Non-Compete And Restraint Of Trade Clauses In New Zealand: Employer Rules

Hiring great people is one of the biggest growth moves you can make as a small business. But it can also feel risky - especially if you’re investing time, training, and access to customers, pricing, suppliers, or confidential know-how.

That’s usually where a non-compete clause (often described as a restraint of trade clause) comes in. In simple terms, it’s a contractual promise that a worker won’t compete with your business for a certain period, in a certain area, or in a certain way after they leave.

In New Zealand, though, a non-compete clause isn’t automatically enforceable just because it’s written in a contract. The real question is whether the restraint is reasonable and whether you’re genuinely protecting a legitimate business interest (not just trying to stop someone from earning a living).

Below, we’ll walk you through how non-compete and restraint of trade clauses work in NZ, what makes them enforceable (or not), and how to set them up properly so your business is protected from day one.

This article is general information only and isn’t legal advice. Because enforceability depends heavily on the role, industry and wording of your contract, consider getting legal advice for your specific situation.

What Is A Non-Compete Clause (And When Do Employers Use One)?

A non-compete clause is a term in an agreement that restricts a worker from competing with your business during the relationship and/or after it ends.

For employers, post-engagement restraints are usually the big one - because that’s when the risk of someone leaving with relationships, strategy, and inside information is highest.

Common Examples Of What A Non-Compete Clause Might Restrict

• Working for a competitor (e.g. joining a rival business in the same industry)
• Starting a competing business (e.g. setting up shop down the road or launching a competing online store)
• Approaching your customers or clients (often overlaps with non-solicitation clauses)
• Hiring your staff (often overlaps with non-poaching clauses)

Non-compete terms usually sit alongside other protections in your Employment Contract, like confidentiality obligations and notice periods. In many cases, the “best” protection isn’t one clause - it’s a group of terms that work together.

Why Small Businesses Use Non-Compete Clauses

If you’re running a small business, the impact of a key person leaving can be massive. You might have:

• a small client list where relationships are everything
• pricing and margin information that would help a competitor undercut you
• unique processes, product formulas, or marketing systems
• staff that clients are personally loyal to

A well-drafted restraint aims to protect those assets without going further than the law allows.

Are Non-Compete Clauses Enforceable In New Zealand?

In New Zealand, restraint of trade clauses (including non-compete clauses) are treated with caution. The starting position at law is that restraints are generally presumptively unenforceable unless the employer can justify them as reasonable.

That doesn’t mean they’re pointless - it just means you need to draft them carefully and be able to explain why the restraint is necessary for your business.

The Key Legal Concept: “Reasonableness”

To be enforceable, a non-compete clause typically needs to be:

• Protecting a legitimate business interest (more on this below), and
• No wider than reasonably necessary to protect that interest

If the restraint is too broad - for example, it bans someone from working in the entire industry anywhere in New Zealand for two years - it’s far more likely to be challenged.

It’s also important to know that, in NZ, the Employment Court can sometimes enforce a restraint in part (for example, by modifying it to a more reasonable duration or scope) rather than striking it out entirely. That said, you shouldn’t rely on a court “fixing” an overly broad clause - drafting it properly upfront is still the safest approach.

What Counts As A “Legitimate Business Interest”?

Employers can’t use a non-compete clause just to reduce competition or make it harder for someone to leave.

Legitimate business interests often include things like:

• Confidential information and trade secrets (pricing, systems, strategy, customer data)
• Customer and supplier relationships (especially where the employee is the “face” of the relationship)
• Goodwill attached to your brand and client base
• A stable workforce (in some cases, where staff-poaching is a real risk)

Confidential information is often better protected with a well-written confidentiality provision - and not every restraint needs to be a full non-compete. If you’re unsure what should go in, it can help to start with the basics of a Confidentiality Clause and build from there.

What Makes A Non-Compete Clause “Reasonable” In Practice?

