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Worklaw subscribers receive a monthly newsletter containing commentary on the latest labour law cases and trends. This month's subscriber newsletter contains an article on Strike ballots: do they play a role? We also look at three new cases: the first looks at whether a transfer of shares is a transfer of a business as a going concern covered by s.197 of the LRA. The second considers when a matter is sufficiently urgent so that a court can stop a disciplinary hearing. The third looks at what is reasonable in a restraint of trade.

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Is a transfer of shares a transfer of a business as a going concern?

An employee was dismissed for alleged operational reasons. He referred a dispute to the CCMA alleging that his dismissal was automatically unfair in terms of the provisions of s 187 of the LRA, for the reason that it was related to the transfer of a business as a going concern in terms of s 197 of the LRA. Conciliation failed and he referred the dispute to the Labour Court. The Labour Court dismissed his claim with costs and he appealed to the LAC.

These are the facts in Long and Prism Holdings Limited & another (LAC JA 39/10) Judgment: 06 March 2012. The employee, Mr Long, was employed as Prism's Human Resources Director. Net 1 Applied Technologies SA Ltd ("Net 1"), acquired the whole of the shareholding of Prism in terms of section 311 of the Companies Act. Thereafter the two companies still remained separate legal entities. Net 1 was five times the size of Prism and had some 2000 employees, while Prism had about 280 employees.

After the acquisition of Prism, a process of integration and restructuring followed. The reason for this was the fact that certain business units (such as Human Resources) in both Net 1 and Prism were performing the same functions. They had to be integrated. The positions of human resources managers in both companies were merged. A memorandum was circulated to all members of staff with a proposed new group structure. Each staff member was invited to comment or make proposals on the structure. In the proposed structure, Long's name did not appear on the proposed structure. Net 1's HR Manager was reflected as the Group HR Manager.

There were discussions with Long and it was made clear that there were no opportunities available to him at a senior level, including Net 1's international initiatives; the only position on offer was that of Human Resources Manager under the Group HR Manager at half his salary. As an alternative to dismissal, Long proposed that he be placed at the position of HR Manager at his current salary which would be frozen for some time until it became market-related. Net 1 was not prepared to accept this proposal.

Long then received a notice advising him that his current position had become redundant and that his services would be terminated because of the Company's operational requirements.

Was this a retrenchment because of a transfer of a business as a going concern? If it was, then it would constitute an automatically unfair dismissal under section 187(1)(g) of the LRA.

The LAC upheld this principle: For s 197 of the LRA to apply, the old and the new employers must be two separate entities. The section will not apply where control of the business is transferred by way of a share transfer. In this case control over Prism was shifted to Net 1, but the legal identity of Prism as the employer remained the same. This case stresses that where control of the business is transferred by way of a share transfer, control is shifted, but the legal identity of the employer remains the same.

For Mr Long this legal principle, based largely in company law, must have been confusing because as he saw it he lost his job because of reorganisation following a change in the control of the business. But the lesson of this case is that s 197 only applies if there is a change in identity of the employer. In Mr Long's case, there was not.

When is a disciplinary matter 'urgent'?

It has become fashionable, it seems, for employees to rush to court to interdict the employer from proceeding with the disciplinary hearing. It is clear that the Labour Court has jurisdiction to interdict any unfair conduct including disciplinary action. But it has been held that such an intervention should only be exercised in exceptional cases. Among the factors that a court has to consider is whether failure to intervene would lead to grave injustice or whether justice might be attained by other means (see Booysen v Minister of Safety and Security and others (LAC 09/08, judgment date 1 October 2010). The Labour Court's reluctance to interfere is seen in Mosiane v Tlokwe City Council (2009) 30 ILJ 2766 (LC) where it was held that an application to declare a suspension invalid may not be treated by the courts as an urgent matter.

