Do you have a restraint of trade clause in your employment contract?
The COVID-19 pandemic has forced almost everyone into new and creative opportunities. Starting a new job and/or business may, for some, be one of the most exciting or most stressful decisions to make. In a situation where an employee only possesses the skills of the job which he/she is restrained from performing, the consideration of the employee’s ability to continue to earn an income may cause a problem for the enforceability of the restraint.
What is a restraint of trade and why are these clauses so controversial?
In short, 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 accepting 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.
The purpose of a restraint, is to provide a company with reasonable and legitimate protection against exploitation of its proprietary interests, including but not limited to, the company’s goodwill, confidential information, and client lists.
The clauses may be controversial due to a clash of fundamental values. On the one hand, there is freedom to contract which relies on agreements being honoured, and, on the other hand, there is freedom of trade which is a constitutionally recognised right.
Is a restraint of trade reasonable? Is it fair?
Each person’s fundamental rights to freedom of trade, occupation and profession are recognized in our Constitution. Section 22 of the Constitution, which protects the right to work, should not be interpreted in isolation. The rights to dignity, the right not to be subjected to forced labour, freedom of association, and the right to fair labour practices, should also be taken into consideration when the content of the right to freely choose a trade, occupation or profession is considered. The freedom to work, is therefore an important human right as it is a means to maintain dignity and self-respect and more importantly, to earn a living.
In the case of Magna Alloys and Research (SA) (Pty) Ltd v Ellis, the court held, that every restraint of trade agreement signed by an employee, is assumed to be lawful and enforceable, and the onus lies on the employee to prove that the restraint is unreasonable and contrary to public policy, etc.
In determining whether a restraint is enforceable or not, the courts, amongst other things, may consider the following factors:
• duration of the restraint;
• geographical area to which the restraint applies;
• whether a restraint payment was paid to the employee;
• whether the employee still has the ability to earn a living; and
• the proprietary interest or asset the employer seeks to protect.
However, the onus of establishing a case for relief based on a restraint of trade is on the party contesting it. It should be noted that a restraint of trade clause cannot restrict or limit the rights of third parties. For example, when a financial advisor decides to leave his/her employment, the existing client of such financial advisor may follow him/her, if the client wishes to do so, subject to certain provisions. It remains the free will and constitutional right of the client in deciding with whom they want to conduct business with and/or the professionals they choose to advise them. The onus rests on the person who alleges solicitation of clients.
In another case of Basson v Chilwan, the court held that a restraint clause would be against public policy if, for instance, it prevented the employee, at the termination of employment, from freely participating in the profession or industry, provided the protectable interests of the employer were not violated. In this case, the court accepted that a person is entitled to take his skills with him/her, even if those skills were acquired through his former employer’s training, and that he/she is free to earn his/her living in his/her chosen occupation.
Is the restraint of trade contained in your employment contract justified?
The courts might not enforce a general, “one size fits all” or vague restraint. The employer should therefore do the appropriate due diligence and seek professional legal advice to determine whether the employer has a clear identifiable proprietary interest and so forth which justifies the inclusion of a restraint of trade clause.
In addition, employees should seek legal advice prior to agreeing to a restraint of trade in an employment contract which might contain terms and conditions unreasonably prejudicial to the employee.
Hence, the way in which the restraint of trade clause is formulated in a contract is critical in, for example, enforcing the restraint. Whether the restraint of trade is reasonable must be judged based on the circumstances existing at the time of entry into the contract and not at the time it was breached. In conclusion, ensure you grasp the scope and consequences of any agreement before you put pen to the paper.
Article by Elzaan Schoeman, Candidate Attorney. For further enquiries kindly contact firstname.lastname@example.org .