s a discrete issue compared to RoT, which would involve structural change.
Before drafting the RoT bill, White says she needs to do considerable research, both here and overseas, and connect with fellow MPs. There may be room for lobbying other parties. She sees RoT clauses as anti-competitive behaviour and an issue the Act Party, for example, might also take umbrage with.
Once a bill is drafted, White will put it to her Labour Party colleagues. She hopes to add it to the agenda at her regional conference first and then move on to policy conferences. “It’s like lots of different processes that I’ll be using to push it.”
White is a first-term MP and says she is enjoying the learning curve and making connections through this issue. “It is something I could offer as a contribution that would allow wages to increase, at the bottom end in particular.”
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