Acquiring a job or establishing one’s own business is possibly one of the most monumental things in one's life. However exciting as it may be, there are always proprietary rights, such as intellectual property, among others, that need to be protected. The need for such protection always creates complexities and may have prejudicial consequences for former employees and employers. These complexities could be addressed through the drafting of restraints of trade or non-compete agreements/ clauses in employment contracts, as will be explained below.
This article explores the most important aspects of restraints of trade to help employers and employees to understand better and make more informed decisions regarding employment contracts.
What is restraint of trade?
It is a contractual agreement between an employer and an employee in terms of which the employee agrees not to take up similar employment with the competitor(s) of the employer, or create competition, upon termination of their employment contract. The restraint applies with respect to a specific duration, geopolitical area and radius.
According to the David Crouch Marketing CC v Mark (J2499/08) [2009] ZALC 63 judgment, former employees are prohibited from enticing their former employers’ employees, clients and/or affiliates, to leave the organnisation for another. They also, according to the Rawlins and Another v Caravantruck (Pty) Ltd. [1993] All SA 389 case, cannot establish their own businesses, in competition with their former employers, during the prescribed period after the termination of their employment contract.
Restraints of trade may form part of an employment contract, or may also consist of a separate document that is supplementary to the employment contract. Employers may request employees to sign the restraint of trade agreements weeks or months after they have commenced working. Where a restraint of trade clause is not part of an employment contract, the court in Marshall v Vistech Communications (1994) 15 (ILJ) 1365 (IC) ruled that employees cannot be compelled to sign the contract, since the restraint of trade clauses were not part of the initial employment agreement. Ideally, restraints of trade should be a separate document so as to easily ensure that they comply with all formalities and contain all the necessary information.
Purpose of restraint of trade
Restraints of trade protect the proprietary interests of employers. For example; trade secrets, confidential information and other intellectual property rights. In Hirt & Carter (Pty) Ltd v Mansfield & Another 2008 (3) SA 512 (D), the court held that proprietary interests must be unique to other techniques elsewhere, not in the public domain, and must be objectively useful to the potential new employer.
Restraints of trade should not solely to be intended to arbitrarily block former employees’ career progression. Similarly, as held in Automotive Tooling Systems (Pty) Ltd v Wilkens and Others 2007 (2) SA 271 (SCA), they should not be for the sole purpose of eliminating or limiting competition. The prohibition from establishing businesses in competition with the former employers is particularly so that they do not have a competitive advantage against their former employers with the inside information that they acquired whilst they worked for the previous employer.
Validity of restraints of trade
Non-compete clauses or restraints of trade have often been perceived as gross violations of one’s Section 22 Constitutional right to choose their trade without arbitrary limitation. A similar position was affirmed in an old English law case, Nordenfelt v Maxim Nordenfelt Guns and Ammunition Co Ltd [1894] AC 535 (HL), wherein the court held that restraints of trade are against public policy, therefore invalid and unenforceable.
Contrary to the aforementioned English law position, the recent cases of Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SA 874 (A) and J Louw and Co (Pty) Ltd v Richter and Others 1987 (2) SA 237 (N), held that restraints of trade are, at face value, valid. The contractual maxim, pacta sunt servanda prevails when regulating restraints of trade, as they are contractual in nature. The Section 22 Constitutional right is therefore limited in terms of the freely consented and signed restraint contract, as long as it is not against public policy, or unreasonable, thus unenforceable.
Challenging validity and enforceability
The court in Basson v Chilwan and Others 1993 (3) SA 742 (A) asserted that former employees bear the onus to prove the unreasonableness of the restraint of trade agreement in question. In practice, former employers bear as much onus to prove their protectable proprietary interests, because these interests must be worthy of legal protection and must be of economic value. In Magda Alloys and Research (SA) Pty Ltd. v Ellis the court devised the following factors to test whether or not restraints of trade are reasonable, hence valid and enforceable:-
Duration of the restraint - the restraint usually persists for between three (3) and twelve (12) months after termination of employment. In Best Financial Services (Pty) Ltd. v Smith and Another (1991/2018) [2018] ZAFSHC 46, the court held that three (3) years was too long, and would render the former employee redundant in the ever-changing market. Conversely, three months was permitted for a restraint of trade agreement in Dickinson Holdings Group (Pty) Ltd and Others v Du Plessis and Another [2007] 1 All SA 583 (D), due to the nature of the work involved.
