Protecting yourself - Restraint of trade

Restraint of trade agreements (also known as non-compete agreements) is typically included as clauses in a contract of employment.

Depending on how it is worded, the agreement may stipulate that an employee may not work for a business’ direct competitors for a certain period of time, or that the employee may not establish their own business in the same profession or industry if it would bring the employee into direct competition with their previous employer. Restraint of trade agreements may also prohibit departing employees from ‘poaching’ customers and fellow employees, or state that employees may not use certain knowledge or intellectual property to benefit anyone other than their employer.

Theoretically, therefore, a restraint of trade agreement gives a small business owner a degree of protection from employees who intend to establish rival businesses or work for competitors.

The reality is more complex. A small business owner may run a business with a straightforward product or service offering and business model that is easily replicable in an environment with low barriers to entry. Even if a former employee were to migrate to a rival, there is no specialist knowledge they would take with them. Or despite that employee being prevented from setting up their own business, anyone else could easily do so and run a thriving enterprise.

Is a restraint of trade agreement really worthwhile in this situation?

Then there is the issue of fairness and reasonableness. What would constitute fair and reasonable terms of a restraint of trade agreement?

Is it acceptable for the small business owner to impose a restraint of trade agreement valid for five years?

Should it apply just to the town or city where the small business owner operates, or to the whole province or country?

Where does the small business owner draw the line between legitimately protecting their interests and being malicious and spiteful?

Before getting carried away, small business owners should bear in mind that a restraint of trade agreement can be challenged and is not always enforceable just because an employee has signed a document. South African case law on restraint of trade agreements does not show a clear bias in favor of employers – each case is judged on its merits, so small business owners should not automatically assume that they are in the right and have unlimited power over their employees.

Some guidelines for small business owners to follow in navigating this topic include:

• Ask yourself whether all employees need to sign a restraint of trade agreement or just certain employees in key positions in the business.

• Get legal advice on how to structure and word a restraint of trade agreement in such a way that it is compliant with the relevant legislation and is likely to be enforceable. Ultimately, whilst restraint of trade agreements have a role to play, they can only go so far.

Small business owners should reflect on their personal experiences and whether any restraint of trade agreements they themselves may have to abide by in the past prevented them from achieving their goals.

Post By: Fadzai Munyaradzi for SimplyBiz