13 May 2015 by

South Africa gets the green light for its restrictive covenant legislation

DLA Piper’s Employment group has produced a global employment law Guide entitled, A Global Guide to Restrictive Covenants, which highlights the legal provisions of restrictive covenants in 33 key jurisdictions across the Americas, Asia Pacific, Europe, the Middle East and Africa. South African business law firm Cliffe Dekker Hofmeyr contributed the South African chapter to this Guide.

The Guide uses an at-a-glance traffic light system to rate the potential risks to employers and employees in each of the 33 jurisdictions. South Africa received the green “G” rating for its restrictive covenant legislation in this research report. This rating was also given to Austria, Norway, Sweden, Thailand, Italy, the United Kingdom and the United States.

Aadil Patel, Director and Head of the Employment practice at Cliffe Dekker Hofmeyr, explains, “This G rating for South Africa means that our country’s legislation protects businesses from the threat of competition posed by ex-employees and compares favourably with many first world countries in terms of its restrictive covenant policies.

“The green “G” button is given to countries where post-employment restraints are enforceable, there is no requirement to pay compensation to the employee and the cost of enforcement action is not prohibitive. There are also various other methods available to protect the business against the threat of competition posed by ex-employees," Patel notes.

Patel explains that in South Africa, contracts in restraint of trade are often entered into to protect employers against competition from employees after their employment terminates. These contracts are in principle lawful and enforceable, unless the person seeking to deviate from it can prove that the restraint provisions are contrary to public policy. In addition, employers may be able to rely on other contractual, statutory and common law rights in the event that employees unfairly compete with them, or use their confidential information, both during and after termination of employment.

Patel says that local and multinational businesses conducting cross border deals will find the information in these global Guides to be invaluable as they begin the process of adhering to varying, complex labour legislation requirements in multiple countries.

Tim Marshall, Global Head of Employment at DLA Piper explains, “As the global economy picks up, and multinationals compete to hire and keep the best talent, non-competes and other restraints on post-termination employee competition are back in focus. A global approach makes sense for multinationals with globally mobile workers, but the challenge should not be underestimated as the approach to enforceability varies significantly from country to country.”

Marshall says that in some countries non-compete restraints are simply not permitted (eg India, Mexico); in others, substantial compensation must be paid for the restraint to work (Germany, Belgium, France); whereas some other jurisdictions (UK, South Africa,  UAE),  permit restraints as long as they are necessary to protect a legitimate business interest.

The traffic light system used in this Restrictive Covenant comparative Guide assigns a red button “R “for countries where the post-employment restraints are unenforceable and there are no or few other methods available to protect the business against the threat of competition posed by ex-employees. Mexico and Russia received R ratings for their legislation in this regard.

The yellow “A” button is assigned to countries where the post-employment restraints are potentially enforceable although there are some limitations on enforcement; compensation may be payable to the employee and the cost of enforcement action can be significant. Countries such as Australia, Bahrain, Singapore, Spain, Germany, France, Hong Kong and China received A ratings for their restrictive covenant legislation.

DLA Piper’s Employment group has  also launched a Global Employment Guide: Employment Laws of the World, an invaluable resource for multinational organizations globally.  The South African chapter was once again written by the employment team at Cliffe Dekker Hofmeyr. The Guide provides at-a-glance information on the employment life cycle for 32 jurisdictions across the Americas, Asia Pacific, Europe and the Middle East and Africa.  The link to this Global Guide is available here: https://www.dlapiper.com/en/uk/insights/publications/2015/02/employment/

DLA Piper’s Employment group has also produced two other guides in its Global Employment Guides series. The Guides are: Business Transfers; and Redundancies and Reductions in Force. Cliffe Dekker Hofmeyr contributed the South African chapter for each of these Guides. In these Guides, South African labour legislation was on par with, or compared favourably to, the legislation of many of the first world countries.

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