Are restraint-of-trade clauses enforceable during Covid-19?
Perhaps not against retrenched employees, says Schoeman Law's Fadia Arnold.
The enforceability of restraint-of-trade clauses in employment contracts has always been a hot topic of debate in law. However, what once was a stringent clause to be abided by the employers when the employment relationship terminated for whatsoever reason has now been raised by many employers and employees during the nationwide lockdown due to the Covid-19 pandemic.
In particular, the question has arisen as to whether a restraint-of-trade clause is enforceable in circumstances where employees are being retrenched en masse due to the Covid-19 pandemic and the nationwide lockdown where many employers have been forced to close their businesses, whether permanently or temporarily. Accordingly, the question to be asked and answered, and which this article will address, is whether a restraint-of-trade clause in an employment contract can be enforced in circumstances where a supervening impossibility has arisen (the Covid-19 pandemic) resulting in mass retrenchments.
The guiding principles in respect of restraint-of-trade clauses are set out in the case of Magna Alloys and Research SA (Pty) Limited v Ellis 1984 (4) SA 874 (A) which has been relied upon in numerous later cases and is still applicable to date, are as follows:
“Covenants in restraint of trade are valid. Like all other contractual stipulations, however, they are unenforceable when, to the extent that, the enforcement would be contrary to public policy. It is against public policy to enforce a covenant which is unreasonable, one which unreasonably restricts the covenanter’s freedom to trade or to work. Insofar as it has that effect the covenant will not, therefore, be enforced. Whether it is unreasonable must be determined with reference to the circumstances of the case. Such circumstances are not limited to those that existed when the parties entered in the covenant. Account must also be taken of what has happened since then and, in particular, of the situation prevailing at the time enforcement is sought.
The case law applicable during Covid-19
Based on the case law above, it is quite clear that the circumstances of Covid-19 and its consequences in respect of employees being retrenched is certainly, in my opinion, a case of public interest and policy. Employers who have retrenched employees as a direct result of Covid-19 would, by application of the case-law set out herein, have limited prospects of success in attempting to enforce a restraint-of-trade clause in these current circumstances due to the reason for the termination of the employment relationship.
Surely, an employer who has retrenched and employee due to operational requirements as a consequence of the Covid-19 pandemic cannot expect an employee to adhere to a restraint-of-trade clause which for example may state that the employee is restricted from working for a competitor of the employer for a period of time, let’s say two years which is often the period stated in many restraint-of-trade clauses, and further that the employee cannot work for a competitor within the Republic of South Africa for the aforementioned period after the termination of the employment relationship.
Enforcing a restraint-of-trade clause such as the example set out herein under the circumstances of Covid-19 would be, in my opinion, against public policy, unreasonable, and unenforceable.
What is more, the case law states that account must also be taken of what has happened since the employment contract was entered into, and in particular, the situation prevailing at the time enforcement is sought. Accordingly, due to the prevailing situation the Covid-19 pandemic has placed employees in, the Courts will surely not easily enforce a restraint-of-trade clause which would restrict a retrenched employee in these times from an opportunity to be economically active and productive to ensure their and their household’s survival during Covid-19.
Enforcing a restraint-of-trade clause during Covid-19
Should an employer wish to force an employee to adhere to the restraint-of-trade clause entered into at the time the employment relationship began i.e. prior to Covid-19, the employer bears the onus of instituting litigation of the dispute in the Labour Court to interdict the employee from breaching the restraint-of-trade clause.
Practically, an employer spending costs on litigation is a nonsensical option if they have had to resort to retrenchments due to the financial consequences of Covid-19.
Employers should be wary of litigating in this regard as the circumstances and financial consequences of Covid-19 have been quite clear and the devastating effects on employees who have been retrenched as a result of the pandemic are far-reaching, and therefore, attempting to restrict such employees from alternative employment may result in a cost order against the employer due to the circumstances of our current era.
Employees who are uncertain as to whether they must abide by a restraint-of-trade clause in their employment contract subsequent to being retrenched as a result of operational requirements directly due to the Covid-19 pandemic should still be cautious and seek professional legal advice on their respective restraint-of-trade clause and circumstances prior to taking up new employment which would breach the clause, merely to ensure that the employer indeed would have limited prospects of success in attempting to restrict the employers during these challenging times from being economically active.