When And How To Use Non-solicit And Non-compete Clauses In IT Contracts In South Africa

South African employers and business owners often rely on post‑termination restraints to protect customer relationships, confidential information, intellectual property and other proprietary information. However, the law requires that these restraints do not extend beyond what is reasonably necessary to protect a legitimate business interest. In this article, we unpack the legal framework governing non‑compete and non‑solicitation clauses in South Africa.

What are non-solicitation and non-compete clauses?

Non-solicitation clauses prevent former employees from poaching or soliciting an employer's clients, suppliers and employees, for a specific period of time and within a specific geographical region. The purpose behind a non-solicitation clause is to protect a business' proprietary interests in the event of a former employee setting up or joining a business in competition with the business of the employer. Businesses consider non-solicitation clauses as protection for the relationships with clients and suppliers that require a substantial amount of time and investment to cultivate. During the course of their employment, employees (especially those who frequently and directly interact with clients and suppliers) often form close ties with these clients and suppliers, thus increasing the need to protect these relationships.

In contracts of employment for employees in IT, an employer would want to use non-solicitation clauses to prevent its clients as well as key employees (namely, employees who have specific technical and specialist skills in certain pieces of software, programming languages, etc.) from being solicited by a former employee.

A non-compete clause (sometimes referred to as a non-competition or restraint of trade clause) is a contractual provision preventing an employee from being employed by or working for a competitor's business or from starting a new business which competes with that of their former employer, for a specific period of time and within a specific geographical region. The purpose of a non-compete clause is to allow employers to protect their proprietary interests (trade secrets and trade connections) by restraining former employees from unlawfully and unfairly competing or engaging in the same type of business as the employer and for using their knowledge of the employer's proprietary interests.

In contracts of employment for employees in IT, employers would want to use non-compete clauses to restrain former employees from unlawfully and unfairly establishing a competitor company which develops a competing software product or using the specialist and technical knowledge which the former employee acquired during their previous employment to compete against their former employer.

When should you consider using these clauses?

• Consider using non-compete clauses when:
  • the employee has access to highly strategic knowledge, trade secrets or confidential information, such as proprietary source code, datasets, etc. which, if used by a competitor, could harm the business;
  • the employee holds a senior role (such as, an executive or managerial role or the employee is a key employee with critical IT skills) with substantial influence on the business or key client relationships;
  • the employer has invested significantly in constructing client or supplier relationships in terms of which the employee is uniquely placed to exploit if they moved to a competitor. In the IT industry, this would apply where an employer intends to protect its existing user base; or
  • the business is of a nature where competition from the former employee would realistically undermine the business' market value and position. This is very prevalent in the IT industry where a competing business with a similar software product or offering can attract customers away from the previous employer, especially if the license to use the software is cheaper than the previous employer's license fees.
• Consider using non-solicitation clauses when:
  • the employee had direct responsibility for key customer and/or supplier relationships during their employment, for example, where the employee was a senior developer working exclusively for a specific client, such that if that employee leveraged those relationships post-employment, the employer's business would suffer; or
  • the employee had a role in recruiting, supervising or managing other employees, such that their poaching of staff would be harmful to the employer. This is relevant where an employee, was in a more senior role, such as a manager of a development team who was responsible for the hiring of software developers.

Enforceability

Non-solicitation and non-compete clauses are enforceable contractual clauses and will be upheld in a court of law provided that such clauses pass, what is commonly known as the ‘reasonability' test, namely that these clauses must be reasonable in their restriction on scope, duration, and geographical region. These considerations are premised on the view that employees should not be unreasonably deprived of their Constitutional right to freedom of trade, occupation and profession. In the line of Court decisions which culminated in the Supreme Court of Appeal's decision of Basson v Chilwan and Others, the principle articulated was that, whilst restraints are prima facie enforceable, they will not be enforceable if they conflict with public policy and considerations of reasonableness. A restraint that prevents one party from participating freely in the commercial and professional world, without the presence of a protectable interest of the former employer, must be unreasonable and against public policy and therefore unenforceable. Accordingly, restraints cannot be used by employers merely to stifle competition.

It is important to consider the following points when drafting these clauses:

• the employer must have a protectable legitimate business interest (such as, proprietary source code, software assets, databases, trade secrets, customer relationships, confidential information, or goodwill) that the clause intends to protect;
• the restraint must be reasonable in terms of its duration, geographic region, and the nature of the restricted activity (i.e., the restriction must not be broader than is necessary to protect the legitimate business interest);
• the clause must not be contrary to public policy, meaning that the clause must strike a balance between the employer's interests with the former employee's right to trade and earn a livelihood; and
• the language of the clause must be clear and specific: i.e., the clause must expressly and clearly address (i) what activity is restricted; (ii) how long the restraint applies; and (iii) in which geographic area the restraint applies. Our courts are likely to strike down vague, ambiguous or blanket restraints (namely restraints which are not specific or reasonable).

In critical IT transactions, naturally, the service provider will want to protect its assets (being its employees who have specific skills in certain software or programming languages) and the customer would be looking for these clauses not to be onerous for the very reason that if there is a breach of the agreement, the customer will want immediate access to such key employees to ensure continuity of services or avoid any disruptions to its business operations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.