Restraints of trade are still common in the workplace, particularly at middle and senior management levels, even though there is no certainty that the restraint agreement will be binding.
If the reasonableness of the restraint is disputed, the Labour Court will consider all the conceptual and structural dimensions of the agreement. There have been several cases where the court did not enforce the restraint.
However, in a recent case in the wealth management industry the Labour Court found that a restraint of trade signed by a former employee was enforceable and the duration of the restraint for two years was not unreasonable.
Brenthurst Wealth Management brought an urgent application to enforce its restraint of trade agreement against a former employee, Gustav Reinach. Reinach left the services of Brenthurst and took up employment with competitor PSG.
According to the court judgment, Brenthurst warned Reinach of his obligations under the restraint agreement but only took the matter to court when the firm started losing clients to Reinach and PSG.
The court interdicted Reinach from disclosing any confidential information of Brenthurst to any person. He is also restrained from inducing, soliciting, or encouraging any client to terminate their contractual relationship or engagement with Brenthurst for two years.
Patrick Dayle, labour arbitrator at Deale Attorneys and acting judge of the Labour Court, says when there is a “provable” breach of an agreement, the remedy is to approach the court for an urgent interdict. “The house is on fire, and the longer you wait, the more the damage.”
The business does not have to show that actual harm has already been done. The court will enforce the restraint if the employer can show there is “serious potential” for harm if the ex-employee is allowed to trade freely in the market. The facts of the case will determine whether the potential exists.
Dayle says the court must balance the rights of the employer to protect its legitimate business interests, which include its intellectual property and trade secrets (protectable interests), against the rights of the employee to earn an income from his or her trade in an area in which he or she has knowledge and experience.
Brenthurst also asked the court to prohibit Reinach from working for PSG. The court, however, found that Brenthurst could not show a breach of its protectable interest in this respect and was bound to fail.
The Labour Court and the Labour Appeal Court consider whether the party has an interest worthy of protection, whether the interest is being threatened by the other party, whether the interest weighs qualitatively and quantitatively against the interest of the other party to earn an income, whether there are public policy issues, and whether the restraint goes further than necessary to protect the relevant interest.
The duration
The shorter the restraint, the more enforceable it becomes. The duration is generally six months, but most often 12 months. Anything longer than that – for example 24 months – becomes “shaky” on enforceability.
Zawadi Dlamini, a senior associate in Bowmans’ dispute resolution department, recently highlighted two case that were handed down on the same day in the Labour Appeal Court.
In the one case, the court upheld a restraint of trade for two years but reduced the duration in the second case from two years to one.
“In the absence of convincing and compelling reasons that justify the duration of the restraint, our courts may reduce the operation of an otherwise reasonable restraint to a period that, in its judgment, will sufficiently protect the interest sought to be protected, while also protecting an employee’s freedom of trade,” he wrote in an article on the firm’s website.
“Employers who seek to enforce long restraints will, accordingly, need to be prepared to justify them,” he adds.
The scope
The agreement must specify what activities the employee is prevented from engaging in within the period. It should define in as much detail as possible the employer’s protectable interest.
A court will not enforce an agreement that wants to prevent a salesman in a chemical company from selling chemicals for another company. However, the court may find a restraint reasonable that prevents the ex-employee from sharing confidential information about the pricing, unique formulas, or marketing strategies of the company.
The area
The area may include the client base of the employer. For example, if it is a professional practice, the former employee may be restrained from working within a radius of 20km from the practice. However, it again becomes shaky if the restraint covers the entire country without compelling reasons.
If one area of these elements is rendered unfair, it does not make the entire restraint unfair, Dayle says. The court will consider the facts and may decide to amend the agreement to make it fairer.
Freedom of choice
If an employee refuses to sign a restraint of trade agreement as part of the employment contract, the employer can refuse to employ the person. However, if the employer asks the employee to sign a restraint of trade a year or two into the employment contract because of changing circumstances, the employee may refuse.
The employee may argue that it amounts to an unreasonable “material change of conditions of employment”. If the restraint proves to be reasonable, the employer may terminate the refusing employee’s employment because of operational reasons.
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Amanda Visser is a freelance journalist who specialises in tax and has written about trade law, competition law and regulatory issues.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute financial planning, legal or tax advice that is appropriate to every individual’s needs and circumstances.