Geographical area to which the restraint applies - this will typically be in the city and the environs of the former employers’ offices. Some industries especially finance and tech often have the restraints operating throughout the country because of the nature of their work. In Den Braven SA (Pty) Ltd v Pillay and Another 2008 (6) SA 229 (D), the court found the restraint was too wide, thus only limited it to the KwaZulu Natal province of South Africa.
Whether a restraint payment was paid to the employee - non-managerial and executive former employees may need these funds after the termination of their employment. It is imperative that companies effect restraint payments to avoid breaching contracts.
The employee's ability to earn a living - being able to have a home, food and healthcare are Constitutional rights, and may not be arbitrarily limited. Former employees must be able to live, either through the restraint payments or from another source. If the restraint payments are not made whilst the former employees have no other source of income, employers may be deemed to have breached the restraints, bringing about unnecessary complications.
The proprietary interest or asset the employer seeks to protect - companies, especially in the tech industry, develop their own unique strategies and coding programmes which are protected as intellectual property. As a result, in Reddy v Siemens Telecommunications (Pty) Ltd 2007 2 SA 486 (SCA), the court held that it is not necessary to prove that former employees in fact used the former employers’ trade secrets. The fact that former employees can and have the opportunity to use and/or reveal the trade secrets to another employer, is sufficient enough for the court to enforce such restraints.
The courts will apply the above factors to each case, based on its own merits. In the recent Oomph Out of Home Media (Pty) Limited v Brien and another (2021) JOL 49492 (GJ) case, the court held that enforcing an eighteen (18) month long restraint, amid Covid-19-related economic hardships, would be unreasonable. Also, the former employee in this matter, Brien, was also owed ZAR1.2 million by the former employer. This case may have far-reaching implications for employers. It is noteworthy that the most exceptional circumstance considered by the court was Brien's livelihood, under the circumstances of Covid-19. This special consideration implies that, under normal economic circumstances, the court may have not reached the same conclusion.
Where a restraint has never been signed or agreed upon, former employers cannot legally seek to enforce any restraints against former employees, as was found in the case, Strike Productions (Pty) Ltd v Bon View Trading 131 (Pty) Ltd and Others (10/21704) [2011] ZAGPJHC 1. Furthermore, the court in Info D B Computers v Newby and Another 1996 (1) SA 105 (W), found that constructive, fraudulent, malicious and unfair dismissals may see courts invalidate and deem the restraints unreasonable, therefore unenforceable. In line with section 189 of the Labour Relations Act 66 of 1995, restraints o trade may be negotiated during retrenchment processes to mitigate the detrimental effects to the livelihoods of the former employees.
Generally, ambiguous, wide and far-reaching restraints are deemed unreasonable and unenforceable as was held in Interpark (South Africa) Ltd v Joubert and Another (09/29946) [2010] ZAGPJHC 39. In casu, it was further held that it would be flawed to have the same terms of restraints between executive, managerial and junior/administrative staff at a workplace. Restraints of trade are intricate and require careful legal consideration and drafting. Therefore, it is advisable to acquire the services of legal experts on the subject.
Conclusion
Restraints of trade are at face value lawful, reasonable and enforceable in so far as they are not ambiguous, unduly wide, and against public policy. However, where restraints payments have not been paid out make it likely that there would be a breach, thereby courts ruling in favour of the former employees.
It is important that employees understand, and where necessary, negotiate the restraints of trade, and the compensation thereof. As a condition of employment, employers may withdraw the employment offers should prospective employees refuse to sign reasonable restraints. However, the employers may not, after weeks or months. force employees to sign prejudicial restraints in the event that they were not part of the initial negotiations and subsequent employment contract. It is advisable that restraints of trade be discussed and negotiated where necessary, to avoid any issues and resort to the courts.
SOURCES
4. ”Restraints of Trade: What does it mean?” by Jeremy Simon & Wesley Scheepers - GoLegal (Abrahams & Gross Attorneys)
5. “South Africa: Restraints of Trade during the Covid-19 pandemic“ by Melissa Cogger - Bowmans Attorneys
6. Case law - full citations in-text