In South Africa, restraint of trade clauses are commonly included in employment contracts to protect an employer’s legitimate business interests. These clauses restrict employees from working for competitors, starting a competing business, or soliciting clients or staff after leaving the company.
A restraint of trade clause is enforceable unless it is found to be unreasonable and contrary to public policy. The key legal principle, established by the courts, is that agreements freely entered into must be honoured unless they impose unreasonable restrictions.
When evaluating a restraint clause, courts consider several factors:
- The duration and geographic scope of the restriction.
- The nature of the employee’s role and access to confidential information.
- Whether the employer has a legitimate business interest to protect.
Overly broad clauses, such as those that extend for several years or cover large geographic areas without justification, are likely to be set aside.
In a recent Labour Court decision, an oil and lubrication retailer sought to amend a restraint clause in its employment contracts. The employer had experienced a situation where an ex-employee attempted to solicit its customers and entice them to do business with him.
In an effort to protect their business, the employer introduced an amended restraint clause in their employment contracts, extending the period to 24 months and the geographical area to include the entire Republic. There were also some other amendments effected to the clause as well.
All but one employee agreed to the amendment. The uncooperative employee was subjected to a Section 189 process and subsequently retrenched. The employer cited operational requirements and the protection of its economic interests as the reasons for termination.
Aggrieved by his dismissal, the employee referred his dispute to the CCMA, where the arbitrator awarded in excess of 10 months’ compensation. In turn, the employer referred the award to the labour court for a review application, citing numerous grounds.
In its finding, the Labour Court agreed with the arbitrator’s outcome. Importantly, it had found that the employer had failed to substantiate its ground that there was an economic operational need to retrench the employee. The court found that the employer had failed to:
- Prove the general need for a restraint of trade.
- Prove the operational reasons for the retrenchment and prove any losses it claimed would materialise from the employee’s failure to sign the restraint of trade.
- Justify why a restraint of trade of 24 months and covering the entire country was necessary.
Importantly, restraint clauses should not be used as punitive tools. They must balance the employer’s need for protection with the employee’s right to earn a living.
By understanding and applying restraint of trade clauses judiciously, employers can safeguard their organisations’ interests while maintaining fairness and legal compliance in employment practices.
Article by Stephen Kirsten
Provincial Manager at Consolidated Employers Organisation (CEO SA)