Restraint of trade in employment contracts

Introduction

In recent times, employees have become more aware of restrictions placed on their employment liberty at the end of their employment relationship. This restriction is usually due to a restraint of trade clause contained in some employment contracts.

It is a settled principle of law that parties are free to enter into a contract and are therefore bound by the terms of the contract. In the absence of misrepresentation, duress, fraud, or undue influence, the court is slow to intervene in contractual agreements because parties enter into contractual relationships freely and should therefore be bound by the terms.

However, there are certain instances where the court will intervene and not enforce contractual agreements. A restraint of trade agreement in employment contracts falls within the ambit of such contracts that are not quickly enforced by the court.

What is restraint of trade?

Restraint of trade is where an employee agrees to restrict his right to engage in a similar business of his employer for a specific period of time after the termination or end of his employment contract.¹ It is a restrictive clause found in employment contracts that limits the liberty of the employee with respect to future employment.

Restraint of trade clauses are mostly post-employment contracts. This means it mostly arises immediately after the termination of an employment relationship. A restraint of trade clause seeks to prohibit an employee from engaging in a similar business of his employer, whether on his own or in the employ of another.

There are four categories of restraint of trade contracts². The focus of this article will be on the first category out of the four listed below:

• Restraints imposed on employees by employers.
• Restraints imposed on the vendor of a business by the purchaser of that business.
• Restraints arising from combinations for the regulation of trade relations. That is, the regulation of supplies or promotion.
• Restraints accepted by distributors or merchants.

Rationale behind restraint of trade contracts

The rationale behind restraint of trade agreement lies in the employer’s desire to protect his business interest with reference to confidential information, trade secrets, and client’s information, of which the employee must have acquired in the course of his employment.

Position of the law

Restraint of trade contract is a common law principle that emanated from England. It states that all agreements in restraint of trade are void and not enforceable unless there are special circumstances justifying them.³ This means that the law will not enforce any contract of restraint of trade unless the restraint is reasonable to protect the employer’s business. The restraint must be reasonable with reference to the interests of the parties concerned and the interest of the public.⁴

Nigeria has followed this common law principle, and this is evident in a number of decided cases.⁵ In a recent judgment in 2015⁶, it reiterated the common law principle by stating that an employer must show that the restraint seeks to protect his business interest and it is not contrary to public policy. However, the establishment of the Federal Competition and Consumer Protection Act (FCCPA) 2019, brought a changing view on this principle. Before we discuss the effect of the FCPPA, let us briefly expatiate on what amounts to a reasonable restraint.

Reasonableness test in restraint of trade cases

It has been noted that the court will only enforce restraint of trade contracts that have reasonable circumstances justifying them. In reaching the decision of reasonableness, the court guides itself with certain factors. These factors are not standard as the court will look into the peculiarity of each contract of trade agreement in reaching a decision. Now, in no order of priority, let us move on to discuss the factors often considered by the court.

To start with, the court looks at the geographical coverage of the restraint of trade. Where the area which the restraint seeks to cover is too wide, the court will not enforce it. This means that a restrictive covenant should not cover an area wider than the scope of the employer’s business.

For example, a company that operates in 2 states out of the 36 states in Nigeria but seeks to restrain an employee from engaging in a similar business anywhere in Nigeria, will be held unreasonable and therefore, unenforceable. This is because the operational scope of the employer’s business is small and the restraint is wider than necessary to protect his business interest. An employer who runs a small business in a village cannot generally impose a nationwide restraint on a former employee.⁷

Also, the court will consider the duration of the restriction⁸. The length of time for a restrictive covenant must be reasonable if the court is to enforce it. An employer who seeks to restrain an employee for an indefinite period of time is highly unlikely to prove that it is reasonable to protect his business interest. Such restraint without limitation can be seen as a scheme of the employer to prevent competition. The court will therefore not enforce it as the law frowns at any restraint that seeks to prevent competition outrightly.

In addition, the restraint should be confined to the employee’s area of specialization under his former employer. It therefore, follows that an employer should not restrain an employee from working in an area of business that is different from that which he previously worked⁹. Where an employee’s new job description or area of specialisation is not similar to his previous employment, it will be difficult for the employer to show that the restraint seeks to protect his business interest.

Lastly, a restraint of trade seeks to protect the legitimate interest of the employer.¹⁰ An employee, who in the course of his employment acquired relevant and confidential information such as client details, trade secrets, or trade connections, might be restrained by his employer. This is because information of such nature is necessary to protect business interests.

These are the factors the court will look into in determining if a restraint is reasonable in the interest of the parties. Additionally, the court considers the interest of the public by determining whether the restraint on an employee’s employment skill or service will deprive the community of benefiting from such services.

The Federal Competition and Consumer Protection Act 2019

The FCCPA 2019 is Nigeria’s principal legislation which protects the rights of consumers and regulate competition. The act permits an employer to restrain the liberty of an employee with respect to future employment insofar as the restrictive agreement does not exceed two years.

This is a shift from the reasonability requirement explained previously which has been a product of case law over the years. It therefore, follows that employers in Nigeria can restrain an employee’s employment liberty, but it must not exceed 2 years. It is, however, arguable that in addition to this 2-year criteria, the court may still consider the reasonability factors when called upon.

