Restraint of Trade Clauses in New Zealand: The Reasonableness Test

A non-compete or non-solicitation clause in a New Zealand employment agreement, known as a restraint of trade, binds a departing employee only so far as it is reasonable. An unreasonable restraint can be cut down or refused enforcement altogether.

This is general information about New Zealand law, not legal advice. For your own situation, consult a lawyer or your local Community Law centre.

What a restraint of trade clause is

A restraint of trade clause restricts what a departing employee can do after their employment ends. The two common types are a non-competition clause, which stops a former employee working in a similar business in a way that could affect their old employer, and a non-solicitation clause, which allows the former employee to take a similar job but stops them approaching their old employer's clients, or sometimes staff, about it.

The reasonableness test

A restraint of trade clause is only enforceable so far as it is reasonable. That has to be true when the restraint is measured against a genuine interest the employer is protecting, such as confidential business information, trade connections, or client relationships built up during the employment, rather than simply wanting to stop competition in general.

Reasonableness is also measured against how far the restraint goes. A clause that covers a wider range of activities, a wider geographic area, or a longer period than the employer's real interest requires is at risk of being found unreasonable, even where some restraint would have been justified. There is no single fixed cutoff for how long or how wide a restraint can be. Courts and the Employment Relations Authority instead weigh the restraint against what the employer is actually trying to protect and the position the employee held.

What happens if a restraint is unreasonable

An unreasonable restraint is not always struck out altogether. Under the Contract and Commercial Law Act 2017, the Employment Relations Authority or a court can delete part of an unreasonable restraint, or modify it, so that what remains is reasonable, rather than only having the choice to enforce the whole clause or nothing at all. If cutting the restraint down would fundamentally change the deal the parties struck, the Authority or court can instead decline to enforce it.

Enforcing a restraint of trade

An employer who believes a former employee has breached a valid restraint can apply to the Employment Relations Authority or the District Court for an injunction to stop the conduct, alongside other remedies available for breach of the employment agreement.

The stalled reform bill

A member's bill, the Employment Relations (Restraint of Trade) Amendment Bill, would have banned restraint of trade clauses for employees earning below a set multiple of the minimum wage and placed extra conditions on restraints for higher earners. It passed its first reading in July 2023 and went to a select committee, which reported back in May 2024. The bill has not had its second reading since and has not become law. Until it does, if it ever does, the existing reasonableness test under the Contract and Commercial Law Act 2017 remains the current law on restraint of trade.

Related pages

For the wider picture on ending employment in New Zealand, see the employment law guide. A restraint of trade clause takes effect once employment ends, alongside the ordinary notice period that applies to ending the employment relationship itself.