Restrictive Covenants in Employment Contracts: Meaning, Types & How to Use Them

Restrictive covenants can help protect your business when an employee leaves, but they are also one of the easiest clauses to get wrong. Many employers use broad wording copied from an old contract, apply the same restraint to every role, or assume a signed clause will automatically be enforceable. That is where businesses often get caught.

In New Zealand, a restraint that goes further than necessary may not hold up when you actually need it. A clause that looks strong on paper can become hard to rely on if it is too wide, not tailored to the employee's role, or unsupported by a genuine business reason.

This guide explains what restrictive covenants in employment contracts mean, the main types used in New Zealand employment agreements, the legal issues to check before you sign, and the common drafting mistakes that can weaken your position when a team member moves to a competitor or starts contacting your clients.

Overview

Restrictive covenants are post-employment promises that limit what a departing employee can do after their employment ends. New Zealand businesses usually use them to protect confidential information, client relationships, team stability, and other legitimate business interests, but the clause must be reasonable and tailored to the role.

• Identify the real business interest you are trying to protect, such as client goodwill, confidential information, pricing, or key staff relationships.
• Match the restraint to the employee's actual role, seniority, access, and influence.
• Choose the right type of covenant, such as non-solicitation, non-dealing, non-poaching, confidentiality, or non-compete.
• Keep the time period, geographic area, and scope no wider than necessary.
• Make sure the covenant sits properly within the wider employment agreement and works alongside confidentiality and intellectual property clauses.
• Review restraints before you sign, and again when an employee is promoted into a more sensitive role.

What Restrictive Covenants in Employment Contracts Means For New Zealand Businesses

Restrictive covenants are most useful when they protect a clear and legitimate business interest, not when they are used as a general deterrent to stop someone leaving.

In practice, these clauses are usually included in an individual employment agreement and apply after the employment relationship ends. The aim is not to punish the employee for resigning. The aim is to stop unfair harm to the business, such as taking confidential customer data, targeting key clients using inside knowledge, or recruiting away the team that helped build your revenue.

New Zealand law generally starts from the idea that people should be free to work and earn a living. That means post-employment restraints are treated cautiously. A business may still be able to rely on a restrictive covenant, but only where the restraint is reasonable and goes no further than necessary to protect a legitimate interest.

What counts as a legitimate business interest?

A legitimate business interest is something the law recognises as worth protecting. It is usually more specific than a general wish to reduce competition.

Examples often include:

• confidential information, including pricing models, supplier terms, strategic plans, and non-public product information
• trade secrets or sensitive know-how
• customer or client relationships built through the employee's role
• goodwill attached to the business
• stable relationships within your workforce, especially where a senior employee could recruit key staff away

If an employee had little customer influence, no access to confidential material, and no strategic role, a broad restraint may be difficult to justify.

The main types of restrictive covenants

Different risks call for different clauses. Using the narrowest clause that actually addresses the risk usually gives you a better chance of enforceability.

• Confidentiality clauses: These stop former employees from using or disclosing confidential information. They are often easier to justify than broad competition restraints and should appear in nearly every employment agreement.
• Non-solicitation clauses: These stop a former employee from approaching your clients, customers, suppliers, or staff to win business or encourage them to leave.
• Non-dealing clauses: These go further than non-solicitation. They can stop the former employee from doing business with certain clients even if the client approaches them first.
• Non-poaching clauses: These are aimed at protecting your team by preventing a former employee from recruiting or inducing employees or contractors to leave.
• Non-compete clauses: These stop a former employee from working in a competing business, or starting one, for a limited period and within a limited area. These are usually the hardest to enforce because they directly limit someone's ability to work.

When are these clauses worth using?

Restrictive covenants are usually most relevant for senior employees, sales staff with close client relationships, founders moving into employment roles after an acquisition, technical staff with access to sensitive know-how, and key managers who can influence both customers and employees.

They are less likely to be appropriate in a broad form for junior staff or roles with limited access to confidential information. Using the same restraint across your entire business often creates risk because it suggests the clause was not tailored to actual business needs.

Why tailoring matters

A well-drafted restraint reflects what the employee actually did, what information they had access to, who they dealt with, and what harm could realistically happen if they left.

