12 September 2022 by and Employment Law Alert

Does a restraint of trade transfer with a business as a going concern under section 197 of the Labour Relations Act?

On 10 August 2022 the Johannesburg Labour Court, for now at least, appears to have settled this contentious question.

In the case of Slo Jo Innovation (Pty) Ltd v Beedle and Another (J 737/22) [2022] ZALCJHB 212, Slo Jo Innovation (Pty) Ltd (applicant) filed an urgent application to enforce a restraint of trade undertaking contained in the first respondent’s (Ms Beedle) contract of employment. Beedle had been employed by Slo Jo Trading (Pty) Ltd (Slo Jo) as a sales representative.

In 2007 Beedle concluded a contract of employment containing a restraint of trade clause. The applicant was a wholly owned subsidiary of Slo Jo. In 2018, as part of Slo Jo’s internal restructuring, three new companies were established, one of which was the applicant. The applicant’s case was that Beedle was then transferred from Slo Jo to the it as part of the internal restructuring under section 197 of the Labour Relations Act 66 of 1995 (LRA).

Subsequent to the transfer, Beedle resigned from the applicant’s employ and become involved with a direct competitor of the applicant. The applicant sought to interdict Beedle from being involved with the competitor’s business. Beedle opposed the application on the basis that her 2007 contract was not concluded with the applicant but with Slo Jo. According to Beedle there was no restraint of trade in place between the applicant and herself. She also argued that a restraint of trade agreement does not by law pass from one employer to another, placing reliance on the 2017 decision of the High Court in Laser Junction where the court held that only contracts of employment and not restraints of trade are transferrable under section 197 of the LRA. The Labour Court declined to follow the decision in Laser Junction, which the Labour Court found (correctly in our view) to be incorrectly decided. The Labour Court also found that there were distinguishing features between Laser Junction and this matter. Unlike in Laser Junction, Beedle had not signed a new employment contract. Under section 197(2) the new employer (i.e. the applicant) is automatically substituted in the place of the old employer in respect of contracts of employment in existence immediately before the date of the transfer. 

In short, the court concluded that a restraint of trade agreement concluded between an employer and employee and included in a contract of employment is transferable under section 197 of the LRA. This case is another in a long line of cases in which the Labour Court has upheld and enforced restraints of trade agreements against former employees who, after concluding an agreement, take up employment in breach of the undertaking. So, employees should tread carefully when it comes to breaching restraint of trade covenants.

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