# Regulatory Compliance Category > Labour Relations and Legislation Forum >  Restraint of trade clause in employment agreement

## manhav

I think that it is the norm to find a restraint of trade clause within an employment agreement. 

The employer requires the restraint of trade in the agreement to safeguard him against a situation  where an employee resigns from his employment, only to find that the employee is now working for his competitor.

The employee normally signs the agreement, not bothering to think about the consequences of such a clause, and only worrying about it when he/she is about to resign from his/her current employment.

A restraint of trade is, in short, a stipulation in the employment agreement stating that the employee, upon termination of the employment relationship for whatsoever reason, is prohibited from being involved in a business similar in nature to that of the employer.

Most clauses to this effect usually have an added clause stating the period of such restraint, calculated from date of termination of employment, and also the area of the restraint, such as 50 km from the office of the employer.

Now, for the purposes of this thread, let us assume that X ("the employee") is employed by Y ("the employer'). Before X was employed by Y, X had no or little experience in the field of, argument sake, automated business systems. X received training from Y, and X got promoted to sales manager within 3 years. X, in his position, received extensive training, inside knowledge of the working of Y, and had access to various databases such as clients, sales, mark-up, marketing strategies, etc.

X now receives an offer from Z ("the new employer") also as a sales manager, but with a better salary and benefits package. X accepts such offer and resigns from the employment of Y. 

The restraint of trade clause, which was contained in the employment agreement between X and Y, stipulates that X is prohibited, for a period of 3 years, and within a radius of 50 km from the offices of Y, to be involved, either as employee or as consultant or as a member, director or partner in a business similar to that of Y. 

Two (2) months after accepting the employment with Z, Y finds out that X is now employed by Z. 

Can Y enforce the restraint of trade clause against X and maybe even Z?

Can X oppose the enforcement of the restraint clause?

Let the fun and games begin!!!

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## daveob

Not a legal eagle, but my thought on the matter would be :

1. the previous employer could not enforce the restraint of trade ( ROT ) as it would deny the person the ability to earn a reasonable living using his / her expertise. I am certain that there must be existing cases in law that would set the precedent for this ?

2. the ROT could, I think, only be enforced if the previous employer had included in the original agreement, some form of financial remuneration that would be paid to the employee at the termination of the employment that would ensure that the employee could financially survive the ROT period. Not sure if this is common practice, but I recall hearing about ROT payments being made to employees.

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## desA

I would agree with case (2) above as being potentially defensible by employer Y.

In law, as I understand things, there must be a balance - employer Y would have to provide income to X through the restraint-of-trade period, through an extended notice period.

I had such a case threatened by a former employer. He could not enforce geographically (within SA) as I was operating abroad; he had also not paid an income stream for the period; he also owed me a decent sum of money.

I replied in a firm letter & told him where to look for sunshine. He tried it on my international client as well, & was politely rebutted. The 'he' I'm referring to was a large corporate entity in SA at that time.

No need to be bullied.

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## manhav

Up until 1984 the position of the South African courts was that a condition is not enforceable. However, the Supreme Court of Appeal, did change the law in this regard. It was decided that the former employee, X, did indeed have a prima facie right to enforce such a clause.

The SCA (Supreme Court of Appeal) laid down a test to determine whether such a restraint was indeed enforceable or not.

Since then, this particular case was quoted with approval in various other cases and it was also confirmed in all the recent SCA cases. Thus, X may apply to court to have such a restraint enforced. 

The onus now rests on the employee to convince the court that the restraint is unreasonable. 

I will present a number of examples in the next couple of days.

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Dave A (21-Apr-10)

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## Dave A

> Can Y enforce the restraint of trade clause against X *and maybe even Z*?


I suspect any case against Z could not be made on the restraint clause itself as Z was never a party to the contract between X and Y.

However, if X could establish that Z required unlawful access to information as a condition of hiring Y, such as client lists of X, proprietary process information and suchlike (or Y offered such information and Z accepted, perhaps to sweeten the deal) - I'd expect things could get interesting.

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## BigRed

A very difficult topic, to say the least. 

Should an employee resign / be terminated (or take up a "better position"), the ROT takes effect, but can be deemed unconstitutional if that individual can prove that that specific industry is his only source of income, hence a ROT has to "be worthwhile" to the employee. Meaning, that if the ROT is for three years etc, the employer has to offer a renumeration that makes it worth while for the emplyee to accept that ROT.

It goes a lot deeper than that (including High court rulings :Smile: ) to enforce. Unfortunatly the law is not 100% clear and a lot of ROT are not enforcable. 

M2CW

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## garthu

Big subject... we recently had a case which was won where the franchise took the the franchisee and won the restraint. Big thing with a restraint now is that it should be very specific. You cannot say we stop you doing xyz work in such areas. You have to say IF you do xyz in certain incertain areas, the penalty is R100 000. Thats how they were won. Employee knew the risk, took it, courts found against.

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