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Are restraints of trade abused?

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The Labour Court hears an increasing number of applications to enforce restraint of trade agreements. In these cases, employers seek to prevent employees from taking up employment with a competitor because they possess confidential information or access to their customers.

There is a growing body of reported and unreported judgements on the topic but very decisions from the Labour Appeal Court.

The reason for this is that by the time an appeal can be heard, the period of the restraint is generally over and the issue will have become academic.

Labour Court judges are required by the rules of precedent to follow the 1984 Appellate Division decision, Magna Alloys, which held that contracts in restraint of trade are not contrary to public policy. That was one of the number of cases in which the judges of our highest court at the time sought to rid our law of the “pernicious” influence of English law and restore it to its Roman Dutch glory.

The judgment contains no discussion of whether the English approach in which the employer must establish that a restraint is fair and reasonable is appropriate in a contemporary economy. Despite its dated origins, the Magna Alloys approach has survived into our constitutional era.

As a result, an employee wishing to resist the enforcement of a restraint clause must prove that its enforcement is unreasonable and contrary to public policy. This is a considerable burden for an employee who may have limited knowledge of the workings of the employer’s business.

Standard form restraint clauses have made their way into a large number of employment contracts. Typically, they are drafted in obscure and impenetrable language that is all but impossible for a layperson to understand and very difficult for most lawyers.

Broadly speaking, their effect is to prevent employees from taking employment with competitors of their employer, or setting up a business in competition with the employer, for a two or three-year period.

In one case, an employer went to court to prevent a computer salesperson earning around R6 000 a month from being employed virtually anywhere else in the IT sector for a period of three years.

The court, quite correctly, refused to enforce this agreement. Most judges of the Labour Court are careful not to allow broad restraint provisions to be placed employees inappropriately.

However, the damage of this doctrine is likely to be done in numerous cases that do not come to court. How many employees do not take the risk of moving to a better position with another employer in the same sector or using their skills to set up their own business because of the fear that a restraint clause, signed many years ago when starting work, will be used against them?

International studies show that the enforcement of restraint agreements negatively effects the mobility of employees and that this has negative economic and productivity consequences. It also has significant anti-competitive effects and is out of keeping with the role of competition law as a central plank of economic regulation.

Many of the world’s most dynamic economies, including California, make it extremely difficult for employers to enforce restraint agreements.

What is the way forward? It will in all probability require intervention by the Constitutional Court to change our law to place the onus appropriately on employers to show a restraint is reasonable. As yet, they have not received the appropriate case. Legislative intervention may also be useful.

Consideration should be given to including a provision in the BCEA prohibiting employers from placing restraints on lower-paid employees or requiring employers to pay employees during any period in which they seek to exercise a restraint.

Professor Paul Benjamin is a director of Cheadle Thompson & Haysom Attorneys. Opinions are his own.

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