Many South Africans make a living through freelance work or employment on fixed term contracts. Some rely entirely on these income streams, while others moonlight as freelancers to supplement their income in addition to a full-time salary. As a freelance or contract employee, you’ll often be asked to sign a restraint of trade agreement as part of your contract.

Restraints of trade can be a bone of contention. Of course, employers are entitled to protect themselves from unfair competition – such as you going to work for a competitor immediately after your contract ends, using skills or trade secrets you picked up from your former employer.

But how far can employers control who you work for if they are not your sole source of employment and income? And should they be entitled to any proceeds from intellectual property (IP) that you generate while working for them? What does the current employment law say, and what options do you have as a freelancer or contract worker?   

Why employers need to enforce a restraint of trade

A restraint of trade prevents you from doing similar work elsewhere or with competitors for a stipulated period after leaving your current employment – and while you are still employed. The last point is important regarding side hustles – for instance, if you start a private business in your spare time that competes in the same sector as your full-time job, it would be reasonable for your full-time employer to impose a restraint of trade.

Restraints of trade also protect an employer’s right to trade secrets and to retain business relationships that they may have introduced you to as a contract employee. Ultimately, a restraint of trade is intended to protect the interests of the employer while allowing you enough freedom to be economically active and productive. Balancing these sometimes-competing interests can be difficult.

What should employers specify?

To avoid ambiguity in a freelance or non-permanent contractual employment relationship, an employer should ensure that the contract forbids:

• the sharing of trade secrets outside the company,
• poaching clients on behalf of a new employer or the freelancer’s personal client list, and
• doing similar work for themselves or another company in the same industry or geographical area for a specified time.

Trade secrets and intellectual property

Employers should set out the specific rules regarding trade secrets and the ownership of any IP – including patents – in employment contracts. The contract should meet the following conditions:

• any information contractually protected by an employer must relate to, and be capable of application in that trade or industry,
• the information must be secret or confidential in the broad sense of not being readily available to the public, and
• the information must be of economic value.

Note that if you generate any valuable IP under the terms of a contract specifying these terms, the products of your work will belong to your employer.

Enforcing restraint of trade clauses

If you’re in breach of a signed restraint of trade clause in an employment contract, your employer will be entitled to take legal action against you. You may be found liable for damages or financial penalties.  

However, restraints of trade may not go further than necessary to protect the employer’s business interests, and employment contracts are not a one-way street. If you’re a freelancer or contracted employee, you may be able to challenge certain restraint of trade conditions, on the following grounds:

• Are you free to earn an income if the restraint is imposed?
• Will you have to relocate to be able to earn an income?
• Is the proprietary interest that the employer is seeking to protect clear to all parties?

A recent restraint of trade dispute in South Africa saw a case before the Labour Appeal Court. The court ruled that the period of restraint of trade be reduced from 2 years to 1, because the employer could not justify that a new employee would need 2 years to form new business relationships in place of the previous employee’s contacts.

It’s clear that employers who wish to restrain a freelancer or contract worker from certain types of employment for long periods after their contract ends will need to justify these conditions if the employee challenges them legally.

Note, however, that a restraint of trade clause only be ruled unenforceable by a court if it is unreasonable, and you as the employee will have to prove that it is unreasonable.

Therefore, it’s important to ensure that any restraint clause you sign strikes the right balance between your ability to earn a living as a freelancer or contractor, and your employer’s interests and competitive advantage.

Any restraint of trade clause should be fair to both parties and should have a reasonable timeframe and geographic limit.

Negotiating employer and employee rights

You are within your rights to refuse to sign a contract including a restraint of trade clause, of course, but an employer also has the right not to employ you without that clause in the contract. Should this be a sticking point between you and a prospective employer, a non-disclosure agreement (NDA) can be a compromise that’s acceptable to both parties.

An NDA protects an employer’s rights and business property without being as personally restricting to you as a freelance employee.

If you’re unsure about how to evaluate and negotiate restraint of trade agreements in contracts, consult an attorney or a labour lawyer for professional advice.

Freelancing, contract work, the gig economy – whatever you call it, many of us rely on a mixture of full-time work, part-time jobs and side hustles for income nowadays. That shouldn’t stop you planning for success and having big life goals, though – it just means you’ll need to be more flexible and creative in your financial planning. Nedbank’s Small Business Services Team can help you with business financial planning and access to logistical and funding support.