Restraints of trade are special clauses you can insert into employment agreements. They can curb what employees do after their employment with you ends.
However, they must be reasonable if you hope to enforce them through the Authority or Court.
But it may not be employees that concern you.
Your fear could be that a contractor you have engaged could do your business damage when they leave.
So can you bind a contractor by a restraint of trade too?
The short answer is that you can.
Yet the context is all-important. Your relationship with a contractor is quite different from that with your employees.
You need to prove there is a need to restrain them to protect your business. You also need to indicate that the context supports the form of restraint you seek.
If you can’t prove those two things, then the restraint may not bind the contractor.
DO YOU NEED A RESTRAINT?
First off, you need to prove there is a reason why your business needs protection from the contractor.
There must be a real risk that the contractor could harm your business.
A restraint may prevent them from poaching staff or clients, or competing against you. So you must show that the risk of the contractor doing those things is real.
What if the contractor never had any contact with your clients? Your clients won’t know who the contractor is. In that case, there may be little risk they could take those clients away from you. Hence, restraining them from poaching your clients may not make sense.
The lesson here is to match the restraint to the underlying risk the contractor poses. If there is no real risk that they could damage your business, it will be hard to justify a restraint. And the courts will not enforce it.
WHAT FACTORS SUPPORT RESTRAINTS?
A contracting relationship can by itself be a factor supporting a restraint.
A contractor is in business on their own account. They are an independent business. The presumption is that they have some commercial sense. They should understand what they are signing up for when they agree to a restraint.
By contrast, there is an accepted inequality in bargaining power in employment relationships. Employees aren’t expected to be so sophisticated in their understanding of contracts. That makes restraints harder to enforce against employees than against contractors.
Yet, the more the contractor looks like an employee, the less weight this factor will have.
A lone contractor may look very much like an employee. Especially if they do not operate through a company. That is why the context is all-important.
Other relevant factors include the scope of the restraint.
Does the restraint restrict the contractor only to the extent necessary to protect your business? For example, do you really need the restraint to last for five years? And across New Zealand and Australia? Or would three months within your local suburb suffice?
The courts are less likely to enforce unnecessarily broad restraints. So taking time to carefully craft the restraint so that it goes not wider than necessary is key.
You can include a restraint of trade clause in an agreement with contractors. But its enforceability will depend on the level of risk they pose to your business.
At the end of the day, you need to justify why a restraint is necessary to protect your business. Once you have that, the courts will look at whether the restraint makes sense in that light.
Do you engage contractors? Do you need to think about including restraints of trade for them too?