Protect your confidential information with a restraint of trade

Don’t let your secrets slip out the door! Even if an ex-employee has not signed a restraint of trade agreement, an employer can theoretically prevent an ex-employee from making unlawful use of his or her knowledge of the employer’s confidential information and trade secrets and from poaching the employer’s customers after termination of employment.

Nevertheless, an employer with a signed restraint of trade agreement puts itself in a far stronger position to protect its confidential information and customer connections from abuse by an ex-employee with unlawful and predatory intentions.

Why a restraint of trade matters for employers

The protection that a restraint of trade agreement provides to an employer was recently demonstrated by the unreported case of Waco Africa Pty Limited v Ismail Ahmed, which was heard in the Labour Court in December 2024.

The facts of the case: Mr. Ahmed had been employed as a workshop manager and had signed a restraint of trade agreement which prevented him, inter alia, from being employed by a business which competes or might compete with the employer’s business for a period of 12 months from the date of termination of his employment. Mr Ahmed had resigned and gone to work for a competitor of his ex-employer and did not dispute that the new employer was indeed a competitor of the employer. The employer alleged in its application to restrain Mr Ahmed from working for the new employer that Mr Ahmed had been exposed to the employer’s confidential pricing in the course of his work prior to his resignation from the employer. The employer’s position was that, in consequence of his exposure to its pricing structures, there was a risk that Mr Ahmed could provide such information to enable the new employer to compete unlawfully with the employer. Mr Ahmed defended himself on the basis that he was not exposed to significant or any confidential information possessed by the employer and that his access to the employer’s confidential information would be of no use to a competitor.

In the course of the legal proceedings the employer was able to show that, contrary to Mr Ahmed’s protests, as a member of its management he had received standard monthly emails from the employer’s accountant which included confidential financial details, including its cost pricing, profit margins, and its employees’ wages. Mr Ahmed responded that although he had received the emails from the employer’s accountant, he never read or looked at the information unless he was asked to address a specific query. He further stated that, given his limited engagement with confidential information, it was impossible that he had committed it to memory or was in a position to provide it to his new employer, thereby enabling it to compete unlawfully with the employer.

The ruling: Applying the relevant legal principles, the court stated that the test for whether an employee poses a threat to an ex-employer and hence could be restrained from working for a competitor is not whether the employee in fact used, copied or remembered the confidential information but whether the employee was exposed to such information or had access to it during the course of his employment.

In such circumstances, the employee in theory could have provided such confidential information to his new employer if he wished to do so. The court went on to refer to the case of BHT Water Treatment Pty Limited v Leslie and another 1993 (1) SA 47 (W) at 58 C where the court stated that the purpose of a restraint agreement is that the party wishing to enforce a restraint of trade agreement should not:

have to rely on the bona fides or lack of retained knowledge on the part of [the employee of the confidential information]

and the court went on to memorably state that the party wishing to enforce the restraint,

should not have to content itself with crossing its fingers and hoping that the [employee] would act honorably or abide the undertakings he has given.

There was no evidence before the court that Mr Ahmed had fed confidential information to the new employer. Nevertheless, on the basis that Mr Ahmed had been exposed to the employer’s confidential information, the court ordered that Mr Ahmed be restrained from working for the new employer for a period of 12 months from his resignation from the employer.

If Mr Ahmed had not signed a restraint of trade agreement, should the employer have felt the need to protect its confidential information, it would have been forced to prove that Mr Ahmed had in fact provided such confidential information to the new employer. The key takeaway of the Waco case is that where a new employee will be exposed to an employer’s confidential information and trade secrets, it is imperative to get the employee to sign a restraint of trade agreement, whether as part of an employment contract or a separate stand-alone agreement.

Employee training is not grounds for enforcing a restraint of trade agreement

It is also important to point out that in response to TPN client enquiries, even if the employee has signed a restraint of trade agreement, the fact that the employee has received training provided by the employer does not in itself give grounds for enforcing a restraint of trade agreement.

An employer wishing to protect itself from a scenario in which it invests in training an employee only to have the employee resign shortly thereafter can insert appropriate contractual provisions in the employee’s employment contract or in a separate contract. Such a provision would provide that should the employee receive training and not continue to work for the employer for a certain period of time, the employee may be required to pay back the full amount of the training or a pro rata proportion of it depending on the passage of time since the training took place.

Three agreements every employer should have in place

TPN and Fullard Mayer Morrison offer a comprehensive HR Pack that contains all the necessary employment documentation required to effectively run your organisation, whatever type of business you may operate. This includes:

1. A formal Employment Agreement: This agreement stipulates that an employee will be liable to pay back the cost of any training received by that employee if they resign less than 12 months after receiving such training – this clause allows an employer to claw back the costs of training employees who lose those newly skilled workers.
2. A Restraint of Trade and Confidentiality Agreement: This agreement can assist an employer in placing a formal restraint of trade in place with a specific employee based on their expected exposure to the organisation’s confidential information.
3. An Employee Education Agreement: If a particular employment agreement does not have the same clause as stipulated above, employers can purchase the Pack and use this separate agreement to ensure that they are entitled to recover training or study-related costs if the employee resigns within a specified period after receiving the training.

Protect your interests, your employees, and yourself – download the TPN HR-Pack today.

Written by Richard Mayer, Director at Fullard Mayer Morrison Inc.