BY MADGE GIBSON, SEPTEMBER 09 2015, 06:31 - Published by: BDLIVE.CO.UK
RESTRAINT of trade is an issue mired in misunderstandings, wishful thinking and bad market intelligence. People hired by Corporates can appreciate that the company wants to protect its hard-earned intellectual property, trade secrets and methodologies.
It can be quite flattering when the company considers its latest recruit important enough to keep on board by devising personalised contracts. But this position comes with pros and cons.
A restraint of trade is a contract, agreed between an employer and employee that places restrictions on the employee’s future activities or employment should they decide to leave the business.
Restraints are used to provide employers with reasonable and legitimate protection against the exploitation of their company’s proprietary interests — most commonly these would be its confidential information, trade connections and goodwill.
While a restraint agreement is understandable, from a commercial perspective, it also has to be reasonable. An employer cannot prevent an employee of the firm from earning a living. So while restraints are regularly upheld by the courts, they should be proven to be justifiably necessary in order to protect the interests of the company, and the interests that the company seeks to protect should be clearly identifiable.
There are several common misconceptions about restraints. Many believe that they are not legally enforceable.
This is not true; they are regularly enforced in SA and in other countries.
There is a belief that a restraint is not valid if the employee is not financially compensated for it, but not all restraints come with financial compensation and payment is not necessary to enforce a restraint.
Some former employees believe that the restraint is lifted if they pay back the money. This is not necessarily true; it depends on the individual circumstances, and the final decision lies in the hands of the contract provider.
MANY people confuse retention bonuses with restraints of trade. The purpose of a retention bonus is simply to encourage important members of staff to stay at a company — and these contracts do not always have restraint clauses.
Employees with only a retention bonus could pay back the money earned and may be released from any restrictions on future employment, but they need to read the terms and conditions carefully — the contract might be a combination of retention and restraint.
Restraint of trade contracts vary. The average restraint in SA is three to six months following a departure from a company, but more and more are specifying one year. In some cases they are for up to three years, but this is rare.
Aside from the generally accepted circumstances of restraints, there are a few contentious points.
Employees are sometimes pressured into signing a restraint. This happens when a much anticipated job offer is contingent on the acceptance of a restraint or when a promotion is forthcoming only if a restraint is signed. Employees have choices, but when is undue pressure beyond the realm of the reasonable?
Businesses restructure, new management is appointed, companies merge and businesses close. What happens to the rights of employees when the circumstances under which the restraint was signed change?
From a legal perspective, contracts have to be honoured; people cannot just change their minds. Similarly, employers have the right to build in unforeseen circumstances to protect themselves. But if a change in circumstances has a negative influence on an employee, surely there must be room for reasonable renegotiation of the original contract. When does the rigid enforcement of a restraint policy negatively affect a business? When it hinders internal company development.
Not all employees remain forever critical to the well-being of the business. Skill requirements change, new technologies are introduced and succession planning is needed to revitalise the management team. And sometimes people reach their intellectual limit.
KEEPING on top of the skills requirements for a business by replenishing the talent pipeline is a no-brainer. But when a "no exception" corporate policy refuses to lift the restraints of those affected, it wades into murky territory. You cannot replace talent if the current incumbents cannot leave. And why should they leave if they are going to be restrained?
If an employee is unhappy in a company or a role, there are few benefits to restricting their departure. Unhappiness breeds contempt, disengagement and poor morale. And yet many companies endure this negativity to secure the necessary skills.
Restraints have their value, especially in the skills-challenged areas of the economy. But the implementation and acceptance of these contracts should be given much thought.
• Gibson heads The CHANGE Initiative, a career management and outplacement company