Restraints of Trade
Parties to an employment relationship often conclude contracts detailing post-employment restraints of trade, only to wait until the cessation of the employment to ask whether the restraints are enforceable.
In the third of three articles addressing labour law issues, we outline when a restraint could be enforceable and examine two recent cases illustrative of the courts’ approach.
Post-employment restraints of trade are inserted into an employment contract to prevent or restrict an employee from making use of the employer’s trade secrets, goodwill and business connections, once the employment has ended.
The question of enforceability often depends on an assessment of two opposing forces; the employer’s desire to have the employee comply with his or her contractual obligations, versus the employee’s right to freely choose and practice his or her trade, occupation or profession. Typically, restraints include a nominated restraint period and restraint area. The longer the restraint period, or the wider the restraint area, the greater the chances are that the restraint will be unenforceable.
Courts have stated that the starting point is that restraints will be held to be enforceable, unless it can be shown that they are unreasonable. To be reasonable, and therefore enforceable, the restraint must seek to protect some interest that is worth protecting, such as customer connections or confidential information. In other words, a restraint cannot be merely an effort to prevent an employee from competing with the employer; this is not sufficient. There must be some interest that requires and deserves protection for the restraint to be enforceable.
For the Employee…
In the November 2016 Labour Appeal Court (LAC) decision of LabourNet (Pty) Ltd v Dyllan Jankielsohn and SEESA Ltd, the employee worked for labour consultants. He resigned from his employment and commenced a position with his employer’s direct competitor. The LAC was asked to rule on the enforceability of a three-year restraint restricting the employee from competing with the employer or soliciting clients in a restraint area that was limited to the Free State and Northern Cape Provinces.
The employer led evidence about the training given to the employee and the intimate knowledge that the employee had about his employer and its clients. The employee suggested the opposite; that he had been in a very junior position, that he had little training and minimal exposure to the employer’s confidential information.
The LAC noted that an employee cannot be interdicted or restrained from retaining his or her experience, skills or knowledge, even if acquired as a result of training given by the employer. In other words, while an employer can protect its trade secrets, it cannot prevent an employee from using what is in his or her own head. The LAC found the three-year restraint to be unenforceable and implied that even a 12-month restraint may have met the same result in the circumstances.
For the Employer…
Vodacom (Pty) Ltd v Godfrey Motsa and MTN Group Ltd (2016) involved a restraint dispute between the two major telecommunications companies in South Africa, after a member of Vodacom’s Exco resigned and joined MTN.
The employee was a Chief Officer of the Consumer Business Unit and Vodacom argued that upon his resignation, he should be required to comply with an obligation to serve a six-month garden leave period and after that, a six-month post-employment restraint.
For perhaps the first time in South African law, the LC affirmed the use of gardening clauses, noting that they were a manner to “sterilise” an employee from access to trade secrets and trade connections for the period nominated in the garden leave clause.
The LC accepted evidence that the employee was a senior member of the management team and privy to Vodacom’s micro and macro strategic plans. It found that it “was an understatement to say this information would be of benefit to a direct competitor” and that the useful life of the information to which the employee was exposed meant that a restraint (that effectively spans 12 months, given the gardening leave clause) was not unreasonable.
Author: Paul Cooley