When is a Restraint of Trade Clause Enforceable?
The restraint of trade is a clause in the employment contract to protect the employer against infringement of its proprietary interest, such as trade secrets, customer contacts, trade expertise, and pricing regimes. It is not intended to restrict an employee’s right to trade in their field of expertise after termination of employment at the particular employer. As such, the nature of the restraint of trade clause is important in considering whether it is fair.
Reasonability of the Clause
In determining the fairness and reasonability of a restraint of trade clause, it is important to weigh up the interest that the employer wants to protect against the degree of limit that the employee experiences in terms of the employee’s freedom of trade. One has to ask what type of interest is protected and whether the restraint of trade clause hinders the ability of the employee to work in their profession of choice. One also has to consider how the employee’s equality and dignity rights are affected.
If the employer simply adds the restraint of trade clause as a means with which to prevent the employee from becoming legitimate competition after leaving the employment, then it is certainly not reasonable. It cannot be inserted in the employment contract merely to protect against competition. Employees cannot be expected to not use the skills and knowledge they have gained once they leave their current employment.
Where Can It Be Used?
Note that the restraint of trade clause is only valid as part of the employment contract. The employer should thus ensure that the employee reads, understands, and agrees to the terms of the clause upon signing the employment contract.
If the employer wishes to introduce the clause at a later stage of the employment, then the best time to do so is when the employee is offered a promotion and such a promotion entails other terms and conditions of employment than originally signed. With such a promotion comes new responsibilities and benefits. The employee then has the opportunity to decline the promotion if the employee does not want to sign the restraint of trade clause.
Contesting Reasonability and Enforceability of the Restraint
If an employee wants the restraint of trade clause scraped or voided after having agreed to it, then the employee must be able to prove that the clause is not in line with public policy and is unreasonable.
For the clause to be contrary to public policy, the court will consider principles of public interest, for example, parties to a contract should meet their obligations related to the contract. This is weighed up against the principle of people having the freedom to work in their profession of choice.
To determine the enforceability of the restraint of trade clause, the court considers what the duration of the particular restraint is, which areas are affected, and whether or not the employer has made a restraint payment to the employee. The court also considers whether or not the employee is able to earn a living in their profession of choice if they adhere to the requirements of the clause.
An employer may, for instance, have such a clause in the employment contract to prevent an employee who has access to the company’s clients from using the connection with the clients to give a competitor an advantage that can cause financial loss for the current employer.
How the Restraint Payment Affects Enforceability
Even if the employer has made a restraint payment to the employee, the court will still consider other factors, such as the limitation of the employee’s freedom to trade in their chosen profession, whether it is against public interest, and the area which it applies to
How the Area and Timeframe Affect the Enforceability
If the restraint period is too long, the court can rule that the restraint is unreasonable. The same applies to the geographic area where it is enforceable. One cannot, for instance, make it applicable across the entire country if it is not reasonable in direct relation to the company’s proprietary interests.
Call our attorneys on 011 234 2125 for assistance in drafting, enforcing, or contesting a restraint of trade clause.
Disclaimer: This article is for information purposes only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing – February 2019.
