With employees job-hopping more than ever, companies put at risk their clients, strategies and technical advantages if their employees are not properly restrained from moving on to competitor companies by enforceable restraints of trade. Although the Appellate Division has said with certainty that restraints of trade clauses are presumed to be enforceable in South African law, any agreement will become unenforceable where it contradicts public policy.
Because public policy is framed and developed by the South African Constitution, an employee’s right to choose their trade freely will now influence whether a restraint clause is enforceable, because their constitutional right cannot be unreasonably limited. Still, where a clear restraint of trade clause exists in an employment agreement and the employee knowingly entered into that agreement, the clause will bind the employee unless s/he can prove that the clause is unreasonable.
The test for reasonableness in restraints was set out by the Appellate Division as follows:
- Does the employer company have an interest that deserves protection?
- Is the former employee in a position to prejudice that interest?
- If so, does the employer’s interest weigh qualitatively and quantitatively against the employee’s interest not to be economically inactive and unproductive?
- Is there any aspect of public policy, with nothing to do with the employment relationship, which requires the restraint to be maintained or rejected?
The Supreme Court of Appeal rejected the possibility of employees undertaking not to disclose confidential information in order to avoid a restraint clause, saying that the employee having the opportunity to disclose information (whether deliberately or not) is sufficient prejudice to the former employer.
Practically, the courts have considered the restraint’s scope, duration and area of enforceability in balancing the parties’ competing interests. Courts will also take into account the bargaining power dynamics between parties in any contractual interpretation. The court will then have to make a value judgment as to whether the employee was unreasonably restrained in the circumstances.
It is therefore imperative that employers guard against the possibility of a restraints clause being so restrictive that it is rendered invalid. It should be sufficiently narrow to still allow an employee to work in their chosen area while precluding them from working for the employer company’s direct competitors.