The sale of a business has more repercussions than just the transferring of ownership, as it has a significant impact on the employees of the business too. New ownership and new management may well lead to restructuring and job losses.
1.Common law principle
When a business is transferred, in terms of the common law, no employee may be forced to continue his/her contract of employment with the new employer, but it also states that the new employer has no obligation to employ the employees. A transfer of business could thus result in the termination of existing employment contracts.
As a result of the principles, it became clear to the legislature that fairness dictates the need to protect employees in the case of a transfer of business.
2. Labour Legislation
The Labour Relations Act, 28 of 1956, required that fair retrenchment procedures be applied in cases of termination as a result of the transfer of a business, and reminded parties to provide for the interests of employees in their sale agreements. In the Labour Relations Act, 66 of 1995 (the LRA), the protection of employees is explicitly provided for in section 197, although section 197 is not the only section that provides protection to employees during transfers, as section 187(1)(g) makes it an automatic unfair dismissal if the reason for the dismissal is a section 197 transfer.
The LRA also defines the resignation of an employee who is provided with substantially less favourable terms and conditions of employment by the new employer after the transfer as a dismissal.
Section 197(1) of the LRA makes it clear that the right of employees to have their contracts transferred is dependent on the transfer of a business meeting the exact wording of section 197, being if ‘the whole or part of any business, trade, undertaking or service’ is transferred ‘by’ the old employer ‘as a going concern’.
- Meaning of “business”
The definition of business is wide, but does not extend to all activities. The two most notable aspects of the defintion of business is firstly that a ‘service’ is expressly included, and secondly that it includes ‘the whole or any part’ thereof.
- Meaning of “transfer”
The meaning of the word ‘transfer’ is clearly intended to be wider than a ‘sale’. In the case of Schutte & Others v Powerplus Performance (Pty) Ltd and Another (1999) 20 ILJ 655 (LC) it was held that ‘transfer’ includes a merger, takeover or as part of a broader process of restructuring within a company or group of companies, by way of an exchange of assets or a donation.
- Meaning of “as a going concern”
In the above mentioned case, it was held that, irrespective of the form the agreement takes, the court should rather look at the substance of the agreement to determine whether a business had been transferred as ‘a going concern’, and further that it should look at whether ‘the economic entity remained in existence after its operation was taken over’.
- Effect of section 197
Section 197(2) lists the consequences of a transfer, being;
- The new employer is substituted in the place of the old employer in respect of all contracts of employment in existence just prior to the transfer;
- The rights and obligations in terms of those pre-existing contracts of employment continue between the new employer and the employees;
- All obligations of the old employer arising from the old employer’s actions prior to the transfer becomes obligations of the new employer; and
- Continuity of employment is maintained.
These consequences affect the freedom of the new employer in many instances, including the application of certain selection criteria for retrenchment, and it may place a bigger financial burden on the new employer. The effect of section 197 is thus that the employees of the old employer become the employees of the new employer with the same terms and conditions of employment and with continuity of employment.
Section 197(3) expressly provides that the employer should provide terms and conditions of employment that ‘are on the whole not less favourable’ than with the previous employer. Furthermore, it is not possible to contract out of continuity of employment, but it is however possible to change the terms of employment, if the employer and employee agree to such changes (section 197(6)). It is also important to note that only the rights of employees before the transfer, are transferred to the new employer.
Section 197 creates a serious barrier on the ability of businesses to determine who it wants to employ and on what basis. When a transfer of business is contemplated, both employers should tread carefully, given the potential financial exposure created by section 197.
If you are considering buying and/or transferring the whole or part of a business, make sure you are fully aware of the legal implications such a transaction can have.
Disclaimer: The material contained in this document is provided for general information purposes only and does not constitute legal or other professional advice. We accept no responsibility for any loss or damage which may arise from reliance on information contained in this article.