The route of the urgent interdict was again tried recently in the case of Hermanus v Overberg Municipality (LC C 144/12) Judgment: 1 March 2012. In this case, the parties had entered into a contract of employment. With regard to disciplinary procedures, the Labour Court said that it embodied 'everything that an internal disciplinary hearing is not meant to be'. It provided for elaborate procedures akin to a criminal trial; it purported to give the employee the right to co-determine the chairperson; and, perhaps most astonishingly, not only was the employee entitled to legal representation, but it provided that the municipality (ie the ratepayers!) must foot the bill for the employee's legal representatives, including a senior attorney and senior counsel. It went further to ensure the same representation up to Constitutional Court level.

The employee was facing charges of misconduct relating to sexual harassment. The applicant asserted his rights to make use of a senior attorney and senior counsel at ratepayers' expense, and planned to do so if and when the disciplinary hearing eventually got underway. The municipality argued that many aspects of the contract of employment were unlawful and against public policy. Hence it did not intend to provide the employee with legal representation at the hearing.

The judge supported the idea that the latitude extended to parties to dispense with the rules of the court in urgent circumstances was an integral part of a balance that the rules attempt to strike between time-limits that give parties a considered opportunity to place their cases before the court and a recognition that in some instances, prescribed time limits might result in injustice. But a departure from the normal provisions is an exception and should not be available to parties who are 'dilatory to the point where their very inactivity is cause of the harm on which they rely to seek relief in this court'.

In this case the court refused the urgent interdict because the employee's inactivity itself had made the situation urgent. This case is a reminder that while the Labour Court is prepared to treat a matter as urgent, there is an obligation on the applicant to fully explain the reasons for urgency (which should not be of the applicant's making) and why urgent relief is necessary.

When is a restraint of trade unreasonable?

Restraint of trade agreements are a common way in which employers try to protect their trade secrets and client base when an employee leaves. As we have pointed out in previous cases, restraint of trade agreements are generally enforceable and valid. Like all other contractual stipulations, however, they are unenforceable when, and to the extent that, their enforcement would be contrary to public policy. It is against public policy to enforce a covenant which is unreasonable.

In the recent case of EOH Mthombo (Pty) Ltd v Bheekie-Odhav (LC C 177/12) Judgment 22 March 2012 an ex-employee had taken up employment with a competitor (but not an existing client) of the applicant. There was no evidence that she attempted to solicit any of its employees to join her, nor that she has caused any of the applicant's existing customers to take their work elsewhere.

The applicant (the old employer) wanted to prevent the ex-employee from doing any of the following for a period of twelve months: (a) being employed by any of its clients or customers; (b) soliciting any of its employees; (c) causing an existing client or customer to take its work to her new employer. There was no geographical limitation to the restraint of trade clause.

The judge usefully summarised the position with regard to restraints of trade in our law:

First, the general principle was confirmed: Restraints of trade are generally enforceable and valid. Like all other contractual stipulations, however, they are unenforceable when, and to the extent that, their enforcement would be contrary to public policy. It is against public policy to enforce a restraint that is unreasonable, i.e. one which unreasonably restricts that person's freedom to trade or to work.

Second, enforceability is a circumstance-specific enquiry. Whether the restraint is unreasonable must be determined with reference to the facts and circumstances of the case.

Third, this is a broad enquiry. The circumstances to be considered are not limited to those that existed when the parties entered into the covenant. Account must also be taken of what has happened since then and, in particular, of the situation prevailing at the time the enforcement is sought.

Fourth, a court must make a value judgement with two principal policy considerations in mind in determining the reasonableness of a restraint: the first is that the public interest requires that parties should comply with their contractual obligations (a notion expressed by the legal maxim pacta sunt servanda); and the second is that all persons should in the interests of society be productive and be permitted to engage in the occupation of their choice.

The lesson of this case is that courts, in balancing the interests of the ex employer and employee, are likely to react against broad restraints and favour the ex-employee's right to choose her / his occupation without unreasonable limitation.


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Bruce Robertson
May 2012
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