Guiding Employers through the Legal Requirements for Transferring Employees in Business Sales or Mergers

When a business is transferred as a going concern, the new employer automatically steps into the shoes of the old employer with respect to all existing employment contracts. Section 197 of the Labour Relations Act 66 of 1995 as amended (“LRA”) aims to protect employees when ownership of a business changes hands. It ensures that employees are not left in a vulnerable position or forced to renegotiate their contracts due to a change in ownership. ?Section 197 also balances the interests of the business owner by ensuring that employment relationships are clear and defined, even in the event of a sale or merger. ?However, while the law provides essential protection for employees, it also places significant obligations on new business owners.

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With that said, section 197 typically does not apply in situations where only assets are being sold rather than the entire business. For example, if a company sells off a piece of machinery or a warehouse without transferring the operations or staff, this would not be considered a going concern. Similarly, if a business is dissolved rather than sold, Section 197 does not come into play.

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What is the Transfer of a Business as a Going Concern?

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A transfer of a business as a going concern refers to a situation where a business is handed over to new ownership in such a way that it retains its essential characteristics and continues operations without significant interruption.

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In terms of the LRA, “business” is defined broadly and includes a trade, industry, or undertaking. This definition can encompass a wide range of activities and can include not only the physical assets of a company but also the intellectual property, customer base, and goodwill that go along with running a business. For a business to be considered a going concern, it must continue operating in a manner similar to how it did before the transfer. The business’s identity should remain largely intact, and the essential characteristics of its operations must be maintained. This might include continuing to serve the same customers, operating in the same market, or using the same premises or machinery. Some common indicators that a business is transferred as a going concern include the retention of employees, continuity of management, maintenance of existing contracts, and ongoing business activities. The idea is that the transfer should avoid causing a significant disruption in operations. For example, consider a retail chain being sold to new owners. If the stores continue to operate under the same brand, with the same staff, and sell the same products, this would be considered a transfer of a business as a going concern. Another example might be a manufacturing plant that is sold but continues to produce goods for the same clients with the same workforce.

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Moreover, Section 197 stipulates that when a business is transferred as a going concern, the new employer is automatically substituted in place of the old employer. This substitution applies to all contracts of employment, meaning that employees continue their employment under the same terms and conditions, just with a new employer.

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Obligations of Buyer and Seller

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Buying a business as a going concern comes with inherent risks, particularly concerning the employees who are transferred along with the business. Section 197(7) sets out specific responsibilities for the old employer during the transfer of employees. These responsibilities include agreeing on the valuation of certain employee entitlements and ensuring that liabilities are clearly defined and communicated. At the heart of Section 197(7) is the requirement for the old employer and the new employer to agree on the valuation of employee entitlements as of the transfer date. ?In cases where liability is shared between the old and new employers, the written (sale or merger agreement) agreement must include the exact terms of how this liability will be split. This apportionment needs to be detailed, leaving no room for ambiguity.

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Section 197(7) emphasises the need for transparency with employees. After the transfer, the new employer must disclose the terms of the agreement to the affected employees. This ensures that employees are fully informed of their rights and which employer is responsible for any accrued entitlements. The disclosure must happen as soon as practicable after the transfer to maintain transparency and trust.

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Employees have the right to be informed about the transfer in advance. The transfer notification should include details about the nature of the transfer, how their employment terms will be affected, and whether any significant changes to their conditions of service are anticipated. Failure to properly inform employees could lead to disputes and claims of unfair treatment, which could expose both the old and new employers to legal challenges. If the business is unionised or subject to collective agreements, consultation with the relevant union or employee representatives is mandatory. These consultations provide an opportunity to address employee concerns, negotiate terms, and ensure that all parties understand the implications of the transfer. Collective agreements already in place continue to bind the new employer unless specifically renegotiated. This continuity reinforces employees' rights and limits the new employer's ability to make unilateral changes to employment conditions.

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Conclusion

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South African courts have consistently reinforced the importance of employee protection under Section 197, interpreting the provision broadly to ensure that it serves its purpose. However, this broad interpretation also means that the law can sometimes apply in situations where the parties do not anticipate it. This makes it essential for buyers and sellers to carefully assess whether Section 197 will be triggered in any given transaction. The courts also assess whether the business retains its identity post-transfer, a critical factor in determining if it qualifies as a going concern.

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The transfer of a business as a going concern under Section 197 of the Labour Relations Act is a complex and often misunderstood area of law. While it is designed to protect employees, it places significant obligations on both the old and new employers, ensuring that employment relationships are preserved and employee rights are safeguarded. For businesses, careful consideration must be given to the nature of the transaction, the assets being transferred, and the employees involved. Both buyers and sellers must approach the process with a complete understanding of their legal obligations and potential liabilities. Ignoring the provisions of Section 197 can lead to costly legal battles and disrupt business operations, making it advisable for all parties to seek legal guidance and ensure compliance from the outset. Contact an expert at SchoemanLaw Inc for assistance today!

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