Restraint of trade clauses commonly form part of employment contracts, directorial agreements, shareholder agreements, and specific service arrangements in the South African business and employment world. Understanding the best way to safeguard your company’s proprietary interests is key. But are there alternatives to a restraint of trade agreement that can protect your business interests just as effectively?
Why Is a Restraint of Trade Clause Necessary?
A restraint of trade clause aids in protecting legitimate business interests by preventing employees from joining a competing employer, starting a new business in competition with your business, or working in a similar role for another company’s benefit limited to a fixed and reasonable period and geographical area after their employment with your company comes to an end. The goal is to shield the employer’s business interests, like trade secrets, client lists, confidential information, and valuable trade connections, from misuse by former employees and their prospective competitor employers.
For example, CVN Attorneys recently represented “Company A” in a case involving a former employee. When the employee received an extension on their employment contract, they chose instead to resign and accepted a role with a new employer, being a direct competitor of Company “A”, working with and providing services to a shared client.
Because the former employee had signed a restraint of trade agreement with Company “A”, CVN Attorneys advised enforcing such a restraint to protect confidential information and clients from unfair competition.
Key Considerations for Enforceable Restraint of Trade Clauses
For restraint of trade clauses to be generally enforceable under South African law, courts look at several key considerations, such as whether:
- a legitimate interest exists that the employer wishes to protect;
- that legitimate interest will be at risk if the restraint of trade clause is violated;
- the employer’s legitimate interest outweighs the employee’s right to be economically active and practice their profession freely.
- the clause is reasonable and in line with public policy.
The Downsides: Are Restraint of Trade Clauses Always Necessary?
Though a restraint of trade agreement can be effective in protecting protectable interests, critics point out that such agreements may limit employees’ career growth, restrict earning potential, and possibly stifle innovation in the industry. Particularly for senior employees, a two year restraint or a sweeping geographic scope might be found unreasonable by the labour court or even the appellate division under current interpretations of fair labour practices and public interest.
Alternatives to a Restraint of Trade Clause
With a recent shift toward limiting restraint of trade agreements, companies are exploring less restrictive options that still help protect legitimate business interests including intellectual property, confidential and proprietary information, such as:
1. Non-Disclosure Agreements (NDAs) and Confidentiality Clauses
Non-disclosure agreements and specific confidentiality clauses in employment agreements protect confidential information, trade secrets, and client lists. By clearly defining what information is sensitive and how and when it may be used, these agreements allow employers to protect critical confidential data without barring an employee from exercising their economical freedom.
2. Non-Solicitation Clauses
A non-solicitation clause prevent employees from actively approaching the company’s clients, customers, or even other employees for a specified period after leaving the employment business. While still protecting trade connections, this solution is less restrictive than a restraint of trade clause as employee remains free to seek new work but cannot take established clients or team members with them. This helps strike a fair balance between protecting business interests and ensuring fair labour practices.
How to Implement a Non-Solicitation Clause
To maximize the effectiveness and ensure enforceability of a non-solicitation provision, consider these three (3) elements:
- Define Prohibited Activities: Clearly specify that soliciting the company’s clients, customers, or staff is not allowed for a certain and defined period after the employee has left the company’s employment.
- Set Reasonable Time Frames: Limit the restriction to a practical duration, such as twelve (12) months, which may not be an excessive and unreasonable period.
- Limit Geographical Area: The geographical area in which the non-solicitation clause is applicable should only include locations where the company has legitimate business interests, and must be reasonable in terms of public poliy and practices.
Final Thoughts
Choosing the right mix of trade clauses, including or in place of a restraint of trade, depends on your company’s proprietary interests and the expectations for employees after their exit. Alternatives like NDAs and non-solicitation clauses provide options that may be more reasonable and fair for both parties, helping protect employers while allowing employees to continue to pursue their careers.