When “staff retention” strategies lead to litigation

Staff changes can be expensive and disruptive.  Depending on the job market at the time, the cost to an organisation of replacing an employee who resigns is usually significant.

A 2022 HR Industry Benchmark Survey gives a few figures:

• 40 days to fill a vacancy

• $24,000 to hire a new employee

• 24 days per year on training, or $10,000 per employee

  
  

These figures are “average” but the real cost would vary significantly depending on the level of skill or seniority, the job market and the industry.  There will also be less obvious costs where understaffing may impact on customer satisfaction, causing those customers to spend their money elsewhere.

This is not intended as advice on keeping employees productive and engaged with a low staff turnover – that’s the job of HR, management and consultants.

But it’s best not to rely on either of these two staff retention tools:

1. Restraint of trade clause

   
   

Post-employment restraints, particularly restraint of trade, are moderately enforceable in New Zealand.   Claims by an employer that a former employee breached a noncompete clause in their employment agreement occasionally come before the Employment Relations Authority (ERA) which has the power to issue an injunction and award penalties, damages and costs.

Enforceability depends on the position and seniority of the employee, whether the noncompete is reasonable in terms of time, scope and geography, whether a valuable consideration was paid in support of that agreement, and whether the employer has a legitimate business interest to protect (other than depriving a competitor of a valuable new hire).

Most employment agreements don’t have a restraint of trade clause but do have a non-solicitation clause, and disputes have arisen where a former employee has actively poached clients using sensitive commercial information to do so.

However, many employers include a restraint of trade clause in employment agreements in circumstances where enforcement is not contemplated but the employee’s fear of enforcement may be enough to ensure their loyalty, depending on the job and industry.

Usually any fear dissipates when the employee realises that the noncompete was successfully used as a wage suppression tool, they’re getting paid below market rate and it’s time to move on.   Grievant employers occasionally sue – here are a few examples:

• In [2020] NZERA 189 Sanguine (Nelson) Ltd v Fenwick the ERA declined an injunction.

  
  

• In [2024] NZEmpC 240 Cookright Filtering Service Ltd v Hill the ERA granted an injunction and awarded $36,424 in penalties, damages and costs to Cookright, but the award was overturned by the Employment Court due to Cookright’s conduct.

  
  

• After the Employment Court declined an injunction against a barista in 2007, the Court of Appeal overturned that decision and granted an injunction for three weeks (although we still don’t know what the trade secret to a cup of coffee is).

While proceedings in the ERA and courts are not common, employees’ careers are more likely to be disrupted by way of confidential mediated settlements.  Sometimes, fear of proceedings traps the employee in a dead-end job, thus a noncompete clause is often used as a wage suppression tool.

With that said, enforceability of noncompetes in New Zealand is moderate, not rampant like in Florida.

2. Training bonds

   
   

In the Sanguine v Fenwick matter,

[20]  [Sanguine] has deducted part of these training costs from Ms Fenwick’s final pay… and seeks the balance in its substantive claim.  Ms Fenwick accepts that she must pay for some of the training however questions part of the training costs.

As there was no substantive determination, we assume that the parties resolved the issue around the cost of several training modules, possibly in mediation.  That likely included reimbursement of part of the cost given that Ms Fenwick left within a year of completing the courses, saying that she “was very unhappy working with the owners…”, perhaps unsurprisingly given the owner Ms Potter’s willingness to enforce a noncompete against a 21 year old.

But the most egregious use of training bond came before the ERA in the last few months.  A grievance had been raised and determined.  Submissions to the ERA included a “Heads of Agreement” document proposing that a low-paid employee of an Exclusive Brethren-linked company be put on a course that would have taken a week and cost around $3,500+GST.

The employment relationship ended before the course could be booked, so the training proposal was not mentioned in the determination (no criticism of the ERA is made here; it’s out of scope).

But the document mentioned, in bold, that the employee was expected to commit to a further three years of employment as a condition of being sent on the course, despite the uncompetitive pay rate.

The director’s affidavit submitted to the ERA said:

“The training bond was not intended to be a wage suppression tool… it was simply a means of entitling [the employer] to recover the costs of the expensive training if he left within three years”.

The employer could have contractually bonded the employee to a three year contract while continuing to pay peanuts. The lesson for employees is – one year is possibly reasonable, but any longer and alarm bells should be ringing and it might be best to refuse the course if the conditions are too onerous (and update the CV).

Conclusion

Restraint of trade clause in employment agreements are one wage suppression tool available to unscrupulous employers; and “training bonds” are another, which are often overlooked.

Tristam Price, Editor