Bradley Workman-Davies | Director | Werksmans Attorneys | mail me |
Kelly Sease | Candidate Attorney | Employment Practice | Werksmans Attorneys | mail me |
In many cases when employers hire executive level, management or key employees, there is a recognition that these hires can impact the success of the business, due to the individual’s recognition in their industry, or knowledge and experience, or client and customer relationships, or a combination of all of these qualities.
Equally, employees can gain invaluable experience and form meaningful networks due to their positions at their employer. As such, it is not uncommon that employers seek ways to protect their proprietary interests after executive or key employees leave the organisation.
Important contractual innovation
One such way is by incorporating restraint of trade provisions/clauses in employment contracts. This is an important contractual innovation to be aware of, since there is nothing implicit in the employment relationship which allows for post-termination protection against unfair competition; any such protections must be concluded in contract between the parties.
This is so that in the event of termination of the key person’s employment, the restraint of trade clauses operate to restrict the employee from taking up employment of similar work/nature in competition with their former employer.
Although these kinds of undertakings are fairly restrictive on an individual’s rights to conduct a trade of their own choosing, and the constitutionality of such undertakings is sometimes queried, it must be appreciated that in South Africa, these kind of restrictive covenants are prima facie enforceable by a court. However, since the courts are sensitive to the inroads which these kind of undertakings make on an individual’s basic rights, the courts always reserve the discretion to assess the reasonableness of the restraints.
When deciding whether restraints are valid and enforceable, courts will consider various factors such as, whether the employer has a protectable interest and result in being potentially prejudiced by the employee and whether the restraint is reasonable and against public policy.
Specifically, any post-termination restrictions must be for a reasonable specified period and should only operate within a specific geographical location.
The question of the enforceability
The question of the enforceability of a restraint of trade was dealt with in the case of Warwick Wealth (Pty) Ltd v Anderson and Others (C178/2023) [2023] ZALCCT 22. In this case the court had to determine whether a former employee whose employment contract contained a restraint of trade clause, had been in breach after soliciting a sponsorship using the confidential information she acquired whilst she was under the employ of her former employer for the benefit of her new employer.
The court found that there was a valid and enforceable restraint provision in the contract between the parties, and that since it was determined that Anderson had in fact acted in the manner complained of, therefore Anderson had been in breach of the restraint and such breach continued to prejudice the Warwick Wealth’s protectable interests.
Also, in Wheelwright v CP de Leeuw Johannesburg (Pty) Ltd [2023] JOL 57978 (LAC) (“Wheelwright”) the Labour appeal Court (“LAC”) had to interpret the meaning of a clause incorporated in a settlement agreement concluded after the dismissal of an employee and determine whether such clause extinguished rights arising out of the enforceability of a restraint of trade enjoyed by the former employer.
In this case, on 26 April 2007 Wheelwright and his employer entered into a fixed term employment agreement which would automatically terminate on 28 February 2010, and which incorporated a restraint of trade undertaking. Shortly before the expiry date the parties verbally agreed that the employment relationship would continue on a permanent basis subject to the same terms and conditions.
In September 2010, Wheelwright was appointed as an associate quantity surveyor by the employer and as such was required to enter into a further restraint of trade agreement with the employer, which replicated the previous agreement’s restraint clause. This agreement was concluded on 10 September 2010.
In August 2015, Wheelwright became a director of the employer’s board of directors, and also purchased 20% of the issued share capital of the employer. The employer subsequently suffered financial distress due to the COVID-19 pandemic, which resulted in a salary reduction for all employees, including its directors.
Dissatisfied with the salary reduction, Wheelwright claimed this was in breach of his employment agreement and opted to be retrenched. A dispute regarding the calculation of Wheelwright’s severance pay arose, but notwithstanding this dispute the employer proceeded with Wheelwright’s retrenchment.
Dissatisfied with the terms of the retrenchment he referred a dispute to the CCMA alleging unfair dismissal and failure to pay the current amount of severance pay due to him.
At the arbitration proceedings the parties settled the dispute in terms of a settlement agreement prepared by the CCMA (settlement agreement) which was concluded on 21 October 2021. The settlement agreement consisted of two separate documents (being a standard form document and Annexure A thereto).
The standard form document contained a clause stating that the settlement agreement was entered by the parties in that they “agree to the full and final settlement of the dispute referred to by the CCMA as well as in full settlement of all statutory payments due to the applicant as reflected in paragraph 5 of this agreement”.
The settlement agreement also elsewhere stated that it was concluded “in full and final settlement of all and any claims which the parties may have against each other whether such claim arise from contract, delict, operation of law, equity, fairness or otherwise”.
When an opportunity arose for Wheelwright to work on a project not relating to the employer, the employer sought to enforce the restraint which was contained in the September 2010 contract of employment. However, Wheelwright took the view that the CCMA settlement agreement had extinguished the restraint agreement and as such that he was free to work on the project.
The Labour Court initially held that Wheelwright had breached the restraint agreement because the claim only arose after the signing of the settlement agreement, which led to an appeal.
On appeal before the LAC, it held that the provisions of the CCMA settlement agreement which purported to settle any and all disputes, had to include disputes arising out of an alleged breach of the restraint undertakings which were contained in the September 2010 contract of employment. The use of the words “all and any claims”, the LAC found, meant exactly that.
In conclusion
It is evident that enforceability of restraints of trade clauses is not a simple and straightforward as one may think.
The enforceability of a restraint of trade agreements/clauses may involve making a value judgment by the court tasked with enforcement to decide whether the restraint is reasonable in balancing the various rights and interests of the parties, and therefore enforceable.
When drafting such clauses or agreements employers should consider all possible circumstances surrounding the termination of the employment to enjoy the full benefits arising therefrom.
Also, care should be taken when settling disputes with employees – when contractual relationships have been concluded which would usually endure beyond the termination of the employment relationship, these should be specifically carved out from the ambit of a settlement, failing which the approach of the LAC in Wheelwright would be likely.
