Restraint of Trade: What Employers and Employees Need to Know

Employers often seek to protect their proprietary information and business interests by incorporating a restraint of trade clause into employment contracts, so understanding the rules around this practice is essential for both employers and employees. Here’s what you need to know about Restraint of Trade Agreements, their enforceability and the rights of both parties.

What is a Restraint of Trade?

A restraint of trade is an agreement between an employer and an employee that restricts the employee from taking up employment with a competitor or starting a competing business for a specified period and within a specific geographical area after leaving their current employment. This type of agreement is designed to prevent an employee from using proprietary information or relationships developed during their employment to gain an unfair advantage over their previous employer.

Protecting Business Interests

At its core, a Restraint of Trade Agreement enables employers to protect, inter alia, two key aspects of their business:

1. Proprietary Information: This includes any intellectual property (IP), trade secrets, customer lists or operational methods that give the business a competitive edge.
2. Goodwill of the Business: The key customer/client relationships that a business has nurtured which are valuable and require protection from former employees.

However, for a restraint of trade to be enforceable, the employer must demonstrate, inter alia, a protectable interest of value to the employer which can be used to cause harm and/or allow the employee and/or a third party to unlawfully compete against the employer.

Balancing Rights: Employee’s Freedom to Trade

While employers have the right to protect their business, employees also have rights under the Constitution. Section 22 of the Constitution guarantees every individual the right to choose their trade, occupation or profession freely. This means that Restraint of Trade Agreements must strike a balance between the interests of the business and the rights of the employee.

What Makes a Restraint of Trade Reasonable?

For a restraint of trade to be considered reasonable and enforceable, several factors are taken into account:

• Proprietary Interest: The employer must have a legitimate interest to protect, such as intellectual property or customer relationships.
• Geographical Area and Time Period: The restraint should not be excessively broad in terms of geographical region or duration. A reasonable restraint is typically limited to areas where the business operates and for a period of appropriate duration to protect its interests without unnecessarily limiting the employee’s right to earn a living.
• Purpose of the Restraint: The agreement cannot simply aim to prevent competition. Its primary goal must be to protect the employer’s proprietary interests.

Conclusion

Restraint of Trade Agreements are a useful tool for employers seeking to protect their business interests. However, they must be carefully drafted to ensure they are reasonable and fair to both parties. Employers should seek legal advice to craft agreements that are enforceable, while employees should be aware of their rights to challenge restraints that unfairly limit their ability to work. If you’re unsure about the enforceability of a restraint of trade in your employment contract, you must consult with an attorney to seek clarity in respect of your options and obligations owing under the agreement.