Yes and no.

The employment relationship should always be documented.

An employment contract prepared by a solicitor is the best option. A good employment engagement letter can also suffice in certain circumstances, but it may not be good enough when something goes wrong.

If you want to restrict your employees from doing something after they have left your business, you require a covenant in restraint of trade (sometimes referred to as a “non-compete” clause) in the employment contract.

Traditionally, employers weren’t able to include covenants in restraint of trade in their employment contracts, as it was considered contrary to public policy. However, the law has developed over the years to recognise these clauses as valid, provided they are justified in the circumstances. An employer may impose restraints on ex-employees, if it is directed at protecting the goodwill of the business following the employee’s departure.

The employer must be able to demonstrate that the restraint:

  • is required to protect the employer’s legitimate business interests, such as confidential information, goodwill, customers, a stable workforce or commercial interests, and
  • includes no more than is reasonably necessary to protect those interests.

So what does ‘reasonably necessary’ mean?

This will be determined at the time the contract is made, and is judged on the surrounding circumstances, including the length of the restraint, the area of the restraint and what the employee is restrained from.

Restraints regarding customers, clients, employees and confidential information are likely to be upheld, and restraints against competition (eg. working for a competitor) are less likely to be upheld.

Restraints will also be viewed based on the circumstances of how the employment contract was terminated. For example, if an employee is made redundant following a company restructure, a non-compete clause is unlikely to be reasonable.

Similarly, restraints which prevent an employee from applying skills and knowledge acquired during the course of the employment will not be upheld. This is due to the principle that a person should not be excluded from earning a living.

This issue is definitely part of employment law, so we suggest you get further legal advice if you want to restrain ex-employees in order to protect your business.

*Correct as of July 2015

*Disclaimer – this article has been produced by Kreston Stanley Williamson as a service to its clients and associates. The information contained in the article is of general comment only and is not intended to be advice on any particular matter. Before acting on any areas contained in this article, it is imperative you seek specific advice relating to your particular circumstances. Liability limited by a scheme approved under professional standards legislation.

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