It is common practice for employers to include restraint of trade clauses in employment contracts to prevent employees who resign from competing with the business of their previous employer.
A second common practice is settling labour disputes, such as misconduct disputes, through mutual separation agreements. These agreements terminate the employment relationship between the parties voluntarily and usually contain a clause confirming that the agreement is a full and final settlement of all the claims between the parties. That is why they are also sometimes called full and final settlement agreements.
Now, the question is whether an employer can enforce a restraint of trade clause when the employment relationship ends through a full and final settlement.
This point recently appeared in the labour court case of Finfloor (Pty) Ltd v Holden and Another. In this case, the employee signed an employment contract with a restraint of trade clause. Later, after alleged misconduct, the employer and employee decided to part ways amicably, entering into a mutual separation agreement.
The employer, claiming that the employee violated the restraint of trade clause, approached the Labour Court to enforce the restraint of trade. The employee argued that it couldn’t be enforced due to the subsequent separation agreement.
Crucially, the separation agreement had a clause stating, “This agreement shall constitute an agreement in full and final settlement of all claims of any nature whatsoever between the parties, whether arising from either the contract of employment, delict, contract, statutory, equity, or any other aspect of the employment relationship between the parties.”
The employee argued that this clause prohibited the employer from enforcing the restraint of trade because they had already settled all claims between them.
The court ruled that the employer must explicitly reserve the right to enforce the restraint of trade from the employment contract in the mutual separation agreement. Without this, the employer loses the right to enforce the restraint.
Employers must, therefore, always consider all existing rights and obligations that may be impacted before entering into mutual separation agreements. It is advisable to use the services of a professional labour consultant due to the technicalities involved.
SEESA offers a range of labour law consulting services, and our team of expert labour law advisors can help your business, providing you with peace of mind.
About the author:
Ivan Husselman obtained his BCom Law degree from the North-West University and joined SEESA in June 2017. He is currently employed as a Senior Legal Advisor at SEESA’s Head Office in Pretoria.