How Does Restraint of Trade Work in SA?
A restraint of trade is a provision in a contract of employment with the aim of protecting an employer’s trade secrets, customer connections and other confidential information. Such a contract provides that after termination of employment, the employee is restricted in the work he/she can perform in that he/she 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.
What about the fairness?
The question then stands that to what extent can an employer restrain a former employee, especially where the employee only has the skills necessary to perform the job which he is restrained from performing?
The impact of restraint of trade undertakings on former employees of a business can accordingly be potentially quite prejudicial by restraining persons from exercising their constitutional rights to choose their trade, occupation or profession.
The leading case on this matter is Magna Alloys and Research (SA) (Pty) Ltd v Ellis. In this matter the court laid down the general principle that, restraint undertakings are not unconstitutional and every restraint agreement signed by an employee is assumed to be lawful and enforceable, and the onus lies on the employee, to show that the restraint is unreasonable and contrary to public policy.
In determining whether a restraint is enforceable, a court will consider the following factors:
- The length of time for which the restraint operates;
- The 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;
- The proprietary interest or capital asset that the employer seeks to protect.
In the situation where an employee only possesses the skills of the job which he is restrained from performing, the consideration of the employee’s ability to continue to earn a living may pose a problem for the enforceability of the restraint.
The above case also states that “It is in the public interest that agreements entered into freely should be honoured and that everyone should, as far as possible, be able to operate freely in the commercial and professional world.”
What about the employer’s interests?
In Aranda Textile Mills v Hurn & Another, the court emphasised that proprietary interests sought to be protected must be properly described as belonging to the employer. The court pointed out that it will generally be contrary to the public interest to enforce an unreasonable restriction on a person’s freedom to trade. It will generally be contrary to the public interest to enforce an unreasonable restriction on a person’s freedom to trade. However, where the proprietary interest of the company which needs protection outweighs the employee’s interest in continuing his trade, such a restraint will be reasonable and enforceable.
The bottom line:
The general principle remains that a restraint will only be enforceable if the employer 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.
Contracts between yourself and an employer can be quite daunting and overwhelming and it is always advisable to speak with your attorney to clarify certain terms in these contracts. Should you have any questions or concerns relating to a contract as either an employee or employer, please feel free to contact us to set up an appointment and have your matter dealt with.