It is every employer's worst nightmare. The employee in whom you invested so much leaves to go and work for a competitor. If the talk around braai fires are anything to go by, agreements in restraint of trade are not worth the paper its written on, right? It seems that every executive has a friend, cousin or ex-colleague who brazenly trashed a restraint of trade that the employer could not or did not want to enforce.
Without detracting from the sage words uttered around sacred fires lit on a Saturday afternoon, what is the view of our judiciary in respect of restrictive covenants? What are the reasonable actions a wily employer could take to increase its prospects for success in litigation to enforce a restraint of trade agreement?
The legal position in respect of a restraint of trade agreement remains that such an agreed restriction on the employee's ability to be economically active post termination of employment is valid and enforceable unless the court holds differently. Our courts will decline to uphold such a restriction where there is no interest worth protecting or the agreement is otherwise against public policy. We discuss these basic requirements below.
What should companies consider to maximise the prospects of its restraint of trade agreement being upheld after termination of employment?
The Labour Court regularly recognises and upholds agreements in restraint of trade. To ensure a restraint of trade will be enforceable after termination of employment, companies should take into account the following questions and considerations before agreeing to the terms of the restraint:
- Is there an interest deserving of protection, i.e. a protectable interest? Companies should record the proprietary interest it is seeking to protect in the restraint of trade agreement. Usually, this relates to customer information, trade connections, goodwill, trade secrets, confidential information, pricing, marketing strategy and so on.
- Is that interest being prejudiced? This question becomes more apparent when faced with a potential breach of the restraint of trade. If an employee decides to go into a completely different business, it is unlikely that the company's protectable interest will be prejudiced. However, if an employee takes up employment with a direct competitor, the protectable interests of the company would likely be threatened. When drafting a restraint of trade agreement, companies are well advised to take into account the circumstances in which a breach would occur to ensure that the restraint appropriately covers all potential prejudice.
- If prejudiced, how does the protectable interest of the company weigh up against the interest of the employee to not be economically inactive and unproductive? This requires a balancing act between the interests of the company on the one hand, and the employee on the other. This is particularly relevant when determining the duration and geographical area of the restraint. Companies sometimes compensate employees for restraint of trade obligations to strengthen the likelihood of a restraint being enforceable.
- Does public policy require the restraint to be enforced or disallowed? Public policy considerations do not concern the relationship between a specific company and employee, but rather whether the enforcement of the restraint of trade would harm the public interest generally. This enquiry requires a balancing act between the principle that everyone should have freedom to trade and earn a living, and the principle that all contracts freely entered into should be enforced, and underpins the need for the restraint to be reasonable in a wider sense.
- Is the restraint wider than is necessary to protect the protectable interest? Again, this is particularly relevant insofar as the duration and geographical area of the restraint is concerned. The company should interrogate how broad the restraint should be to protect the protectable interest and ensure that it remains proportionate to the need to protect the protectable interest. In doing so, the company may take into account market standards, the nature of the protectable interest and any other factors that may be relevant. For example, in some industries, confidential information that the employee will be exposed to will become outdated after 6 months, therefore a 2 year restraint of trade may be unreasonable.
What can companies take away from this?
Because of the restrictive effect a restraint of trade agreement will have on the economic rights of an employee, it is important to analyse not only the nature of the employer's business, but also the role that the employee plays in respect of such business. Where an employee never had any real exposure to the employer's technical or other confidential information, or any relationship with customers or suppliers, a restraint of trade agreement may not be necessary. Companies should assess their policies and template documentation to ensure restraint of trade agreements concluded with different categories of employees will be enforceable after termination.