RESTRAINT OF TRADE versus PUBLIC INTEREST? IS THIS THE TRUE QUESTION?

RESTRAINT OF TRADE IN SOUTH AFRICAN LAW… AND THE PUBLIC INTEREST?

In essence, a restraint of trade provision is a term in a contract of employment that (typically) provides that after termination of employment, the employee is restricted in the work s/he can perform in that s/he will be restrained/restricted from performing the same/similar work in competition with his/her former employer, for an agreed period of time and in respect of an agreed geographical area. Further restrictions may be agreed to such as the number of people to be restricted, the types of entities and the industries involved.

These restraint provisions/terms aim to protect the employer’s proprietary interests, such as client and customer goodwill and connections, trade secrets, confidential information, know-how, business relationships, business territories, employment confidentiality.

A pertinent question to be asked is: to what extent is an employer legally capable to restrain a former employee?… especially where the employee only has the skills necessary to perform the job which s/he is restrained from performing?

The potential impact of restraint of trade terms/undertakings on former employees of a business is invariably substantially prejudicial and has it has been argued to prevent restrained persons from exercising their constitutional rights to choose their trade, occupation or profession.

A proper understanding and appreciation of how the law and the court will approach any application for a former employee to be restrained from competing with his former employer is to appreciate that there is no statute or legislation or regulation which provides an employer a right to this type of protection.

It is apposite to understand that unless the employee agrees in his contract of employment to be bound by a restraint, the employer has no legal entitlement to try and prevent him from working after termination of the employment relationship, even if this is in direct competition with the erstwhile employer.

Therefore, the manner in which the restraint terms are formulated in the contract of employment is critical, as the courts look very closely at the actual terms and conditions of these undertakings to determine if same should be enforced by the courts.

Invariably, the courts perform a balancing act between the rights of the employer not to be subjected to unfair competition, and the right of the employee to choose his trade.

The leading South African precedent dealing with these issues is Magna Alloys and Research (SA) (Pty) Ltd v Ellis 1984 (4) SALJ 874 (A) which has been referred to with authority on numerous occasions since 1984. The Appellate Court, in 1984, laid down the general principle that, on the face of it, restraint terms are not unlawful per se and every restraint of trade agreement contained in an employment contract signed by an employee is assumed to be lawful and enforceable, The onus thus lies on the employee, if he/she wishes to be released from the restraint, to show that the restraint is unreasonable and contrary to public policy or the public interest as more commonly known.

In determining whether a restraint is enforceable, a court will consider, inter alia, the following factors:

• the duration of time that the restraint operates;
• any limitations on the employee working in his/her personal capacity or through a company;
• whether or not the restraint applies only to the employee or more than one person in association with the employee;
• whether the employee still has the ability to earn a living;
• the geographical area to which the restraint applies;
• whether a restraint payment was paid to the employee;
• the proprietary interests, goodwill, income assets, revenue flows, or capital assets that the employer seeks to protect.

Since 1993 (interim Constitution of South Africa) and 1997 (final South Constitution of South Africa) complex constitutional considerations have become applicable to restraint of trade provisions found in contracts of employment in that competing interests of employers and employees have to be weighed very carefully in light of the relevant constitutional provisions in the Bill of Rights and the manner in which same are applied in the law courts.

In the situation where an employee only possesses the skills of the particular job which s/he is restrained from performing, the consideration of the employee’s ability to continue to earn a livelihood will pose serious problems for the enforceability of any restraint.

The Magna Alloys case above also stated that “It is in the public interest that agreements entered into freely should be honoured and that everyone should, as far as possible, be able to operate freely in the commercial and professional world.” This provides for conflicting interests between the employer and employee which must be balanced in light of the public interest. This view has gained much plaudits and support over the years and particularly in the recent case law since 2010.

It is well established that the proprietary interests that can be protected by a restraint agreement are of two kinds. The first consists of the relationships with customers, potential customers, suppliers and others (trade connections). The second consists of all confidential matter which is useful for the carrying on of the business and which could therefore be used by a competitor to gain a competitive advantage (trade secrets).

In Aranda Textile Mills (Pty) Ltd v Hurn and another [2000] JOL 7350 (E), the court emphasised that employers’ proprietary interests sought to be protected must be properly described as belonging to the employer. The court pointed out that it will generally be contrary to the public interest to enforce an unreasonable restriction on a person’s freedom to trade. The court went on to record that:

“A man’s skills and abilities are a part of himself and he cannot ordinarily be precluded from making use of them by a contract in restraint of trade. An employer who has been to the trouble and expense of training a workman in an established field of work, and who has thereby provided the workman with knowledge and skills in the public domain, which the workman might not otherwise have gained, has an obvious interest in retaining the services of the workmen. In the eye of the law, however, such an interest is not in the nature of property in the hands of the employer. It affords the employer no proprietary interest in the workmen, his know-how or skills. Such know-how and skills in the public domain become attributes of the workman himself, do not belong in any way to the employer and the use thereof cannot be subjected to restriction by way of a restraint of trade provision. Such a restriction, impinging as it would on the workman’s ability to compete freely and fairly in the market place, is unreasonable and contrary to public policy.”

It will generally be contrary to the public interest to enforce an unreasonable restriction on a person’s freedom to trade/earn a living. However, where the proprietary interests of the employer, which needs protection, outweighs the employee’s interest in continuing his trade, such a restraint will be reasonable and enforceable.

In the recent case of PB Hairdressing Organisation v Rudolph Kruger and Jingles Hair Emporium, the Applicant employer in seeking to enforce a restraint of trade provision, failed to demonstrate any protectable interests. The Labour Court dismissed the employer’s application.

In the case of PB Hairdressing Organisation t/a Carlton Hair International v Vinciguerra and Another (J2948/16) [2017] ZALCJHB, the Labour Court dismissed the employer’s application to enforce a restraint of trade. The Labour Court found on the facts, inter alia, that the restraint sought to be enforced was contrary to public policy and thus unenforceable. The employee was 21 years old and had been employed a junior hair stylist. He averred that he only accrued between 20 to 30 regular clients in the 6 months that he spent working at Carlton Hair, where a more senior stylist would have 12 to 20 regular clients a day. In this instance, the court held that the restraint of trade which restrained him until 18 November 2017 from within a radius of ten kilometres (as the crow flies) from the front door of the salon, was against public policy and unreasonable because the employee was a junior employee, qualified for only 6 months and who was only 21 years old.

Clearly, employers face an uphill task to enforce restraint provisions in contracts of employment. It is vital that such restraint terms are professionally crafted, drafted in light of the prevailing business world and changing circumstances.

Copying and pasting of restraint of trade terms into employment contracts does not suffice.