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Restraint of Trade Explained

Tuesday, 03 July 2012   (0 Comments)
Posted by: TaxFind™
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Restraint of Trade Explained

What is a Restraint of Trade?
A restraint of trade may be enforced by your employer which entails the employer placing certain limitations on your freedom of employment thus rendering you ineligible to trade within the same industry you currently work in, should you resign.

Does a Restraint of Trade apply to me?
Restraints of trades are not a pre-described feature in a standard employment contract and thus are an additional clause added to unique employment agreements.As this is an addition to a contract a restraint of trade is considered to be above and beyond an employee’s call of duty.An employee is required to agree to that which is stated in the employment contract in order to accept the propositioned role.Although you might not agree, it will be to your benefit to be aware of these restrictions before accepting a role.If you aren’t sure if you are bound by a restraint of trade, go through your employment contract as it is here where this will be documented.

How can a Restraint of Trade affect my job?
A restraint of trade will impact your employment agreement in one of the following ways:
•Whether you are on contract or a permanent employee,if you are restricted by a restraint of trade you cannot do business with anyone else.A restraint of trade typically limits employees from making use of ‘company resources’ for personal gain.An employee’s unique skills are considered to be ‘company resources’ and it is this that you are not entitled to utilise for the benefit of anyone else other that your current employer.For example; you cannot perform any freelance work whilst employed with the company with a restraint of trade in place.
•At termination of employment. This means that an employee restricted by a restraint of trade is able to resign from a position, but may not continue to work for a similar company that competes directly or indirectly with the company once you have resigned from the company.A restraint of trade therefore effectively ‘bans’ an employee from working in a similar firm and/or industry to the one directly relating to their current job.This restraint would apply for a specific time period detailed in the employment contract and usually specifies a geographical range in which these restrictions may reasonably be enforced on the employee by the employer.

To many, a restraint of trade impacts on their entire livelihood,although it may become very difficult for an employer to enforce a restraint of trade in the instance where any employee is unable to make a living from an alternative field of work due to limited skills.This is spelt out in the Magna Alloys Appellate Division case of 1984.

The Appellate Division came to the conclusion that the position in South African Law is that the sanctity of a valid contract overrides the right and freedom to trade.And on that basis, restraints of trade are deemed prima facie valid and enforceable, unless they are contrary to public policy.As a result of the Magna Alloys decision, restraints of trade are therefore in the first instance deemed enforceable unless the employee, who alleges that the contract is against public policy,is able to prove so.The courts will therefore interfere with restraints of trade only where the restraint is unreasonable in relation to the employee’s freedom to trade.

To test the enforceability of a restraint of trade clause, the following assessment may be useful:
•Is there a legitimate interest of the employer that deserves protection at the termination of the employment agreement?
•If so, is that legitimate interest being prejudiced by the employee?
•If the legitimate interest is being prejudiced, does the interest of the employer weighed up against the interest of the employee not to be economically inactive and unproductive – section 36 of the Constitution of the Republic of South Africa?
•Is there some other aspect of public policy which indicates that the restraint of trade requires enforcement or not?
•Is the ambit of the restraint of trade (in respect of its nature, area and duration) justifiable and necessary to protect the interests of the employer?

Source: By Aneesa Cassim Ahmed (Tax professional)



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