CEO’s, corporate executives and employers alike proficiently handle section 197 business transfers with the utmost care, carrying out their due diligence with meticulous attention to detail. The company or business unit is scrutinised, and the estimated benefits of the same are recorded in the “Offer to Purchase” or sale agreement. What is often forgotten, however, is the status of the transferring employees employed by the company or business unit and whether the new employer has an exercisable discretion to accept or repudiate the transfer of any of the said employees.
The common law dictates that the sale, transfer or merger of a business results in the termination of the contracts of employment in existence between the business and its employees. Thus, under the old Labour Relations Act of 1956, due to the termination of the employment contracts and the transfer of the business being considered necessary in terms of operational requirements, employers were obliged to pay employees their severance pay and the employees were then retrenched. The new Labour Relations Act 66 of 1995 (“the LRA”) sets out a different position in that the contracts of employment of the existing employees are automatically transferred to the new employer and thus negate the need for any “no-fault” terminations.
Section 197(6), read with sub-section (2) and (7) of the LRA, however, gives the new and old employer scope to enter into a termination agreement or “no-fault” termination agreement with the existing employees. This process must resemble that which is recorded under section 189 of the LRA insofar as, inter alia, the affected employee(s) must be notified in writing of the process to be followed and must be invited to consult with the new and/or old employer accordingly. The aforementioned sections and sub-sections provide the employers, old and new, with an option to contract out of automatically transferring all the existing employees.
In the absence of any agreement concluded under section 197(6) of the LRA, the new employer will be automatically substituted into the place of the old employer, making the new employer liable and bound by all employment agreements, verbal or otherwise, in existence immediately before the transfer. All existing employees will dissociate themselves with the old employer and will, without any consultation, approval and/or consent from any of the relevant parties, be the responsibility of the new employer. All amounts owing to the existing employees must be disclosed by the old employer and a valuation of the various amounts due to the employees should be agreed upon by the respective employers. Furthermore, section 197(3) of the LRA dictates that a new employer is not allowed to employ the transferring employees on terms and conditions less favourable than those on which they were employed by the old employer.
Caveat: beware of S197(6) and its application
S197 of the LRA’s primary function is the protection of employees’ rights, specifically their right to continuity of employment. Mergers and business transfers are decided at top level management and often do not concern any of the general employees within the business. Therefore, any dismissal or termination pursuant to a section 197 transfer of a business as a going concern, done without the correct procedure, will be inherently unfair and will constitute an automatically unfair dismissal in terms of section 187(1)(g) of the LRA. Employees who are successful in this vein could receive up to 24 months’ compensation from the CCMA or reinstatement. Therefore, employers who wish to rely on section 197(6) must do so with extreme care and with the assistance of a legal representative. All provisions of sections 197(6), 197(7) and section 189(3) of the LRA must be followed in order to properly exercise the legal inadequacy and to satisfy the stringent requirements of the same. If these provisions are not followed by the new and/or old employer, either or both of the employers may be liable, depending on the circumstance and parties involved in section 197(6) agreement.
Therefore, employers who intend on selling their businesses as a going concern, as well as those employers who wish to buy such businesses, must pay careful attention to the provisions of section 197 and the possibility of the same leading to unpleasant and costly consequences. Employers are required to exercise great care and diligence when considering the provisions of section 197 and applying them to any transfer of a business as a going concern, failing which the employer will be liable for any amounts owing, be it compensation or back-pay, if no procedure is followed and the existing employees are thrown out with the proverbial bathwater.
Section 197 of the LRA deals with complex and stringent provisions. Ensure that you make an appointment to meet with an experienced labour law attorney, such as those in the CAF Labour Law Department, prior to exercising any of the aforementioned provisions.
Matthew Schoonraad
Junior Associate