Restraint of Trade and its Impact on Employees

An employee should be very wary when signing an employment contract that contains a restraint of trade clause. A restraint of trade clause is inserted in an employment contract when an employer is of the belief that the company has a proprietary interest that needs protection. The proprietary interests of the company pertain to things such as confidential information, client lists, skills acquired during the course and scope of employment, know-hows and trade secrets.

The restraint of trade affects an employee when the employment relationship is terminated and the employee seeks employment with a competitor or a company often  within a specified geographical area.

However, the clause may only be executed to the extent of its reasonableness.

To ascertain the reasonableness of the restraint the courts will consider:

1. If the company has a “legitimate proprietary interest worthy of protection”; and
2. Public interest and policy.

The person wanting to declare that the restraint is unreasonable bears the onus of proof.

The leading case Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SALJ 874 (A) dealt with the aforementioned, particularly the “reasonableness test” and stated as follows:

• The courts found that any contractual agreement where the signatory is aware of the clause, the contract should be enforceable;
• Should an employee wish to be released from the restraint, the employee bears the onus to prove that the restraint is unreasonable and against public interest/ policy;
• Public interest – that all persons should comply with their contractual obligations;
• Public policy – that every person should be allowed to freely choose their trade and occupation;
• The reasonableness and enforceability of the restraint is dependent on the following factors:
• the duration of the restraint;
• the reasons for which the employer has provided the restraint;
• 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.

To determine if there is a “protectable interest” the case of Basson v Chilwan & Others 1993 (3) SA 742 (A) provided a test to determine if it would be reasonable to enforce the restraint, the following questions were asked:

• does the one party have an interest that deserves protection after termination of the agreement;
• if so, is that interest threatened by the other party?
• in that case, does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?
• is there an aspect of public policy, having nothing to do with the relationship between the parties, that requires that the restraint be maintained or rejected?

The courts will weigh out the proprietary interest of the company against the employee’s interest to continue in his/her trade, though it is uncertain on how the courts may decide and each case is decided on its own merits.

The clause is quite controversial however it is very well executed in South Africa, and as a result an employee must carefully consider same with a potential employer before merely signing an employment contract with the clause. An employee should thus be wary should the employment contact contain the clause, as it may be severly detrimental to the employee in the future.

TRISHA PILLAY works in the Labour Department at Alan Levy Attorneys Notaries and Conveyancers. Trisha can be contacted on enquiries@alattorneys.co.za or 011 326 8050.