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THE RESTRAINT OF TRADE CONTRACT

the restraint of trade contract

A subject that is mired in misunderstanding, wishful thinking and bad market Intel is the issue of a Restraint of Trade.

Restraint of Trade is a contract, agreed between an employer and an employee.
It is created by the employer to protect them from loss of valuable IP that the employee would have been exposed to during their employment with the company. Typically this includes things like intellectual property, operating methodologies, client and trade secrets etc.

The contract places restrictions on what company information the outbound employee can share with other companies, as well as limit how quickly the employee can join a competitor company.

While the inclusion of a restraint agreement, from a commercial perspective is understandable, the agreement also has to be reasonable. An employer cannot prevent a departing employee from earning a living.

Here are six of the most common misconceptions around restraint of trade –

  • Restraints are not legally enforceable 
  • Restraints are legally enforceable, in South Africa and overseas
  • A restraint is not valid if you are not financially compensated for it
  • Not all restraints come with financial compensation
  • Payment is not necessary to enforce a restraint
  • Your restraint is lifted if you pay back the money
  • Not necessarily so. It depends on the individual circumstances and the contract wording. The final decision lies in the hands of the contract provider. 
  • Confusion between ‘Retention Bonuses’ with ‘Restraint of Trade’.
  • The purpose of a retention bonus is to encourage key members of staff to stay with the company over a critical or extended period of time – and these are not always linked to restraint clauses
  • If the employee only has a retention bonus clause, paying back the money may release them from any further restrictions, but the terms and conditions of the clause must be read carefully – the document could be a combination of retention and restraint.
  • Restraints are only valid for a few months
  • Not true – contracts vary. The average restraint period in South Africa is 1-year post departure, but restraints are getting longer, in some cases issued for up to three years, but this is rare.
  • Restraint periods and Notice periods are separate issues
  • The average notice period in South Africa is one month, but the more senior you are the longer your notice period. Three to six months notice periods are not unusual.
  • Once you have worked out your notice period and left the company, only then does your restraint of trade restriction start.

 

Restraints have their value, especially in the skills-challenged areas. But the implementation and acceptance should be given much thought.

This is a summarised article and not intended to serve as legal advice or a definitive or exhaustive analysis of the subject matter.

About the Author

After several years in corporate finance and a decade in c-suite executive search, Madge Gibson now heads up The CHANGE Initiative (Pty) Ltd – a Career Management and Outplacement company based in South Africa.

Article by Madge Gibson, Harfield Village Resident

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