One of the difficulties an employer may face in business is staff turnover, which can lead to a loss of operational capacity and skills needed to perform a business’s functions, ensuring productivity. Continuity is essential for the effective operation of a business. It may cost an employer time, effort, and money to find a new employee and to sufficiently invest time and resources into training their skills and knowledge to bring the new employee up to the required performance standard of the business.
The problem is compounded in that employers may not find sufficiently capable employees, and the cycle may repeat at the cost of production and resources.
Often, departing employees may join a competitor to the employer, which could directly affect the productivity of a business as the employee may attempt to bring over clients and “business” to that competitor. An employee may further implement strategies and trade secrets learned previously, which will ultimately benefit the competitor.
What can an employer do to avoid such a situation?
A restraint of trade is a provision within an employment contract which stipulates that the employee is restricted from taking up employment doing similar work in the event of termination of employment. The application of a restraint of trade prohibits an employee from conducting similar work, which is a further constraint to the reasonableness test that determines whether a restraint of trade is enforceable, with consideration to the following factors:
- The geographic location of enforceability;
- The period in which the restraint is in effect; and
- The interest upon which the employer is seeking the restraint.
It is evident from the nature of a restraint of trade that such provisions give rise to socio-economic concerns where there is a balance between the interests the employer seeks to protect and the conflicting interests of the employee’s ability to practice their trade.
A restraint of trade obligation comes into effect once the party bound by the obligation leaves the employer. The obligation is required to be honoured by the party. If they violate the obligation, the party seeking protection in terms of the restraint of trade may seek legal action to enforce the obligation following the breach of contract. This can result in expensive legal fees in pursuing the enforcement of a restraint of trade.
An employer seeking to rely on the enforceability of a restraint of trade agreement has a vested interest in protecting information, goodwill and trade secrets that would have a “material” impact on the employer’s operations. It is, therefore, of particular importance that employers adopt well-written provisions for restraint of trade agreements to avoid the consequences of unenforceable agreements. Where a restraint of trade agreement is not enforceable, the employer may find itself in a position of potentially losing clients or trade secrets to competitors resulting in economic loss to the business.
Employers must take note that for a restraint of trade to be enforceable, it must be reasonable, implying that a reasonable restraint of trade must not be contrary to public policy.
Article By: Wesley Lazarus
Dispute Resolution Official – CEO George