A Restraint of Trade seeks to prohibit any person having an interest in any business entity, in any capacity such as a partner in a partnership, shareholder of a company, employee and the like, from competing with the business entity in which he / she had been interested in. This article is limited to the manner in which an employee may be restrained after termination of his / her employment with the former employer, whether by resignation or dismissal.
A restraint is often included as a standard provision in a contract of employment. It seeks to restrain / prohibit an employee from being interested in any capacity which are specified therein (which is all encompassing) in a business enterprise which is in competition (not those which are not in competition) with the former employer for a specified period of time and within a specified area.
The enforcement of a restraint of trade, may obviously have a severe impact on the employee’s position to be able to earn a living from his / her profession / trade.
Restraints are not being enforced by the Court per se.
The law seeks, by the application of considerations based on public policy, to determine the conflictory interests of the former employer and the employee on an equitable basis, to determine whether a restraint of trade must be enforced or not.
Although public policy is a wide term, the Courts have considered the practical application thereof on restraints of trade and does not allow the enforcement thereof under circumstances in which:-
1. the restraint provision may be considered “too wide”, on the basis of the area and period for its enforcement – the Court will not reduce the area and time, as it is not a party to the agreement;
2. confidential information / proprietary interests of the former employer will not be utilized in the business entity in which the former employee is now interested in;
3. the former employee had not been compensated for his / her willingness to have entered into the restraint of trade. An acknowledgement that such a compensation is built into the employee’s remuneration package in the restraint of trade clause is proof of such compensation;
4. based on a consideration of any other factor/s which may tilt the balance of the scale in favour of the former employee or the former employer.
Confidential information does not include knowledge which is available in the open domain, but rather what is termed trade secrets, primary examples of which are a list of the employer’s customers, the prices at which the employer sells its products or renders its services, technical knowledge such as a Coca Cola recipe, processes in manufacturing products and the like. It is emphasised that any information is available in the public domain cannot be termed a trade secret/s and an employee may therefore not be prohibited from utilizing knowledge / experience gained at the former employer which is in the public domain. Proprietary interests have the same connotation, in that information which is not available in public, is an asset owned by the former employer.
The employer may approach the Court to enforce the restraint on the mere basis that the former employee is interested in another business entity competing with it and that confidential information / trade secrets had become available to employee during the period of employment, but does not have to prove that the employee in fact utilizes such information at the business entity in which the person now has an interest, the onus in this regard being on the employee. The mere fact that the former employee is so interested in a competitor of the former employer draws an inference that the employee is likely to utilize such confidential information upon the termination of his / her employment. It is in practice often so that the business entity which competes with the former employer employs the former employee in order to have such confidential information available to it and thereby enables it to compete with the former employer, which is considered to be unfair.
The new employer is not bound to a restraint of trade clause between the employee and former employer, as it is not a party to that agreement, but the employment of the employee may justify an action / interdict against the new employer on the basis of unlawful competition.
An employee who is not contractually bound by a restraint of trade clause may nevertheless be restrained from being interested in another business entity competing with the former employer, on the basis of the common law of unlawful competition. It is less likely that the Court will enforce a common law restraint of trade, than a contractually agreed upon restraint of trade, as in the latter event the employee has voluntarily and willingly agreed thereto.
Disclaimer: This article is for information purpose only and does not constitute legal advice. Call on our attorneys for legal advice, rather than relying on the information herein to make any decisions. The information is relevant to the date of publishing.