The purpose of section 197 of the Labour Relations Act 1995 (hereafter “LRA”) is to regulate the consequences on the employment where a whole or a part of a business or service is transferred as a going concern. This section facilitates commercial transactions and particularly provides security to employees in terms of employment and contractual relationship.

In terms of section 197 and section 197B(1)(b) of the LRA, a transfer means the transfer of a business by one employer (the old employer) to another employer (the new employer) as a going concern. In NEHAWU v University of Cape Town & Others [2003] 24 ILJ 95 (CC), the Constitutional Court stated that section 197 of the LRA has a dual purpose – “it facilitates the commercial transactions while at the same time protecting the workers against unfair job losses”.

When a business is transferred as a going concern, the question usually asked is who takes the rights and existing obligations and how are they taken? Section 197(2)(a) of the LRA states that if the transfer of a business takes place, unless otherwise agreed, the new employer is automatically substituted in the place of the old employer for all contracts of employment in existence, immediately before the date of transfer.

Section 197(2) further states as follows:

  • All the rights and existing obligations between the old employer and an employee at the time of the transfer remain in force. This means the same rights and obligations still apply to the new employer and the employees, which include, among others, providing service and payment of salaries.
  • 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 an act of unfair discrimination, is considered to have been done by the new employer; and;
  • The transfer does not interrupt an employee’s continuity of employment, and an employee’s contract of employment continues with the new employer as if with the old employer.

In this regard, the employees must be transferred to a new employer on the same terms and conditions, not less favourable than the terms that they enjoyed when they were employed by the old employer. This type of transfer occurs automatically by operation of law, and the new employer steps into the shoes of the old employer.

In MTN (Pty) Ltd v Pillay and others (DA 02/18) (2019) LAC, the Labour Appeal Court held that it implied in section 197 that the new employer, like the old employer, has a duty inter alia to pay the employees their wages as and when they fall and fell due in terms of their respective employment contracts.

The new employer would, therefore, have the same obligations in that regard as the old employer. Moreover, the terms and conditions that applied to the employees under the old employer continue under the new employer. The employment contract is thus uninterrupted by the transfer to the new employer.

It is important to note that consultation is required where old and new employers wish to deviate from the provisions of section 197 of the LRA. The old or new employer or both employers acting jointly may conclude an agreement with employees or their representatives to contract out of section 197 (2) of the LRA. It is encouraged to have a consultation with employees or their representatives to ensure that there is a harmonious relationship and transition between the parties.

In SACWU v Unitrans Supply Chain Solutions (Pty) Ltd (2009) ILJ 2469 (LC), a business had been transferred as a going concern in terms of section 197(2) of the LRA. The employees refused to “recognise” the new employer whatsoever and withheld their services. The Court concluded that this conduct was unlawful and unjustified but nonetheless found that the dismissal of the employees was unfair as the breakdown had been caused by the failure of the employers to communicate adequately with the union and employees.

Section 197(8) of the LRA states that for a period of 12 (twelve) months after the date of the transfer, the old employer is jointly and severally liable, with the new employer to any employee who becomes entitled to receive payment of leave pay, severance pay or any other amounts owing as a result of the employee’s dismissal for a reason relating to the employer’s operational requirements or the employer’s liquidation or sequestration unless the old employer can show that it has complied with the provisions of this section.

Furthermore, section 197(9) of the LRA states that the old and new employer are jointly and severally liable for any claim concerning any term or condition of employment that arose before the transfer. The risk of any liability being placed on the new employer may be mitigated by obtaining an indemnity from the old employer.

The transfer of a business as a going concern introduces some formalities for the commercial partners in the transfer of a business, non-compliance with section 197 may result in liabilities for either the previous employer or the new employer and some instances, both employers. The two employers must agree which employer is liable to pay amounts that are due to the employees. Should the employers agree to apportion the liability, the terms of the apportionment must be agreed upon, and the terms of that agreement must be disclosed to the employees.

Article by: Tshepang Makhetha
Dispute Resolution Official – Pretoria