What does including a restraint of trade in an employment contract mean for you and your employee?

Can you turn to South Africa’s Labour Law when an employee has breached their Restraint of Trade Agreement?

Simply put, no.

When it comes to settling arguments regarding a former employee who has taken up employment with a competitor even when his contract clearly stated he couldn’t, the Law of Contract is your go-to guide.

What is a Restraint of Trade?

The restraint of trade agreement is a clause added to an employment contract in which the employer stipulates certain work restrictions that will come into effect, should an employee resign. Not all company contracts will have restraints of trade.

In fact, because employers are involved in different industries and have different assets, the circumstances surrounding a restraint on trade may vary significantly from one company to the next.

As an employer, when should I include a restraint of trade?

Restraints of trade are recommended in two instances:

1. Your product or service is remarkably unique

2. Your employee has specialized skills which are hard to come by

If the above applies to your company, including a restraint of trade in an employee’s employment contract will enable you to protect any unique assets your company should have and allow you to maintain exclusive rights to your trade secrets.

As an employee, how can a restraint of trade affect my career?

When your employer requires you to agree to that which is stated in the employment contract, you’ll have to carefully consider what has been stipulated before signing on the dotted line.

Not only will the restraint of trade limit you during your employment, but it will play an important role when you decide to leave the company.

The most common feature in restraints of trade is limiting the employee from leaving the company. Therefore, although you may resign from your job, you may be unable to work at a company similar to your previous employer. This can even go as far as limiting you from working in the same industry.

However, the time period and geographical range should both be detailed in your employment contract.

Tip: Although you might not agree, it will be to your benefit to be aware of these restrictions before accepting a role. If you aren't sure if you are bound by a restraint of trade, go through your employment contract as it is here where this will be documented.

Settling in court

Courts will enforce restraints of trade agreements provided the restraint is considered reasonable. To determine the reasonableness, the court will first assess whether it is in public interest that both parties comply with their agreement. Secondly, the court will consider the rights of the parties involved to be able to generate income.

When making a ruling, the court will consider the duration and scope of the restraint. In terms of duration, a restraint of between 6-24 months may be regarded as reasonable. However, there are no standard rules, and therefore each case will be considered on its own merits.

Remember, that for you as an employer, a restraint on trade will protect you and your company’s assets from potential information leaks. For the employee, the responsibility will be on you to be aware of what restraints are in place as they may have a significant impact on your next career move.