Noncompete enforcement against a barista – what the....? by Tristam Price

Admittedly this case, Fuel Espresso v Hsieh is nearly 13 years old...

...but it was noted by legal bloggers at the time as a precedent for enforcement of restraint of trade clauses (non-competes) against low paid workers. More than a decade later the lack of other such examples would suggest that this matter was aberrational, not precedential. VUW Law Professor Gordon Anderson sets out the technical aspects here:

...before calling BS on enforcement against low paid workers in general. The employment law industry seems to have agreed, as searches of show a modest number of restraint of trade enforcements mostly against some types of well compensated workers who are likely to have access to commercially sensitive information such as pricing.

I guess Fuel Espresso didn’t get that memo because in 2018 it was up to its old tricks:

(the ERA sent the parties to mediation and we’ll probably hear no more).

What factors decide enforceability?

Enforceability of a Restraint of Trade clause, also known as a non-compete, depends on it being reasonable in terms of time, scope and geography, supported by a valuable consideration and not against public interest or tainted by misconduct by either party.

Restraint of Trade clauses are by definition anticompetitive and a judge would have to weigh the anticompetitive implications of enforcement against the need for the former employer to protect a legitimate interest such as confidential and commercially sensitive information.

They are anticompetitive because they have the effect of:

- depriving a competitor of a potentially valuable employee

- wage suppression, by making employees too scared to seek a higher or even competitively paid job in the same industry because of the possibility, however remote, of non-compete enforcement. And of course these disputes are publicised so employees’ fear of their names googling up during shortlisting for future vacancies would not be irrational.

How enforceable are these non-competes in New Zealand? That could depend partly on which US state we are comparing NZ to. Non-competes range from very enforceable in Florida to unenforceable in California. Massachusetts have recently updated the legislation and non-competes there are now moderately enforceable...

That State had been losing technology graduates to California especially Silicon Valley, partly because of overenforcement in the face of free market principles. Why would a MIT graduate agree to risk being tethered by a non-compete to a job in MA, when the CA Right-To-Work stance allows employees to move freely around their industry?

Based on the number and content of publicised judgements on, and the fact that confidential MBIE employment mediations catch a lot of disputes that might have otherwise been litigated, non-competes currently appear to be moderately enforceable in NZ.

Here’s where things get interesting.

Unenforceable noncompete “blessed” in MBIE mediation?

What if a dispute ended up in mediation because of entitlements deliberately withheld (holiday pay, commissions etc), and was resolved by way of a Record of Settlement (RoS)?

When finally agreeing to pay the employee’s entitlements that it always intended to pay, the employer could have its counsel demand something in return – an undertaking to observe the terms of an overreaching non-compete; one that would normally be unenforceable due to the employer’s conduct that led to the dispute, or perhaps the employee’s simple and reasonable resignation to take up a better offer elsewhere.

A respected Product Manager and associate of mine was put in this position a few years ago and this caused a minor disruption to my business activities. The effect on my associate was that the threat of enforcement caused her to lose 3 - 4 months of work. She explained the circumstances that gave rise to the dispute; the business had changed hands the previous year and a restraint of clause was slipped into her new Employment Agreement, and a small consideration paid (her first payrise in 2.5 years). She was then subsequently disadvantaged financially on sales commission and expense reimbursement which gave rise to a strong “unclean hands” defence to potential enforcement. I suggested that the non-compete would be unenforceable for that reason, and given that she had been offered several months contract work with the new NZ agent of the brand she specialised in, she should take it (two months before the expiry of the non-compete period) but lie low to avoid being hassled. At the time I knew that lawyers were involved but I didn’t know there had been a mediation, or a mediated RoS.

If her claim for unpaid commission went to mediation and the RoS included an expectation that an otherwise unenforceable non-compete be treated as enforceable, then her acceptance of an offer of work from a competitor would have been an enforceable breach of that RoS, and these are watertight. But it worked out OK on this occasion; my associate had two months of work that she would otherwise have been too scared to take, and the new, temporary employer no doubt found her expertise valuable.

