The High Court recently held in Laser Junction v Karl Fick 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. We think this decision is clearly wrong, but even if it isn’t, there are ways to protect the new employer that should be adopted.
In this case, 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 transferred in terms of section 197 to Laser Junction. Mr Fick was one of such employees.
Mr Fick subsequently took up employment with a competitor and when Laser Junction sought to enforce the restraint of trade agreement, it relied on the agreement Mr Fick had concluded with Laser CNC. The court, in refusing the application, held that the restraint of trade agreement did not survive the transfer in terms of section 197.
The Judge found that only contracts of employment are transferable under section 197 and that a contract of employment contains only basic conditions of employment. The corollary, the Judge held, was that contracts that do not contain basic conditions of employment, or which are less favourable than the basic conditions of employment set out in the Basic Conditions of Employment Act cannot be contracts of employment.
This is simply wrong. It is so for two reasons.
The first is that a contract of employment may contain terms and conditions that go beyond the basic conditions of employment set out in the Basic Conditions of Employment Act. Thus, it cannot be correct that a restraint of trade agreement cannot be part of an employee’s contract of employment.
The second reason is that the Judge’s interpretation of section 197 incorrectly focused only on the language of section 197(2)(a), which refers to the substitution of “all contracts of employment” and ignored section 197(2)(b) which provides that:
“If a transfer of business takes place, unless otherwise agreed in terms of sub-section (6) 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.”
Section 197(2)(b) must refer to something more than that contained in the contracts of employment, otherwise it would not be included in the Act. Restraint of trade agreements must clearly fall within the definition of rights and obligations between the old employer and the employee. These rights and obligations, namely the obligation not to go to a competitor and the right of the employer to seek to interdict the employee from doing so, continue as between the new employer and the employee.
But if we are wrong on these points, the learning to be taken from the judgment is to ensure that employees, once they transfer, sign new agreements with the new employer which are the same or substantially the same as the terms and conditions under which they were employed. If that is done, there can be no claim that the agreement had not been transferred.
Indeed, in this case Mr Fick contended that he had signed a new agreement but that agreement could not be presented at court. Mr Fick further contended that that agreement did not contain a restraint of trade undertaking and that the agreement specifically provided that it superseded all other agreements. Had Mr Fick been right, that would have been the end of the matter and there would have been no need to consider the transferability of restraint of trade agreements in terms of section 197 of the Labour Relations Act.