When you’re deciding whether a non-compete clause is reasonable, you’re usually looking at a few practical factors. Think of it like a balancing exercise: your need to protect the business versus the individual’s right to work.

1. Duration (How Long The Restraint Lasts)

Shorter is usually safer. Many restraints are in the range of 3–12 months, depending on the role and what you’re protecting.

To sense-check the timeframe, ask yourself:

• How long would the information still be commercially sensitive?
• How long would it realistically take you to transition client relationships to someone else?
• Is there a sales cycle (e.g. six months from lead to signed deal) you’re trying to protect?

2. Geographic Area (Where The Restriction Applies)

A non-compete clause should generally match the real footprint of your business.

• If you’re a local service business, a nationwide ban can look excessive.
• If you serve clients remotely across NZ (or internationally), geography might be less relevant - but you still need to tailor the clause to your actual market.

3. Scope Of Restricted Activities (What “Competing” Means)

This is where many restraints fall over. If “competition” is defined too broadly, it can accidentally ban someone from doing work that doesn’t really threaten your business.

A stronger approach is to define competition in a way that links back to the role and the risk, for example:

• the same or substantially similar services
• the same customer segment
• work involving the same confidential strategies or pricing models

4. Seniority And Access

Courts and tribunals are more likely to accept restraints for senior staff or people with deep access to:

• key customers
• strategic planning
• financials and pricing
• product roadmaps

For junior roles, a broad non-compete clause is harder to justify. In many small businesses, a non-solicitation clause plus confidentiality obligations can be a better fit.

5. How And When The Clause Was Agreed

Even a well-written non-compete clause can become risky if you introduce it the wrong way.

For example, if you ask an existing employee to sign a brand-new restraint later on, you’ll want to think carefully about process and what the employee receives in exchange (because you’re changing the deal mid-stream). In NZ, adding a new restraint after employment has already started can be unenforceable if the worker doesn’t receive some genuine benefit (sometimes called “consideration”) for agreeing to the new restriction.

If you need help tailoring restraints to the role and your industry, a Restraint Of Trade Advice session can help you get the scope right before you roll it out.

How To Draft A Non-Compete Clause That Actually Protects Your Business

A non-compete clause should never be a “copy/paste” job. The most enforceable restraints are the ones that clearly reflect your business reality and the worker’s role.

Use A Layered Approach (Not Just One Big Ban)

In many cases, you’ll get better protection using several targeted clauses rather than one heavy restriction. Common layers include:

• Confidentiality (protects sensitive information during and after employment)
• Non-solicitation (prevents approaching clients/customers for a set period)
• Non-poaching (prevents recruiting your staff)
• Non-compete (used for higher-risk roles and tailored carefully)

This approach can also be more “reasonable” because it restricts only what you genuinely need to protect.

Be Clear About Definitions

Ambiguity is your enemy in restraint drafting. A well-drafted clause should clearly define things like:

• what counts as a “competitor”
• what services/products are considered competing
• the geographic area (if relevant)
• the restraint period and when it starts

Make Sure Your Other Documents Back It Up

A restraint can be undermined if your overall employment documentation is messy or inconsistent.

For example, if someone has access to client lists, pricing and systems, you should also have:

• a strong Conflict Of Interest Policy (so you can address side-hustles or competitor involvement early)
• clear confidentiality and IP clauses
• role descriptions and access controls that match what you say you’re protecting

Also note: restraints can come up in contractor relationships too, but enforceability can look different depending on whether the person is truly an independent contractor (and how the restraint is drafted). If you’re using restraints for contractors, it’s worth getting the contract reviewed to make sure the clause is fit for purpose.

If you’re dealing with higher-risk hires (or you’re updating your contracts as your business grows), it’s worth speaking with an Employment Lawyer to make sure the restraint fits the role and won’t create unintended issues.

Common Mistakes Employers Make With Non-Compete Clauses

Most restraint problems don’t come from bad intentions - they come from using generic clauses that aren’t designed for your business.

