Are Restraints of Trade Enforceable? Ivan Israelstam Gives Key Answers

Are Restraints of Trade Enforceable? Ivan Israelstam Gives Key Answers

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  • Company: Labour Law Management Consulting
  • Player: Ivan Israelstam
  • Contact: +27 (0)11 888 7944
  • Visit:  www.labourlawadvice.co.za

Are you adequately protected against the threat posed by employees who leave to join competitors?

There are few things more annoying than employing a new staff member, training them to do the job, and having them resign just as they start to earn their keep. What’s worse is when they leave to join a competitor.

Related: 9 Reasons to Quit Your Job As Soon As You Can

Many employers try to prevent this by making new recruits sign a restraint of trade agreement in which they agree that, should they resign, they will not take up employment with a competing business in a defined geographical area for a specified period of time.

These agreements have proved to be a vexing issue. The validity and enforceability of restraint agreements requires consideration of a few key aspects. Issues such as the duration and scope of the restraint are areas of concern for the courts.

To ensure that a restraint of trade is enforceable, it should go no further than what is reasonably required to protect the company’s proprietary interests. We asked Ivan Israelstam, CEO of Labour Law Management Consulting, to explain.

1. When is a restraint of trade enforceable?

The two primary criteria for enforceability are firstly, whether the restraint agreement has the effect of providing a real and material protection for the employer.

 

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The second is whether the former employee’s compliance with the restraint will result in their being unable to earn a living. It’s vital that these agreements are limited to no more than what it is absolutely necessary to protect the employer.

2. What period should the restraint be for?

There is no statutory rule on this but a period of between one and two years is most common practice. The restraint of trade conditions need to be fair.

The shorter the period, the better, and the more likely it is to obtain a favourable ruling. If a company goes too far, the judge may simply find it unenforceable in totality.

3. Does an employer need to compensate an employee for a restraint?

While this is not a legal requirement, it serves to strengthen the validity of the restraint especially if the compensation covers the remuneration that the employee would have earned during the restraint period.

4. What if a business unwittingly hires a candidate who is operating under a restraint of trade?

The previous employer would have the right to send letters of demand to the former employee and new employer requiring that the new employment be terminated. Should they not comply, the old employer could sue both of them in civil court.

5. How can employers guard themselves in future to avoid such situations?

Ask all potential employees to show you all contracts signed with their previous employers. Get sworn statements from them in respect of their legal obligations.

Get signed indemnities from all new employees undertaking to pay all costs of any legal actions by former employers which are caused by the employee.

Protectable proprietary interest: It’s not unreasonable for a company to want to prevent its competitors from gaining an unfair advantage. Generally, a restraint of trade is not about preventing an employee from moving on.

Instead, the goal is to stop them from passing on sensitive inside information on customers, strategy methodologies, pricing and more.

To be effective, restraint of trade contracts must therefore set out why the company has a protectable proprietary interest in the information that the employee has access to. That’s why careful drafting of the agreement is critical to ensure successful enforcement.

Related: Hustling on a Side Business? How to Find the Time.

Monique Verduyn
Monique Verduyn is a freelance writer. She has more than 12 years’ experience in writing for the corporate, SME, IT and entertainment sectors, and has interviewed many of South Africa’s most prominent business leaders and thinkers. Find her on Google+.