Restraints of trade: A useful guide for employers
04 Mar 2016
A restraint of trade is an agreement between an employer and an employee, or a provision in an employment contract that restricts an employee from entering into employment with a competitor of the employer, or establishing a business in competition with the employer, for a specified period in a specified geographical area, following termination of employment.
A restraint enables an employer to protect the proprietary information of its business, ie trade secrets, confidential information, trade connections, customers and clients, as well as the goodwill of the business.
Though every citizen has the right to choose a trade, occupation or profession freely, restraints are legal and very much enforceable against South African employees. Restraints will only be invalid and unenforceable if deemed unreasonable. An employee alleging that a restraint is unreasonable, bears the onus of proving this in court.
Restraints are considered unreasonable if they are in conflict with public policy and the public interest. In this regard, it is important to determine whether public policy requires that the restraint of trade be maintained or rejected. In determining whether an employer’s restraint is unreasonable, a court will consider whether the business interest is deserving of protection. In addition, a court will take into account whether the business interest is being prejudiced by the employee or whether the business interest weighs heavily against the employee’s interest, resulting in the employee not thriving economically and being unproductive. If a court finds that the business interest weighs heavily against an employee’s interest, resulting in him or her not thriving economically and being unproductive, the court will likely find that the restraint is unreasonable and therefore unenforceable. The same will apply in the converse.
A court will also consider inter alia, the proprietary interest of the business, the geographical area and period of the restraint (which should not be unnecessarily and unreasonably broad), whether its sole purpose is to prevent mere competition, the employees right to trade, whether consideration has been paid for the restraint; whether the employee was forced/coerced to sign the restraint and whether the employee was reasonably unaware of the restraint.
A business should only restrain senior employees and those employees who, in their day-to-day operations have access to and would possess the proprietary information of the business.
The issue around the enforceability of a restraint of trade agreement in relation to a senior employee was recently tested in South Africa’s Labour Court. In this case, Vodacom was able to enforce a senior employee’s contract, which included a six-month notice period and a restraint of trade for a further six months after the notice period. The employee had resigned in December 2015 and had planned to start at a competitor a few weeks later. Vodacom argued that as a senior employee, he had been exposed to significant confidential and proprietary information relating to Vodacom’s business which in some instances had a useful life span of more than one year. In making its decision, the court noted that the employee was a senior employee and had intimate knowledge of Vodacom’s short and longer term strategic plans, and that this information would be of benefit to a direct competitor. The court confirmed that the restraint was reasonable and that the employee had to spend six months on gardening leave and could not work for the competitor for a further six months.
The remedies available to a business where a new employer and competitor employs a former employee who is bound by a restraint, are to apply for an interdict or institute a claim for damages under the common law of delict. The same principles would apply in respect of a former employee who is bound by a restraint and who forms a business in competition with the original business.
Generally, a court will only hold an employee to a restraint that he or she has agreed to. However, it has been confirmed that an employee may be bound to a restraint where he or she has tacitly accepted the written restraint. A court will always look at the circumstances of each case in deciding whether or not to uphold the restraint. Employers are, however, advised to sign restraint agreements with their employees to avoid any disputes down the line.
A question that remains open in South African law is whether a restraint would remain enforceable if a business unfairly dismissed an employee. On one occasion the court enforced the restraint on the basis that its provisions intended for it to operate after termination of employment, for any reason whatsoever. In a more recent judgement, the court held that if the restraint provision specifically excluded its operation on termination of employment due to an unfair dismissal, it would not be enforceable.
The enforceability of a restraint of trade is therefore dependent on various factors and there is no one size fits all approach. Each case will be determined based on its own set of facts.
See also:(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)