What you need to know about Restraints of Trade in employment contracts

Image: unsplash.com

The majority of employment contracts contain a Restraint of Trade clause. Many people consider this as just another standard clause in an employment contract, but it can have serious implications for future employment.

A Restraint of Trade is a provision in a contract of employment that you become responsible for after the termination of employment. The employee is restricted in the work they can perform in that they will be restrained from performing similar work in competition with his/her former employer, for a prescribed period of time and in a specific geographical area. These provisions aim to protect the employer’s proprietary interests, such as client and customer connections, trade secrets and confidential information.

I guess there are some arguments that cannot be settled with hard and fast rules – a Restraint of Trade is one of these. Firstly, it must be noted that Restraint of Trade agreements are not regulated by Labour Law. These agreements are regulated by the Law of Contract. The circumstances surrounding every Restraint of Trade clause are different – simply because the employers are involved in different industries and have different assets, trade secrets etc. that need to be protected. Therefore, no hard and fast rules can be laid down – as indeed is the case with many aspects of the employment relationship; circumstances are different, and each case must be examined separately.

A Restraint of Trade should also not be confused with “Gardening Leave”. A garden leave clause forms part of an employee’s contract of employment, the employer may elect to relieve the employee from performing his/ her duties for the duration of any notice period, on full pay. For all intents and purposes, during the garden leave, the employee remains an employee and must remain accessible to the employer. For the purpose of this article we will not be discussing gardening leave

A Restraint of Trade clause limits the ability of an employee to accept future employment which could be to the detriment of their current employer – usually because it is a competitor and the employee has access to confidential information. Once you have signed your employment contract, you accept the consequences of the Restraint of Trade, and claiming you did not fully understand such clause is not a defence in law.

So what do you do if your employer chooses to exercise the Restraint of Trade, especially where you only have the skills necessary to perform the job which your employer has restrained you from performing?

No matter what’s in your contract, your old employer can’t stop you taking a new job unless it could lose them money. For example, if you might:
• take customers to your new employer when you leave
• start a competing business in the same local area

Check if any restrictions apply to you

Look in your contract or terms and conditions of work for wording like “You cannot” work for a competing business if it’s less than 60km away, for instance. It should also say how long the restriction lasts – usually 3 to 6 months. Restrictions like this could be under a heading that says ‘Restrictive Covenants’ or ‘Post-Termination Restrictions’. You’ll usually have to follow restrictions like these if they’re written in your contract. This includes restrictions in any other documents you’ve signed, such as a deal to settle a dispute with your employer. You can work for whoever you like if there are no restrictions in any documents you’ve agreed to.

When is restraint of trade unenforceable?

There are instances in which Restraint of Trade agreements are unenforceable. This is usually where it is proven that the contract was not understood by the employee or the application of the Restraint of Trade agreement is too broad.

In a recent matter involving a Restraint of Trade agreement – Dayandren Reddy (appellant) and Siemans Telecommunications (Pty) Ltd (respondent), the essence of the agreement was that the appellant was prohibited from taking up employment with his employer’s competitor. The appellant was employed by Siemens, and upon his resignation from that company he took up employment with a competitor – Ericsson. His restraint agreement with Siemens prohibited him from doing this for a period of 1 year after leaving the employment of Siemens. In the agreement, the appellant undertook not to disclose trade secrets and confidential information belonging to Siemens. In interdicting Reddy – the appellant – from taking up employment with Ericsson, the court held that it was not necessarily to find that Reddy would actually use the trade secrets and confidential information in his newly employment – but that it was sufficient if he could do so. The court held that the restraint was aimed at preventing a person with the knowledge of confidential technologies, obtained as a result of this employment, from using them to the detriment of the employer. That really is the essence or purpose of any Restraint of Trade agreement.

The appellant stated that the training he underwent while employed by Siemens would be of no use to Ericsson and that his employment with Ericsson would not involve any of Siemens’ customers in South Africa, and in fact that he would not be working with any of Siemens’ customers in South Africa, and that therefore the restraint agreement was unreasonable.

The court in Reddy v Siemens [2006] SCA 164 stated that “the substantive law as laid down in Magna Alloys is that a restraint is enforceable unless it is shown to be unreasonable, which necessarily casts an onus on the person who seeks to escape it.” In determining the reasonableness, the court considers public interest, which expects parties to comply with their contractual obligations, balanced against the interests of society allowing people to trade freely and be employed in the profession of their choice.

In that particular case, Reddy v Siemens, the court found that the restraint of trade agreement only prevented the employee from taking up employment at a competitor of Siemens – it did not prevent the employee from being employed, it merely limited the specific employer. The court also found that the employee had access to confidential information of the employer (Siemens) and whilst it is sufficient that he has the ability to disclose this confidential information, it is not required that he actually disclose this information. Accordingly the Restraint of Trade agreement was found to be valid and enforceable.

Determining the reasonableness of the Restraint of Trade clause

The courts also refer to the test as set out in Basson v Chilwan [1993] ZASCA 61, which asks four questions to determine the reasonableness of the Restraint of Trade agreement:

1. Does the one party have an interest that deserves protection at the termination of the employment?
2. If so, is that interest threatened/prejudiced by the other party?
3. Does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?
4 .Is there an aspect of public policy having nothing to do with the relationship between the parties, which requires that the restraint be maintained or rejected?