If a relatively modest number of non-compete disputes end up in the employment jurisdictions, how many more, particularly overreaching non-competes, are being beefed up by way of a mediated RoS? And is it common for employment lawyers to advise their employer clients to hold entitlements of a departing employee to ransom to get them into a mediation, in order to strengthen an otherwise weak case for enforcement? We don’t know, because mediations are secret.

Enforcement in the 2007 Fuel Espresso example was by way of an interim injunction in the Employment Court (this was refused, but the Court of Appeal subsequently granted it). Since then the Employment Relations Authority (ERA) have gradually taken over this function.

The ERA which is also part of MBIE, more commonly deals with enforcement of mediated Records of Settlement. Either party can challenge the ERA determination to the Employment Court.

In these recent examples the ERA has considered, but declined to enforce a non-compete (neither matter involved a Record of Settlement)...

...which basically means that the ERA can consider issuing a Compliance Order, even without a mediated RoS. Here’s an example of where it did enforce, in relation to a courier driver who through no apparent fault of her own (in fact, a drop in turnover) was not employed beyond her 90 day trial...

There was a restraint of trade clause in the employment agreement; that employment relationship lasted 90 days and the employer’s Let Them Eat Cake attitude towards this mother of three seemed to be expressed as something like “sorry we can’t give you any more work, now please leave the industry” which the ERA agreed with.

Undermining the legal process

Here’s a matter where the ERA issued a Compliance Order in relation to confidential information disseminated to a third party by affidavit . That affidavit was provided to assist with existing High Court proceedings between his former employer and its customer which is in liquidation.

Public records indicate that in April 2019 Inland Revenue applied to put the plaintiff company in liquidation; that company’s near-collapse was alluded to in the ERA determination and elsewhere the plaintiff’s poor reputation in the industry has been noted.

The ERA is a tribunal and certainly lower down the food chain than the High Court. The ERA determination does not mention whether interference with a witness in High Court proceedings by the ERA, in issuing this Compliance Order has been considered. Interfering with a witness in Court proceedings is an an offence under s.117 of the Crimes Act 1961 so the ERA member who imposed a Compliance Order on the respondent could be prosecuted if not for the fact that ERA Members are in fact immune from prosecution (a compulsory report under Rule 2.8 of the lawyers’ Rules of Conduct has been made to the Law Society). An application for review is possible.

So it then follows that the ERA can make an urgent Compliance Order against an employee for breaching a Restraint of Trade clause in an employment agreement; this can be done “on the papers” and without an investigation.

To conclude, expect to see an increase in enforcement of restraint of trade clauses, with or without a mediated Record of Settlement, and assume that weak, overreaching non-competes will be strengthened by way of unscrupulous employers and their counsel coaxing unwitting departing employees into secret mediations.

Thinking of enforcing a noncompete? Consider reputational harm.

By the time you find out you weren’t paying your employee as much as your competitor is prepared to pay, it’s too late; their resignation letter is on your desk. If there was a restraint of trade clause in the IEA then your employee either forgot, or didn’t think such a clause would be enforceable, or decided the risk of enforcement was acceptable. What now?

If the employee was any good, keeping the option of poaching them back off the new employer later would be a good start.

Here’s an extreme example of employees preparing to set up in competition while still employed by their employer and poaching its clients, staff and confidential information (eventually the new company BMW Contracting was put into liquidation and its three directors bankrupted). But Rooney is not the same as a hairdresser – or barista – going to work for a new employer on the same floor of a shopping mall because the pay and working conditions are better. If a small, not particularly specialised company is being mean-spirited and anticompetitive, and an application for restraint of trade injunction or Compliance Order ends up in the public domain, word could get around.

The burden of reputational harm would fall on both the employer and employee, and the employee is probably going to try and shift the blame for the dispute onto the former employer in order to obtain work, deservedly or not. The “goodwill” the enforcing company will have earned could be devalued, and sales could drop. Burying a former employee in legal fees (eg: Zelande, ERA365 above) while already on shaky ground reputationally is likely to earn the applicant an even worse name in its industry. So the cost of enforcing a noncompete against a departing or former employee would be more than just lawyers’ fees.

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