Enforcing employee restraints of trade after termination of employment

This article was written by Steven Adams, an associate at Norton Rose Fulbright South Africa

Introduction

As opposed to various other jurisdictions, such as the United Kingdom, in South Africa, restraints of trade are generally enforceable unless the restraint is found to be unreasonable and contrary to public policy.

The purpose of enforcing a restraint of trade clause is to protect an employer’s proprietary interest.  These interests are usually in the nature of confidential trade secrets, know-how and pricing or customer connections.  The right to choose and practice a trade is a constitutional right (section 23 of the Bill of Rights) and can only be restrained by reasonable and justifiable means.

The proprietary interest sought to be protected will be weighed up against the limitation placed on the employee’s freedom to trade, and the question will be considered whether the company’s proprietary interest (ie its right to protect its trade secrets or customer connections) outweighs the right of the employee to work in his/her chosen profession and the employee’s rights to dignity, equality and freedom.

A restraint of trade will be unreasonable if it is designed merely to eliminate legitimate competition by an erstwhile employee.  South African courts have held that the mere prevention of competition for skilled labour is not a proprietary interest that justifies protection in a restraint.  Employees are entitled to use the general knowledge and skills acquired during employment with a particular employer once they leave its employment, even if their new employer benefits from such knowledge and skills.

Restraints of trade can only be imposed with an employee’s agreement. This is most easily obtained at the time that the employee concludes his/her employment contract prior to commencing employment with their employer.

If it is an existing employee, agreement is most easily obtained by an employer at the time that an employee is promoted because the offer of promotion comes with new terms and conditions, such as increased remuneration, benefits and incentives as well as restraint of trade obligations.  This assumes that the new position brings with it new secrets and connections.

The general legal principles

The leading case on restraints in South Africa is Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SALJ 874 (A).  The following principles were adopted:

• On the face of it, every restraint agreement signed by the employee is enforceable. Where an employee wishes to be released from her restraint obligations, traditionally, the onus lies on the employee to show that the restraint is not only unreasonable, but contrary to public policy.
• In determining whether a restraint is against public policy, a court will look at the facts and circumstances at the time that the employer is attempting to enforce the agreement against the employee and weigh up two main considerations.  The public interest requires, in general, that parties should comply with their contractual obligations.  The countervailing principle is that consideration that all persons should, in the interests of society, be permitted as far as possible to freely engage in commerce or their chosen professions.
• In determining whether a restraint is enforceable, a court will consider, among others, the following factors:
  • the duration of the restraint;
  • the area to which the restraint applies;
  • whether a restraint payment was paid to the employee;
  • whether the employee still has the ability to earn a living;
  • the proprietary interest or capital asset that the employer seeks to protect.

The proprietary interest

In South African law, a restraint is only valid if there is a proprietary interest which justifies protection.  Therefore, a restraint would be an enforceable restriction on the activities of an employee who (for example) had unfair access to the company’s clients and could use their relations with the company’s clients to the advantage of a competitor to the detriment of the company.

An employee may legitimately complain about the enforcement of a post-employment restraint of trade provision if they can show that its enforcement would be contrary to the public policy which is informed by the values of the Bill of Rights.  Usually it will be contrary to the public interest to enforce a restraint of trade where there is no real threat to the employer’s confidential information, trade secrets or customer connection/s. There must be a proprietary interest which justifies protection.

Freedom to trade

The company’s proprietary interest sought to be protected will be weighed up against the limitation placed on a person’s freedom to trade, and the question will be considered whether the company’s proprietary interest (ie its right to protect its trade secrets, know-how, pricing or customer connection) outweighs the right of the party against whom it is being enforced to exercise his/her chosen profession, skills or occupation. Rights factors such as the indignity of unemployment or underemployment will be relevant.

Restraint payments

Whether or not a restraint payment is made to the employee is only one of the factors that a court will consider in determining the reasonableness and enforceability of the restraint of trade.  If a restraint of trade payment is made, it is more likely that a court will find that the restraint is not unreasonable, if the individual has been adequately compensated for the limitation placed on their freedom of trade.  However, the absence of a restraint payment does not mean necessarily that the restraint is unenforceable and the courts have frequently enforced restraints where no such payment has been made.

Restraint period and restraint area

It will also be contrary to the public interest to enforce a restraint where it can be shown that the period of the restraint is unreasonably long when considered in the light of the interests that the employer is seeking to protect; or that the geographic area in which the restraint applies is unreasonably wide in relation to the extent of those interests.

The enforcement process

Should a prior employer seek to enforce a restraint, it would generally commence proceedings by writing to the new employer and the employee and demand that they provide an undertaking that the new employer will not employ the employee in contravention of the restraint undertaking.

If the new employer and/or the employee fail to give this undertaking, the previous employer would need to approach the High Court or Labour Court on an urgent basis to enforce the restraint.

The new employer, together with the employee, would normally both be cited as parties to the proceedings. The new employer would then have to decide whether to oppose the restraint application or abide the decision of the court. If it opposed the proceedings and the court upheld the restraint, the new employer would in all likelihood be held jointly and severally liable for the costs of the court proceedings.  In other words, not only would the new employer and the employee have to pay their own legal costs, but also those of the old employer.  The restraints are brought to court on an urgent basis and the legal costs involved can be significant. A new employer who deliberately breaches a restraint may also be liable for the resultant losses suffered by the previous employer

Although the substantive position is that a restraint is enforceable unless it can be shown to be unreasonable – which places an onus on the person who seeks to escape it – the usual method of enforcement of a restraint undertaking is through an interdict in motion proceedings (ie the court is asked to enforce the restraint so that the erstwhile employee is not permitted to continue working for a competitor).

In practical terms, this means that the applicant in motion proceedings for all intents and purposes has to show that the restraint is reasonable or it will fail to show its entitlement to an interdict.  In the majority of cases, therefore, the real burden is upon the old employer of the undertaking to demonstrate the reasonableness of the restraint.

The old employer will need to establish that not only is the restraint reasonable in its ambit and duration, but that it has a real proprietary interest which is deserving of protection.

The old employer does not need to show that the employee will use proprietary knowledge to benefit the new employer but merely that there is a risk that the employee will do so.  Ultimately, it is a question of fact whether alleged trade secrets are truly confidential or just claimed to be confidential.

Should the court rule that the restraint is enforceable, the new employer would be precluded, by law, from employing the employee for the period of the restraint.

In practice employers frequently include a restraint provision as a standard term in their template contracts of employment, and will generally want to enforce the restraint under any circumstances. Employers, should however, first conduct an evaluation and determine whether or not there is a proprietary interest worth protecting before imposing restraints.