Generally speaking, according to the Basson judgment, if the answers to the first three questions above are in the affirmative, and the answer to the last question is in the negative, then the Restraint of Trade is reasonable and consequently not contrary to public policy, therefore making it enforceable against the restrained party. However, if the answers to the first three questions are in the negative and the answer to the last question is in the affirmative, then such Restraint of Trade would be contrary to public policy and therefore unenforceable. In some instances the court may find that a Restraint of Trade provision has gone further than is necessary to protect the interest of the restraining party but doesn’t go so far as to render it contrary to public policy. The court may then order that the restraint be partially enforced. By partially enforcing a restraint, the court would restrict its limitation to either a narrower proximity than the one that was initially included in the Restraint of Trade, or for a lesser period of time than the period that was initially agreed.

Protectable interest vs. the right to be economically active

In order to determine whether a restraint would be reasonable, the concept of a Protectable Interest must be considered further, as either parties’ assertion or defence would primarily be dependent on whether there is any Protectable Interest that the restraining party could argue he is entitled to protect. A court would normally only entertain a Restraint of Trade dispute if it is satisfied that there is indeed a Protectable Interest. There’s no exhaustive list of what constitutes a Protectable Interest, although the judgment in Advtech Resourcing (Pty) Ltd t/a The Communicate Personnel Group v Kuhn and another [2007] 4 All SA 1368 (C), provides the following insights:

• A Protectable Interest includes the restraining party’s ‘trade secrets’ (meaning any information that is capable of application in trade or industry provided that such information is only known to a certain number of people but not to the public and is of economic value). By way of example, technical processes, chemical formulae, computer software, price lists, credit records and business conversations constitute trade secrets.

• However, the mere fact that an employer had provided an employee with training and skills development does not mean that he or she owns the skill provided to an employee. This is illustrated by the following excerpt: “An employee who, in the main, uses his own expertise, knowledge, skill and experience [after leaving employment] cannot be restrained [from doing so]”.

• Confidential information constitutes a protectable interest.

• Customer goodwill or trade connections constitute a protectable interest.

Another question that needs to be considered is that of who bears the onus of proof in restraint cases. Most past judgments follow the approach that was laid down in Magna Alloys, in which it was held that the party alleging that the restraint is contrary to public policy, bears the onus of proving the unreasonableness of such restraint. In the new Constitutional dispensation, however, every person has a constitutionally enshrined right to choose and carry on his/her chosen trade, profession or business. With that background, some more recent commentaries have held that the restraint enforcer should bear the onus of proof. Some commentators remark that it does not matter who bears the onus of proof because the guidelines that were laid down in the Basson judgment are decisive.

How is a Restraint of Trade agreement enforced?

The means by which to enforce a Restraint of Trade agreement is an interdict. If a final interdict is sought, three things need to be established: “there must be a clear right, secondly an injury actually committed or reasonably apprehended, and lastly, the absence of any other satisfactory remedy” (Hi-Tech Recruitment (Pty) Limited and Others v Nel and Another).

Where an employee has access to confidential information and the ability to divulge that information, the first two requirements are met. Whether an alternative remedy is available considers the reasonableness of the Restraint of Trade agreement and the weighing up of the competing interests.

When is a Restraint of Trade unreasonable?

Courts have found Restraint of Trade agreements to be unreasonable in instances where they are too vague or too broad in their application. In Hi-Tech Recruitment (Pty) Limited and Others v Nel and Another, the court stated that “the restraint will be unreasonable if the duration and scope of area sought to be enforced falls outside of the agreement itself, and/or the restraint is broader than necessary.”

Negotiating with your old employer

You might be able to persuade your old employer to ignore a restriction, or at least make it shorter. To make you follow it they’d need to go to court to prove the restriction is reasonable. This is time-consuming and can be expensive, so they might prefer to compromise.

Start by explaining why you don’t think the restriction should apply and explain why your new job won’t harm their business. They might have misunderstood what your new job is or where you’re working. Make it clear that you’ll honour any other restrictions in your contract, such as confidentiality, or not approaching former customers. This can help show that you won’t be harming your old employer’s business. If you’re not sure why your employer wants you to follow the restriction, ask what business interests they’re trying to protect. You might then be able to find ways around that problem. For example, if they’re worried you’ll take their customers, you could reassure them that you won’t.

Negotiating with your new employer

If your old employer won’t compromise, you could also ask your new employer if they can give you a different job until the restriction you agreed to runs out. This could be either a different kind of job or a different location, that way you won’t be breaking the restriction. For example, if you work in Marketing you could ask your new employer to give you an admin job for 3 months. If you do agree to a temporary change, check if your pay and conditions will stay the same. Or if your old employer worked in a particular town, ask if your new employer will let you work somewhere else until your restriction runs out. That way your old employer won’t worry you’ll take their customers. If your new employer doesn’t have any other work you could do, and you really want the job, ask if you can delay starting until your restriction runs out.

Advice for employers and employees
Employers should ensure they draft Restraint of Trade agreements narrowly and only to the extent necessary to protect their protectable interests. Similarly, employees should ensure that they understand the extent and content of the Restraint of Trade agreement they enter into, as the onus is on the employee to prove its unreasonableness and thus its unenforceability.

Each matter will need to be determined on its own facts on a case by case basis. The general principle remains that a restraint will only be enforceable if the employer is seeking to enforce the restraint has a legitimate proprietary interest worthy of protecting, the restraint is reasonable in as far as the geographical area and duration of the restraint are concerned, and the restraint is clear in its meaning and application. It’s best to get advice from a professional when dealing with Restraint of Trade matters as they can become complicated.

*Note that this article does not constitute legal advice for which you can hold the writer or the publication liable.

By Cindy Ross

Author avatar
Sihle Bolani

Post a comment

Your email address will not be published. Required fields are marked *