Do Restraints of Trade actually restrain?

NB this article is equally applicable to employees and Independent Contractors

Restraints of trade definitely have a bad reputation as being unenforceable, and I have heard many horror stories of salon operatives setting up shop in the immediate vicinity and nobbling your client base.  However, the good news is that they can be made to be enforceable.

What you can and can’t restrain

Legally you are allowed to restrict someone from stealing your clients.  However, you CAN’T prevent someone from earning a living.

Why do Restraint of Trades fail?

The most common mistake with Restraint of trade is putting in an unreasonable restraint such as “you shall not undertake work in competition within a 50 Km radius of the salon”.

Basically, this would restrict someone from earning a living in the same city as they are currently working.  This is considered unreasonable.  Unfortunately, if a restraint clause is found to be unreasonable then the whole restraint is found to be unenforceable, so you would not have a claim against them for setting up next door.

How do you make restraints enforceable?

For Salons a geographic restraint probably makes the best sense, so think about the area you want to limit.  For example:

“You shall not undertake work in the suburb in which the salon is based, nor in the immediate surrounding suburbs”

This would be appropriate for a Grey Lynn, Auckland salon as this would restrict someone from setting up in Ponsonby, but they could still set up in Parnell.  So, arguably, you are not limiting them from earning a living.

You also need to think about how long the restraint is for.  3 months may be too short a time period when you consider the cycle of your clients.  However, 12 months would probably be too long a restraint.  So, consider how often your clients visit you and base the restraint length on that.

Poaching Clients

The law is clear that you are not allowed to steal clients from an employer.  This is a matter of good faith and therefore a fundamental principle of employment and contract law.

As such I recommend that, in addition to the Restraint of Trade, you have a Non-competition clause, for example:

It is an important term of this contract that you must refer all business during the term of this contract that may relate to the business of the company, to the company and that after the termination of your contract, you will not for a period of six months from the date of termination approach or solicit business from any client, customer or contact of the company for the purpose of selling products or services in competition with the company.

 

In summary

Think carefully about what you want to restrict, and be reasonable in your restrictions, and put in place a non-competition clause.

Help is at hand

Call the HRtoolkit team on 0800 HRTOOLKIT (0800 47 86 65) for more help and advice, NB we don’t charge for the 10 minute issues, and in the vast majority of cases 10 minutes is all it will take our specialists to solve the issue with you.