1 Furmston, (ed.), Cheshire and Fifoot Law of Contract 13th ed. (London: Butterworths, 1996)

2 I. E. Sagay, Nigerian Law of Contract 2nd ed. (Ibadan, Spectrum Law Publishing, 2000) Pp. 427-428.

3 Nordenfelt v Maxim Nordenfelt (1894) A.C.535

4 O. Ogunniyi, Nigerian Labour and Employment Law in Perspective 2nd ed. (Ikeja, Folio Publishers Ltd, 2004) p.109

5 Andreas I Koumoulis v. Leventis Motors Ltd (1973) 11 S.C

6 7th Heaven Bistro Ltd v. Amit Desphande (NICN/LA/396/2015)

7 Forster and Sons v Sugget (1918) 35 TUR 87

8 Esso Petroleum Ltd. V. Harper’s “Garage (Stourport) Ltd (1968) A.C 269

9 Attwood v. Lamont (1920) 3 KB 571.

10 Fitch v Dewes [1921] 2 AC 158

Introduction

Probation has become a necessary aspect of the employment process in many organisations. Although probation has no statutory backing in the law, its practice in employment relationships has become widely accepted in different organisations. This article aims to answer some questions about the status of an employee on probation.

What is probationary period in employment?

Probation is an initial period in employment where the skills, knowledge and expertise of new recruits in an organisation are tested to determine their suitability for the job before permanent employment.¹ It is a period where the employer observes the employee keenly before he is employed.

Length of the probationary period

Legally, there is no time frame for probation because no law provides for a probation period. However, the law has mandated employers to give every employee a contract of employment no later than three (3) months after commencement of his/her employment.² Most employers have implied this three (3) months period to be the probationary period. Hence most employers usually fix the probation period from 3-6 months (or more, as the case may be).

In addition, determining the length of probation is at the discretion of the employer based on the nature of the job. This is because different job role demands a different level of expertise and skills from the employee. For example, the probation period of a cleaner in a law firm will be different from the probation period of an associate in the same firm.

Completion of the probationary period

At the end of the probation period, the status of the employee should be confirmed as that of a permanent employee and given a contract of employment, or his employment should be terminated.

Where the employer fails to confirm the employment status or terminate the employment at the end of the probationary period, it will be implied that the status of the employee has been confirmed to an employee under a contract of employment.³ This means the employee will be treated as a permanent employer and entitled to all the rights and benefits of an employee under a contract of employment.

What is confirmation of employment?

Confirmation of employment in this context means that an employer is satisfied with the services of the employee while he was on probation and, as such, changed his status of employment from probation to a permanent worker at the end of his probation.

The employer has a prerogative right to confirm the status of the employee. This means that he is not compelled to confirm the employment of the employee at the end of the probation if he is not satisfied with his work. Wherefore, refusal to confirm the status of the employee or unnecessarily delays in terminating the employment of the employee by the employer would be accounted as automatic employment.⁴

Termination of employment while on probation

As previously mentioned, it is important for an employer to confirm the employee’s status at the end of his probation. However, an employer is not compelled to retain an employee whose service is dissatisfactory.⁵ Therefore, with reasonable notice, an employer can terminate the employee’s employment while still on probation.

The justification for termination of employment while on probation lies in satisfying the purpose of probation. The purpose of probation is to determine the employee’s suitability for the job. An employer, therefore, who lacks assurance of an employee’s suitability for the job role has the right to terminate his employment.

The procedure for terminating the employment of an employee on probation is not as rigid as an employee under a contract of appointment⁶ because he is not yet an employee who can be lawfully protected by the law.

Promotion while on probation

Where an employer promotes an employee who is on probation, such an act singularly cannot imply confirmation of the employee’s status to that of a permanent worker. Although promotion shows proof of skill and merit required of an employee, it is not potent enough to change the probationary status of an employee to a permanent employee.⁷

Conclusion

In conclusion, for the status of a qualified employee with the requisite skill, knowledge and expertise to be changed upon successful completion of the probation period, the employer must confirm his employment as that of a permanent employee and give him a contract of employment. The employee can then come under the full protection of the law regarding employment relationship, as well as enjoy the rights and benefits of any employee under a contract of employment.

1 Al-Bishak v National Productivity Centre & Anor (2015) LPELR- 24659 (CA)

2 S 7 Labour Law Act 2004 (L1 LFN 2004)

3 Iwuji v Federal Commissioner for Establishment (1985) 1 NSCC 580

4 The Council of Federal Polytechnic, Ede & Ors. v. Johnson K. Olowookere [2014] 49 NLLR (Pt. 161) 144 at 170 – 171, Paras. D – E. The Court of Appeal held thus ‘where an employer had delayed unnecessarily in making up his mind whether to terminate or confirm an employee’s probationary appointment by keeping him in his employment and continuing to pay him for months after the probationary period had expired, he would be deemed by operation of law to have confirmed the employee’s appointment, and the doctrine of ‘estoppels by conduct’ would operate to prevent the employer from alleging and treating him as if he was still on probation. Delay defeats equity.

5 Ogbaji v. Arewa Textile Plc. [2000] 11 NWLR (Pt. 678) Page 326

6 Ibid (1)

7 BABA v N.C.A.T.C [1991] 5 NWLR (PT. 192) 388