Mistake 1: Using The Same Non-Compete Clause For Every Role

A one-size-fits-all restraint is a red flag. The more junior the role, the harder it is to justify a broad non-compete clause.

It’s usually better to scale restrictions based on risk, for example:

• basic confidentiality for entry-level roles
• confidentiality + non-solicitation for client-facing roles
• confidentiality + non-solicitation + non-compete for senior roles with deep access

Mistake 2: Drafting Something Overly Broad “Just In Case”

This often backfires. If the restraint is too wide, it’s more likely to be challenged - and harder to rely on when you actually need it.

Mistake 3: Treating Restraints As A Substitute For Good Business Systems

Even the best non-compete clause won’t fix poor access control.

Practical steps that reduce risk include:

• limiting access to sensitive folders to those who truly need it
• documenting key client relationships in a CRM (so the relationship isn’t “in one person’s head”)
• clear offboarding steps (return of devices, disabling logins, confirming confidentiality obligations)

Mistake 4: Not Preparing For The “Employee Starts Competing” Scenario

It’s worth thinking through what you’ll do if someone leaves and starts competing.

That might involve reviewing your contract terms and your evidence (what information they had access to, what clients they’ve contacted, and whether it’s actually competitive activity). If this is a realistic risk in your industry, it can be helpful to have a plan in place for how you’ll respond. Situations like Employee Setting Up A Competing Business can move quickly, so early advice can make a big difference.

What Should You Do If A Former Employee Breaches A Non-Compete Clause?

If you believe a former employee is breaching a non-compete clause, it’s tempting to fire off an angry email or threaten legal action straight away.

But a calmer (and more strategic) approach usually gets better outcomes.

Step 1: Check What The Contract Actually Says

Start with the wording. Confirm:

• the restraint period hasn’t expired
• the geographic area and restricted activities actually match what they’re doing
• there aren’t conditions you haven’t met (for example, in some contracts there may be procedural steps, notice requirements, or related clauses that affect enforcement)

Step 2: Gather Evidence (Without Overstepping)

You’ll want to document what’s happening - for example, customer communications, public advertising, social media posts, or messages from clients about being approached.

If you’re investigating, be mindful of privacy and workplace obligations. (This is especially relevant if you’re reviewing system access or internal communications as part of an investigation.)

Step 3: Get Advice On Enforceability Before Escalating

This is the step many businesses skip - and it can save you time and money. Even if the clause is clear, you still need to consider whether it’s likely to be enforceable as “reasonable” in the circumstances.

In some cases, a well-written letter to the former employee (and/or their new employer) can resolve the issue without formal proceedings. In other cases, you may need urgent action to prevent damage to your client base.

Because restraint disputes can move fast, it’s worth getting tailored advice early rather than waiting until the damage is done.

Key Takeaways

• A non-compete clause (restraint of trade) can be a valuable way to protect client relationships, confidential information and goodwill - but it needs to be carefully tailored.
• In New Zealand, non-compete clauses are not automatically enforceable; they generally must be reasonable in duration, geographic area and scope, and protect a legitimate business interest.
• In some cases, NZ courts can enforce a restraint in part (for example, by modifying it), but it’s still best practice to draft restraints narrowly and role-specifically from the start.
• Overly broad restraints (“just in case”) often backfire and can be hard to rely on when you actually need them.
• A layered approach (confidentiality + non-solicitation + targeted non-compete where appropriate) is often more effective than one heavy restriction.
• Use role-based restraints - senior staff with access to strategy and key clients typically justify stronger protections than junior employees.
• If you introduce a new restraint after a worker has started, it may need to come with a real benefit to improve enforceability.
• If you suspect a breach, check the contract, gather evidence carefully, and get advice before escalating - restraint disputes can move quickly.

If you’d like help reviewing or drafting a non-compete clause that’s genuinely fit for your business, reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.