Shaun Harris
taking Stock
A few months ago I met a woman who was truly distressed. A residential property agent, in her late 30s, divorced and with a child to support, she said she had received an employment offer from a rival estate agent but was too scared to move. Why? “Because in terms of my restraint of trade I will not be able to work as a property agent for six months,” she said.
The restraint, it turned out, was a clause in her letter of appointment. She said she had not received any financial award or other inducement to sign the letter that contained the “restraint”, but feared her employer, a large agency, would enforce the conditions if she left, effectively keeping her out of employment, at least as an estate agent, for six months.
I do not know what this woman did in the end, but what struck me about the conversation was just how scared she was by a clause in her letter of appointment that I really doubt would have had much legal standing if taken to court.
The matter came up again a couple of weeks ago when another person, this time from the personnel industry, complained about a similar-sounding clause in a letter of appointment. It seems there are a lot of people out there being held to ransom by restraint of trade agreements of dubious standing.
These agreements are serious and do play an important part in the relationship between employees and the companies they work for, particularly when they involve key staff who could do damage to a company by joining a competitor or starting up their own business in the same industry.
But this type of agreement is a carefully structured, carefully worded document often connected to a substantial reward, either a lump sum payment or shares in the company concerned.
The legal enforceability of this type of restraint was shown earlier this year following the walkout at Old Mutual Asset Management. There were other issues involved, including the alleged removal of information from Old Mutual, but the financial services group could show the potential damage to their business if the restraints were not enforced. And some of the key players who walked out had received substantial payments for accepting the conditions of the restraint – R2-million in the case of Bryan Hopkins, Old Mutual’s former chief investment officer.
This is not the sort of restraint of trade we are looking at here, but rather what seems to be fast becoming a standard clause in letters of appointment in certain industries. In some cases it is doubtful if they are even drawn up by attorneys, but possibly just dropped into the employment contract as a vague threat.
And the people affected by these clauses are typically middle-income earners, the type of employee who cannot afford to quibble too much when signing a letter of appointment and who probably does not have the financial resources to take on a bloody-minded boss in the courts.
One of the problems for an employee with a restraint of trade, says Graham Cox, senior partner at legal firm Cox Yeats, is that it is prima facie enforceable, placing the onus on the person being restrained to contest the clause if they believe it is unfair and unreasonable.
He points out that in certain instances the employer might be able to make a good case for restraining a departing employee, for instance on the grounds that they will receive the full financial benefit of concluding negotiations they started while working for the company, and where some of that money should have come into the company.
But if it seems clear that the employee will not benefit at the company’s expense or be able to cause damage to their former employer if they leave, Cox says his advice is often to ignore the restraint of trade.
“I’ve found that in eight or nine cases out of 10 the employer does not try to take the former employee to court,” he says.
Cox warns, however, that it could cause some sleepless nights. Even if the employer realises that the restraint will not be enforceable, threats and intimidating letters could follow.
But regarding the type of restraint clause that is simply dropped into a letter of appointment, Cox says there is a tendency for these to be drafted too widely and severely.
“What has to be looked at is whether the restraint is reasonable in the context of the particular industry,” he says.
Few restraint of trade agreements have been tested in court, but some have got close. At the beginning of 1997, Roy Alderdice, then deputy MD of JHI Property Services, and four colleagues left the group to form their own business, the Alliance Property Group. JHI threatened to enforce restraints against Alderdice and a colleague, restraints he felt were severe.
“We pooled our resources and decided to take them on in court if we had to,” Alderdice says, “but then sanity prevailed. We negotiated with JHI out of court instead and reached a satisfactory conclusion.”
There were no cash awards connected to the restraints in this case, although Alderdice did have shares in JHI. What it shows, however, is that even a large group might be reluctant to try and enforce a restraint in court.
The problem is that many employees, like the property agent referred to above, might not have the financial means to challenge the restraint in court. Legal aid from the state could be a possibility, but it’s a slow system.
It’s very subjective, but if a restraint does seem unfair and unreasonable – and you are sure that you will not benefit at your employer’s expense or damage the company in an unfair way by leaving – perhaps it’s best to take a deep breath and ignore the restraint.
The risk is that your former employer might take you to court. But what’s the alternative? Working for a company where you are not happy, or voluntarily placing yourself outside an industry for a specified amount of time.