Transfer of a business – what about restraint of trade agreements?

Under the common law, Contracts of Employment did not automatically transfer to the new Employer once the Business was transferred or sold as a going concern. Section 197 of the Labour Relations Act (“the Act) changed this and provides for the automatic transfer of Employment Contracts to the new Employer, should the Business be sold as a going concern. What other agreements transfer with the employment contract in terms of section 197 of the Act? In this article we discuss whether restraint of trade agreement survives such a transfer.

The primary protection afforded to the Employees in Section 197 is the right to continuity of employment. In terms of section 197 of the Act, there is an automatic transfer of Contracts of Employment from the old Employer to the new Employer where the whole or part of any business, trade, undertaking or service is transferred from the previous Employer to the new Employer as a going concern. For a transaction to fall within the scope of Section 197, the following elements must be present:

• The transfer must be from one Employer to another;
• The transferring entity must be the whole or part of a Business;
• The Business must be transferred as a going concern.

All 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.

In Laser Junction v Karl Fick, the High Court held that a restraint of trade agreement imposed on the Employees of the Seller does not survive the transfer of a Business to the new Employer in terms of Section 197. Laser Junction had bought the business of Laser CNC as a going concern. As a result of that acquisition, all the Employees of Laser CNC became Employees of Laser Junction in accordance with the provisions of Section 197. In terms of Section 197, Mr Fick was one of these Employees. During his tenure at Laser CNC, Mr Fick a signed a Memorandum of Agreement of Secrecy and Restraint and later the parties entered into a Contract of Employment.

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