The COVID-19 pandemic has had a significant effect on the business sector across South Africa. With a number of businesses closing doors. Often employers are placed in the precarious position of being forced to sell their business in order to avoid further financial detriment and try to save jobs. Often businesses are sold as a going concern, and whether you are looking to either purchase or sell a business it is extremely important that you consider the implications in terms of Section 197 of the Labour Relations Act 66 of 1995 (hereinafter referred to as the Labour Relations Act).

 

In essence, section 197 deals with the transfer of employment contracts between the new and old employer when a business is transferred as a “going concern.” There is no specific definition of a transfer as a going concern in the Labour Relations Act. The Constitutional Court however in the case of National Education Health & Allied Workers Union v University of Cape Town & others  2003 (3) SA 1 (CC); (2003) 24 ILJ 95 (CC); 2003 (2) BCLR 154 (CC) cited a number of factors that would qualify a transfer as a going concern:

  • The transfer or otherwise of assets both tangible and intangible,
  • Whether or not workers are taken over by the new employer,
  • Whether customers are transferred and
  • Whether or not the same business is being carried on by the new employer.

 

The Court further stated that this list of factors is not exhaustive and that all of these factors must be considered in the assessment collectively.

 

These transfers are bound by section 197 of the Labour Relations Act, which places strict conditions upon employers in regard to employees’ contracts of employment. In essence, should the parties not reduce the transfer to writing in line with section 197 (6) the result is as follows:

  1. The new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of the transfer.
  2. All the rights and obligations between the old employer and employee at the time of the transfer continue in force as if they had been rights and obligations between the new employer and employee.
  3. Anything done before the transfer by or in relation to the old employer, including the dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination, is considered to be done by or in relation to the new employee.
  4. The transfer does not interrupt an employee’s continuity of employment, and the employees’ contract of employment continues with the new employer as if with the old employer.

 

The above can have serious consequences for new employers as they could be liable for issues arising from labour disputes as a result of the old employers’ actions. Further, the continuation in terms of the length of service would severely increase the amount the new employer would have to pay in terms of retrenchment packages, should financial difficulty force the employer to go down this route.

 

What is of extreme importance is noting section 197 (8) and (9):

These provisions provide that for a period of 12 months after the transfer the old employer is jointly and severally liable with the new employer to any employee who is due to receive payment in regard to severance, leave pay or amounts owing in regard to a dismissal related to operational requirements, unless the previous employer can show that it has complied with the provisions of section 197.

 

Further, both new and old employers are jointly and severally liable in regard to claims and conditions of employment that arose prior to the transfer. Karen Ainslie in her article “What are the employment implications of the transfer of a business?“, is of the belief that while it is not mandatory, consultations should be conducted with employees and their representatives in order allow for a smooth transition to occur.

 

It is strongly suggested that any employer either purchasing, selling or even involved in the transfer of a business take the necessary precautions and obtain the necessary legal advice in order to avoid any adverse effects as a result of failing to comply with Section 197.

 

Article by: Krian Rathinam

Dispute Resolution Official – Durban