Under common law, restraint of trade clauses are invalid and unenforceable, unless the employer can show they have a legitimate interest in including them in the contract and the clause is reasonable.
As a rule of thumb, restraint of trade clauses should
• not be for more than 12 months duration (time limit)
• only cover an area necessary to protect the employer’s business (geographical limit), and
• refer only to the particular area of business the employee is involved in (inidvidual limit).
The latter means that employers are well-advised to use customised restraint of trade clauses which take into account the position of the employee, his or her exposure to trade secrets, customer information etc. Put simply, the higher ranking the employee, the wider a restraint of trade clause may be drafted.
Most importantly and most often overlooked, consideration should be provided for entering into the restraint. The higher the consideration, the less likely it is that a Court will consider it unreasonable. After all, the employer wants the employee to limit his or her professional activities AFTER the employment relationship has ended. It is more than fair, then, to reimburse the (ex-) employee for this additional obligation.
Germany has, naturally, fixed the requirements of restraint of trade clauses in statute. Pursuant to section 74 German Commercial Code (HGB) 1897 a restraint of trade
– has to be agreed on in writing
– requires a specific legitimate interest by the employer
– may be up to two years in duration
– must have a geographical limit considering the services provided by the employee (not: his or her future services)
– must provide for adequate compensation (at least half of the employee’s last wages or salary).
So, whats the difference between the German law from 1897 and the (NZ) common law?
I have previously noted that common and civil law are moving closer to each other every year. Whereas in the common law jurisdictions we see more and more statutes being passed (sometimes even codes), the civil law jurisdictions develop more and case law setting precedents and filling the gaps in the statutes (German Employment Law being a case in point). And, even more interesting, where we find statute and common law dealing with the same matter, the outcomes are more often than not almost identical – such as here.
That doesnt mean that all laws are effectively the same. But it probably points to a general understanding across countries of what is fair and provides a proper balance in law.
Good to know.
More details on the German restraint of trade provisions: