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Golden Handshake
October/November 2011

Golden handshake?

Or is a restraint of trade order a punishment that can prevent an employee from earning a living in the only industry he’s been trained for? BEVAN FRANK explains

In an employment context a restraint of trade is an agreement an employee signs in favour of his or her employer that the employee shall not compete with the employer for a specified time in a specified geographical area after he is no longer employed, says Nicholas Robb, a partner at Webber Wentzel Attorneys.

This will be required where the employee, during employment, acquired knowledge of the employer's proprietary information (in the form of trade secrets and customer connections) that is protectable because it is not generally known to the employer's competitors. Divulging and using it against the employer shall prejudice the employer's competitive advantage.

The employee would have to give consent to a restraint agreement by signing the document. This is most easily obtained at the time that the employee concludes his/her employment contract.

“Once the employee is in employment, the employer’s bargaining power is reduced because the employee can refuse to agree to become subject to a restraint of trade. This would constitute a new term and condition of employment,” explains Shelley Wilson, a director at Bowman Gilfillan Attorneys.

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“An employer has very few options at this stage. If the employer could show that there is an operational requirement necessitating the employee’s agreement to a restraint, he may be able to justify the retrenchment of the employee. This is a very risky route.”

A restraint of trade agreement needs to be reasonable and not seen to be against public policy. In determining this, a court will look at the various facts and circumstances when the employer is trying to enforce the agreement.

“Two main considerations will be weighed up,” says Wilson. “The first is that the public interest requires, in general, that parties should comply with their contractual obligations, even if these are unreasonable or unfair.

The second consideration is 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 of trade is contrary to public policy and should not be enforced, a court will consider various factors:

  • the duration of the restraint;

  • the area in 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 that the employer seeks to protect.

  • Robb maintains that SA courts shall not impose restraints for periods of time longer than is necessary to protect the proprietary information at stake, since information loses its potency over a period of time.

    “Generally enforcement for longer than a year is unusual, although in the appropriate circumstances restraints are enforced for longer periods than that,” he says.

    If the time period of a restraint of trade is unreasonably long, a court might deem the clause to be unenforceable.

    Practical Scenarios

    Some practical examples of when restraint of trade agreements can be enforced, would be: A footwear buyer, for example, is a specialised job. If that person is not allowed to buy footwear for another retail chain, then he/she will not be able to work in the capacity that he/she was trained as.

    Wilson says that in this scenario the company’s proprietary interest sought to be protected will be weighed up against the limitation placed on the footwear buyer's freedom to trade. The question will be considered whether the company’s proprietary interest (i.e. its right to protect its trade secrets, know-how, pricing, or customer connection) outweighs the right of the footwear buyer against whom it is being enforced to exercise his/her chosen profession, skills or occupation.

    If you have been trained by a manufacturer, can you be prevented from joining another manufacturer in the same line?

    A restraint, which is merely intended to prevent an employee from using his/her personal skills and knowledge in the service of a competitor, is unenforceable.

    The SA courts have held that even if an employer has spent a great deal of time, money and effort in equipping an employee with various skills and knowledge, the employer cannot claim to own the knowledge and skills that have been taught.

    These skills can be said to be part of the public domain and become attributed to the employee, who cannot then be restricted by a restraint of trade provision, which would be considered unreasonable.

    “Therefore, employees may 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,” says Wilson.

    Regional representatives or sales agents often build up their own retail database. Could this prevent them from moving to another company where they'll use the relationships they built to benefit the new firm?

    A restraint of trade clause will apply to the above scenario. “A restraint would be an enforceable restriction on the activities of regional representatives or sales agents who (for example) had access to the company’s clients and could use their relations with the company’s clients to the advantage of a competitor and to the detriment of the company,” Wilson explains.

    If someone who’s worked in marketing or sales for a big multi-national company (for example, Company X) wants to leave there are limited opportunities (there’s only a handful of companies of the same size) and all would be considered competitors of Company X. Can he/she be prevented from working in the industry?

    If the marketing or sales person has become privy to Company X’s confidential information — or has established relationships with Company X’s customers — then he/she can be prevented from working in the industry, says Wilson.

    The protection of Company X’s proprietary information will be weighed up against the limitation placed on the marketing or sales person's freedom to trade, and the question will be considered whether Company X’s proprietary interest outweighs the right of the marketing or sales person against whom it is being enforced to exercise his/her chosen profession, skills or occupation.

  • Shelley Wilson can be contacted at 021 480 7815 or email s.wilson@bowman.co.za

  • Nicholas Robb can be contacted at 011 530 5627 or email nicholas.robb@webberwentzel.com


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