Restrictive Clauses

What are Restrictive Clauses and what you need to know.

What are Restrictive Clauses

Restrictive Clauses include Restraint of Trade (ROT) or Liquidated Damages (LD) clauses in employment contracts.

ROT clauses temporarily restrict the freedom of employees to contract with other parties in order to protect a company’s legitimate business interests, after the employees leave employment.

LD clauses state the sum of money to be paid by the employee to the employer in the event of a breach of the contract by the employee, in order to recover the losses from the employee. Such clauses may also include losses incurred when an individual does not show up for work after he or she has committed to take up a senior executive position.

What You Must Do to Be Fair

The following Tripartite Guidelines on Fair Employment Practices (restrictive clauses) state what you must do as an employer:

  • You should carefully consider if there is a genuine need to include ROT or LD clauses in your employees’ employment contracts. 
  • Such clauses should balance employers’ and employees’ needs and interests, and also the public interest to allow labour market flexibility and mobility.  

Restraint of Trade

  • You should not include ROT clauses in the employment contracts for lower-paying jobs as:
    • These employees are more unlikely to have access to information that would                    significantly harm their current employer’s interest;
    • These clauses have a greater impact on their livelihoods, compared to higher-                  paying jobs.

  • You may reasonably include ROT clauses in the employment contracts for higher-paying jobs given the nature of the work and position in the organisations. To protect legitimate business interests*, the ROT clauses must be reasonable in terms of:
    • Scope;
    • Geographical area; and
    • Duration
    (*Legitimate business interests include advantages and assets regarded as the employer’s property, trade secrets and confidential business information; and trade connection/relationship with clients, that have direct impact on sales, business prospects and profitability in the event of a breach.)
 

Liquidated Damages

  • LD clauses should be reasonable and should not be used to deliberately penalise the employee. They should represent genuine pre-estimates of the loss that may be incurred when an employee breaches the contract (e.g. payment for the costs for training and relocation of a certain stated amount that is a genuine pre-estimate of these costs).
  • In particular, you should not include LD clauses that do not represent such genuine pre-estimates in the employment contracts of lower-paying jobs as they more greatly impact the employees’ flexibility to change employers.


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Tripartite Guidelines

Refer to the Tripartite Guidelines on Fair Employment Practices to ensure that you abide by the guidelines on all the relevant practices.