Most contracts of employment have a restraint of trade clause in them. The clause usually states that the employee is restricted from performing certain work within a certain industry for a certain period. The purpose of this clause is to stop the employer’s proprietary interests from being accessed by its competitors. Proprietary interests are, inter alia, the employer’s trade secrets and confidential information. An enforceable restraint of trade prevents a former employee from joining the employer’s direct competitors if the employee is privy to the company’s confidential information and trade secrets, thus protecting the employer’s commercial interests.

On the other hand, a transfer in terms of section 197 of the Labour Relations Act occurs when a business is sold as a going concern. The usual consequence of such a transaction is that the new owner of the business takes over the responsibilities of the old owner as they are. This includes responsibilities towards employees and any labour disputes that are ongoing or arise after the transfer has taken place.

It can be said that a majority of cases relating to section 197 transfers are usually litigated from the point of whether the new employer has fulfilled all their responsibilities in relation to the employees satisfactorily. In contrast, restraint of trade disputes is usually litigated from the employer’s point of view. In the recent case of Slo Jo Innovation (Pty) Ltd v Beedle and Another [2022] ZALCJHB 212 (10 August 2022), the employer initiated a dispute against an employee who had been transferred to them, seeking to enforce the restraint of trade clause.

In their response, Ms Beedle’s legal representative argued that Slo Jo Innovation (Pty) Ltd had no cause of action or a clear right in the form of a restraint of trade; therefore, they could not obtain the relief they sought. This argument was made against the background that Ms Beedle was employed by Slo Jo Trading (Pty) Ltd as a sales representative, where a contract was entered into by both parties in April 2007. The contract contained a restraint of trade clause. In 2018, Slo Jo Trading (Pty) Ltd underwent a restructuring process. As a result, three subsidiaries were established: Slo Jo Innovation (the Applicant), Slo Jo Distribution and Slo Jo International. Different employees were transferred into the different subsidiaries, and no changes were made to the terms and conditions of the employees save for the change of the employer’s name.

Upon her resignation in 2015, Ms Beedle joined Flavourpro, the Second Respondent, a direct competitor of her former employer. Ms Beedle argued that the contract the Applicant relies on was concluded between her and Slo Jo Trading (Pty) Ltd in 2007, and it was not transferred to the Applicant in 2018 when her transfer took place. Therefore, there is no restraint of trade between her and the Applicant. She argued that it was never indicated to her that the restraint had been transferred, and she did not consent to it being transferred. She further argued that the terms of a restraint of trade agreement do not transfer from one party to another by law.

The Court rejected her reliance on the judgment of Laser Junction (Pty) Ltd v Fick (2017) 38 ILJ 2675 (KZD) (Laser Junction), where the Court stated that only contracts of employment and not restraint of trade agreements are transferrable under section 197 of the LRA. The Court’s rejection was because, amongst others, the facts of this matter and those of Laser Junction were different, wherein the employee in Laser Junction had concluded a new contract without a restraint of trade clause subsequent to his transfer while Ms Beedle never signed her new contract with the Applicant in 2018 after her transfer.

The Court stated that a transfer takes place by operation of law. Therefore, Ms Beedle’s consent was not a requirement for the validity of the transfer of her contract of employment. 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. The Court quoted Horn and others v LA Health Medical Scheme and another 2015 (7) BCLR 780 (CC) where the Court stated that “if the obligation was in existence at the time of the transfer, it continued in force beyond the transfer.” The Court further noted that the LRA clearly states that all the rights and obligations between the old employer and an employee at the time of the transfer continue in force as if they had been rights and obligations between the new employer and the employee. The Court found Ms Beedle’s second argument that the agreement was concluded between the parties when she was a sales representative and thus did not continue to apply when she got promoted over the years to be opportunistic. Therefore, Ms Beedle’s obligation existed at the time of her transfer and continued beyond the transfer. Ms Beedle’s matter was consequently dismissed.

In conclusion, the answer to the question of whether a restraint of trade is transferrable is a resounding yes, unless a new agreement is concluded after the transfer, which states otherwise.

Article By: Buhle Masuku 
Dispute Resolution Official  – CEO Durban