For example, a software business might use:

• a stronger confidentiality clause for developers with access to proprietary code and product roadmaps
• a client non-solicitation clause for account managers who control customer relationships
• a staff non-poaching clause for senior executives with influence over the team
• a narrow non-compete only for a small number of genuinely key people where lesser restraints would not be enough

This is usually far safer than inserting a blanket 12 month non-compete into every contract and hoping it works later.

Legal Issues To Check Before You Sign

Before you sign a contract with restrictive covenants, check whether each clause is genuinely necessary, clearly drafted, and reasonable for that specific role.

This is the stage where founders and hiring managers can avoid most future disputes. It is much easier to fix an overreaching or vague restraint before the employee starts than after they have resigned and joined a competitor.

1. Is the clause tied to a real business risk?

The first question is simple: what exactly are you trying to protect?

If the answer is only that you do not want the employee to work for a competitor, that is usually not enough on its own. Your agreement should instead connect the restraint to things such as customer relationships, strategic information, confidential pricing, product development knowledge, or the stability of your team.

2. Is the scope reasonable?

The core reasonableness questions usually relate to time, geography, and activity. Each of these should be no wider than necessary.

• Time period: Ask how long the business really needs protection. In many cases, the relevant concern is the period needed to secure client relationships, update account ownership, or reduce the commercial value of confidential information.
• Geographic area: The area should reflect where the business actually operates and where the employee had influence. A nationwide restraint may be hard to justify for a local role.
• Restricted activity: The clause should focus on the activities that create the risk. Stopping all work in an entire industry may be too broad if the real concern is only a defined client base or a specific competing service.

These points matter before you sign because they often determine whether the clause can be relied on later.

3. Does the role justify the restraint?

Job title alone is not enough. A court or decision-maker is likely to look at what the person actually did.

Consider factors such as:

• how much access they had to sensitive information
• whether they managed major customer relationships
• whether they could influence other staff to leave
• whether they were senior enough to shape pricing, strategy, or commercial direction
• whether a narrower clause would protect the business just as well

Before you hire your first worker, or before you update contracts as your team grows, it helps to create different employment agreement templates for different levels of risk rather than a single one-size-fits-all contract.

4. Is the wording clear enough to enforce?

Vague restraints are difficult to apply. The agreement should define the restricted persons, business activities, and time period with enough precision that both sides understand the obligation.

For example, if you want to protect customer relationships, think carefully about whether the clause should apply to:

• all customers of the business
• only customers the employee dealt with personally
• prospective customers they were actively working on
• customers they learned confidential information about during a set period before termination

A broad phrase like “any client of the business” may create unnecessary arguments if the employee had no relationship with most of those clients.

5. Does the clause fit with the rest of the employment agreement?

Restrictive covenants work best when they sit alongside other clauses that protect the business in a more targeted way.

You should usually review:

• confidentiality obligations
• intellectual property ownership clauses
• notice period and garden leave style provisions, where appropriate
• return of property and deletion of business data requirements
• employee duties relating to good faith and conflicts of interest during employment

If your real concern is misuse of information, a strong confidentiality and IP framework may matter more than a broad non-compete.

6. Have you updated the contract after promotion or role change?

A restraint that made sense when a person was junior may become too narrow once they move into a leadership role. The opposite is also true. A broad restraint included when someone first joined may not have been justified at that stage.

Before you sign a promotion letter or change role responsibilities, review whether the post-employment restrictions still match the commercial risk. This is especially relevant for startups and SMEs where employees often grow quickly into broader positions.

7. Are you relying on a standard template without checking NZ context?

Imported clauses from Australia, the UK, or the US can create problems if they do not reflect New Zealand employment law and business realities. Terms, assumptions, and drafting styles can vary, and some template clauses are far broader than local practice would support.

Before you accept the provider's standard terms, or reuse a contract from another market, have the wording checked through a contract review in a New Zealand context.

Common Mistakes With Restrictive Covenants in Employment Contracts

The most common mistake is treating restrictive covenants as standard boilerplate instead of role-specific risk management.

That usually leads to clauses that look tough but are difficult to rely on when a valued employee leaves. Here are the issues that come up most often for startups and SMEs.

