Restraint of trade clauses: when are they unfair?

Employment contracts may contain restraint of trade clauses. However, not all restraint of trade clauses are the same and are therefore largely dependent on the nature of the work and nature of employer the employee will be involved with.

The purpose of restraint of trade clauses is to protect the proprietary interests of the employer (which can be anything from the employer’s goodwill to the employer’s client base). This is done by providing that after termination of the employees contract the employee may not: work for the employer’s competition or start a business in competition for a certain period of time, within a particular geographical location or perform certain services. There are no fast and steady rules as to what such a clause should contain but there are guidelines as to how far it should extend.

Several cases have developed the precedent to determine the guidelines as to how far the restraint of trade clause is allowed to extend before it starts infringing on ones right to freedom of trade in terms of section 21 and the right to fair labour practices in terms of section 22 of the Constitution. The most important are those of Basson v Chilwan 1993 and that of Reddy v Siemens 2007.

Basson determined that there are 4 requirements which must be met in order for the restraint of trade clause to be valid.

1. There must be a legitimate interest that is protected (of the employer)
2. That such an interest will be prejudiced should the restraint of trade clause be contravened
3. Is the prejudiced interest of the employer greater than the right of the employee to be economically active after termination?
4. A consideration for current public policy.

Reddy then further elaborated on Basson and added that reasonableness entails a value based judgement. In order to determine such a value based judgement, the court added a 5^th factor to be considered. Does the restraint of trade go further than just protecting the interests of the employer?

The above requirements are seen from a judicial point of view when judging such a clause. In simplifying these factors the potential employee must look at:

1. How long such a restraint will last,
2. Where can you not work (geographical location and other competing employers),
3. What is the restraint of trade clause actually protecting, and
4. How will this restraint affect you after you leave that place of employment?

For more information and advice on Restraint of Trade clauses, contact Du Toit’s Attorneys on 012 742 0100 or 012 643 1882. Alternatively, you can send an email to: johan@dutoitsattorneys.co.zaor hanja@dutoitsattorneys.co.za