When is an entity considered to be a small business corporation for income tax purposes?
November 1, 2018

What is the value of a restraint of trade in an agreement?

A restraint of trade is a clause that will typically be included in an employment agreement. Under the terms of this clause, the employee or person subject to it is restricted to perform work that is in competition with that of the employer, within a specified area as well as for an agreed period. The purpose of these clauses is to protect the rights and interests of clients, confidential information of the employer, as well as the client base of the employer.

Consideration must be given to the extent to which an employer can and must protect his rights and interests against employees, especially in cases where an employee is specifically qualified and trained for the work for which he is required to sign a restraint of trade. Although this is a general clause in an employment agreement, there are no legal provisions given to an employer to protect his rights in this regard. An employee must therefore voluntarily agree to the terms of the restraint of trade clause in order for the employer to enforce it.

Apart from the fact that parties voluntarily enter an agreement with each other and agree to the effect and extent of a restraint of trade, the rights of the employee must be taken into account. A person’s skills and abilities form part of each individual and its application cannot be excluded or restricted in an agreement to such an extent that that person can no longer use it to his own advantage. These skills and abilities do not belong to the employer, and if it is barred in such a way that the employee can no longer compete freely in the market, it will be deemed unreasonable and against public policy.

A restraint of trade, although common, must be prepared with great consultation in order to ensure that neither party is disadvantaged. It is important that both the employer and employee’s interests and rights be protected and that no parties are disadvantaged by their scope and duration.

Should you have any enquiries relating to this article, please contact Tiaan Jordaan (tiaanj@asl.co.za) or your relationship director.