Using a non-compete when a narrower clause would do

Non-competes are often the first clause employers think of, but they are not always the best option. If your real concern is client contact or staff poaching, a targeted non-solicitation or non-poaching restraint may be more appropriate and more defensible.

This is where founders often get caught. They ask for the broadest restriction possible, but that can undermine enforceability rather than improve it.

Applying the same restraint to every employee

A junior administrator, a sales lead, and a chief operating officer do not create the same post-employment risks. If every contract contains identical restraints regardless of role, that can suggest the clauses were not carefully considered.

A better approach is to classify roles by risk level and use different clauses accordingly.

Choosing an unrealistic time period

Longer is not automatically better. A 12 month or 24 month restraint may sound safer, but if the business only needs a few months to protect customer relationships or transition accounts, a long period may be hard to justify.

The right period depends on the business model, sales cycle, and nature of the information involved.

Defining the restricted group too widely

Clauses often fail because they cover more people than necessary. For example, stopping a former employee from contacting every customer nationwide may be excessive where they only managed a small portfolio in Auckland.

Before you sign, ask whether the restraint could instead focus on:

• clients the employee worked with directly
• clients they supervised or serviced in the last 6 to 12 months
• prospects where they had active involvement
• employees or contractors they managed or influenced

Ignoring evidence and process

Even a well-drafted restraint can be harder to enforce if your records are poor. Businesses often fail to document why the employee was considered high risk, what information they had access to, or which customer relationships they owned.

When someone resigns, practical steps also matter. Exit reminders, return of devices, revoking system access, and confirming continuing confidentiality obligations can all reduce risk.

Forgetting that confidentiality may do most of the work

Some employers over-focus on non-competes and under-invest in confidentiality protections. For technical businesses, consultancies, agencies, and service providers, the greater risk may be misuse of know-how, data, and pricing information rather than direct competition alone.

If that sounds like your business, your agreement should state clearly what information is confidential, how it must be handled, and what must happen to it at the end of employment, ideally in clear written terms.

Relying on verbal assurances

If a departing employee verbally says they will not approach clients or take information, that may not be enough. Before you rely on a verbal promise, check what the written agreement says and whether the obligations are clear.

Employment relationships often end on good terms, but risk can still arise later if expectations were not properly documented.

Missing the chance to review contracts as the business grows

What worked when your business had five staff may not work when you have 30, multiple service lines, and key account managers across different regions. Restrictive covenants should be reviewed as your commercial model changes.

This is especially relevant after acquisitions, leadership hires, rapid scaling, or a shift into new markets or service offerings.

FAQs

Are restrictive covenants always enforceable if the employee signs the contract?

No. A signed clause can still be challenged if it is wider than reasonably necessary or not tied to a legitimate business interest.

What is the difference between a non-solicitation clause and a non-compete?

A non-solicitation clause stops the former employee from approaching certain clients, staff, or contacts. A non-compete goes further and restricts working for or operating a competing business, so it is usually harder to justify.

Can a small business use restrictive covenants, or are they only for large employers?

Small businesses can absolutely use them. The key point is that the clause must match the actual risk in the role and be drafted reasonably.

Should every employee have a restraint clause?

Not necessarily. Many businesses should include confidentiality obligations for all staff, but stronger post-employment restraints are usually best reserved for roles involving sensitive information, key clients, or influence over staff.

When should a business review restrictive covenants?

Review them before you sign a new employment agreement, when someone is promoted, after a major role change, and when your business model or customer structure changes.

Key Takeaways

• Restrictive covenants in employment contracts are designed to protect legitimate business interests after employment ends, not to stop employees leaving altogether.
• New Zealand businesses should tailor restraints to the role, the actual risk, and the information or relationships being protected.
• Non-solicitation, non-dealing, non-poaching, confidentiality, and non-compete clauses each serve different purposes, and the narrowest effective option is often the safest.
• Reasonableness matters. Time period, geography, and restricted activities should go no further than necessary.
• The strongest approach usually combines carefully drafted restraints with good confidentiality, IP, notice, and exit management provisions.
• Standard templates and one-size-fits-all clauses create risk, especially if they are copied from another market without New Zealand review.

If you want help with contract drafting, reviewing restraint clauses, confidentiality protections, and role-specific employment agreement updates, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.