January 2000

Section 197 of the Labour Relations Act 1995 regulates rights and obligations in the employment sphere where a business is sold as a going concern. There are a number of novel features to this section, the legal and practical implications of which are now emerging. Of particular importance is the automatic transfer of rights and obligations introduced by this section.

Before considering the section it is useful to re-examine the position that prevailed prior to the implementation of the Act to allow for a comparison.

Before 11 November 1996, on the sale of a business as a going concern, employment contracts and collective agreements came to an end as the identity of the employer party changed. The seller could not simply cede contracts of employment to the purchaser, common law requiring the employees' acceptance.

The Industrial Court developed general guidelines under its unfair labour practice jurisdiction for the seller and purchaser to follow on the sale of a business. Consultation in advance of the sale with the employees or their representatives was the central requirement, the reason being that sales are often accompanied by retrenchment or at least restructuring and redeployment of staff and so the rights of employees may be affected.

The purpose of the process of consultation was "to discuss the measures which are to be taken to protect the interest of the employees and the preservation of the employment relationship notwithstanding the change of ownership of the business". See: Kebeni v. Cementile Products (Ciskei) 1987 8 1LJ 442 IC.

Consultation covered such matters as retrenchments, severance payments, the transfer of the contracts of employment, changes to terms and conditions of employment, the effect on accrued rights in retirement funds and so forth.

In Ntuli v. Hazelmore Group 1988 9 ILJ 709 IC the Court suggested that the purchaser also had a duty to consult with the employees: "An employer who parts with an undertaking as a going concern should consult with his employees and their representatives in regard to the possible consequences of the takeover. The transferee should also be involved in these consultations or at least consult separately with the employees and their unions".

In this particular case the purchaser had retrenched employees very shortly after the transaction. The Court decided that if compensation was appropriate, the retrenched employees should look to the seller rather than the purchaser.

The Industrial Court on occasion recommended that a tripartite agreement on matters affecting employees be concluded. While having the advantage of certainty it was not always practical and could delay or prejudice a transaction.


At first glance Section 197 of the Act appears to make a significant change to rights and obligations of the parties concerned. Upon examination of this section however, and its implications, it emerges that while the law changes the practical route to be followed by both the seller and purchaser may be much as before but with a number of important different considerations to be borne in mind.

Section 197 restates the common law that an employee's consent is required if a contract of employment is to be transferred from one employer to another. However, there is an express exception to this rule which operates where the whole or part of any business is transferred as a going concern. In these circumstances the rights and obligations that existed between the old employer and each employee at the time of the transfer continue in force as if they were rights and obligations between the new employer and each employee. While a new contract arises, there is at the same time an automatic transfer of employment rights and obligation by operation of statute (with an exception made in the case of insolvency, schemes of arrangement and compromises). Also anything done before the transfer by or in relation to the old employer will be considered to have been done by or in relation to the new employer.

Importantly, the transfer of rights and obligations is qualified by the phrase "unless otherwise agreed". To avoid the automatic transfer an agreement is required between the purchaser and the employees that new rights and obligations should follow the transfer.

The section goes on to provide that such an agreement must be concluded with the persons or bodies with which an employee is obliged to consult in the case of retrenchment as provided for in section 189(l). In descending order, these are, any person with whom the employer is required to consult in terms of collective agreement and if there is no relevant collective agreement then with a workplace forum. In the absence of a workplace forum, any registered trade union whose members are likely to be affected and in the absence of such trade union, the employees themselves or their representatives are the parties with whom agreement must be concluded.

An automatic transfer of rights and obligations of employees may give rise to problems in the future for a purchaser in the form of claims or disputes about a range of matters where there is an actual or perceived variation in the terms and conditions of employment with the new employer. In most cases it will he important that an agreement on new terms and conditions of employment should be reached which also specifies which obligation, if any, of the old employer are to be transferred to the new employer.

To this end a process of consultation will be required with the relevant body or persons referred to in section 189(1) in which both the current and prospective employer should participate. What is required will differ from the consultation process envisaged in the case of retrenchment. In these circumstances an employer is obliged to consult with the view to reaching agreement, but if no agreement is reached, retrenchment may still follow. In terms of section 197 agreement is essential if there is not to be an automatic transfer of employment rights and obligations on the transfer of the business

Often a prospective purchaser will not be prepared to go ahead with the transaction if there is to be an automatic transfer of rights and obligations or he may require that employees who do not agree to new terms and conditions should be retrenched by the seller. It is plainly undesirable for dual employment standards to apply which will arise where some employees have not agreed to the new terms and conditions of employment but remain employees of the business at the time of transfer.

Practical preliminary steps which should be taken by the parties to a proposed transfer of business are the following:

1. A careful examination should be undertaken of the terms and conditions of employment and the employment benefits of the seller as well as those of the purchaser. This process should extend to such matters as salaries and bonuses, increases, performance appraisals and incentives, annual and sick leave benefits, hours of work, staff loans, policies regarding retrenchment benefits, all employment benefits including pension and provident funds, share schemes and medical aid, union recognition and bargaining agreements and so forth.

2. A comparison should be made between the current and prospective terms. Where they are the same or more favourable they should not pose a problem. Where they are less favourable for some or all employees they may present obstacles to reaching an agreement. Potential problems should be identified in advance and creative ways of dealing with them considered before consultation commences towards reaching an agreement.

3. In the course of consultation the proposed restructuring and transfer should be explained as well as the proposed new terms and conditions of employment describing where these will remain constant and in what respects they may differ.

4. New letters of appointment should be prepared and should be drafted in such a way that once signed they constitute an agreement as envisaged by section 197 thereby avoiding the automatic transfer of rights and obligations. The signing of such letters should precede or coincide with the effective date of the transfer.

5. Particular attention should be paid to any accrued rights or benefits such as accrued leave, recognition of length of service and long service awards or severance pay entitlements and also accrued rights in retirement funds.

A difficulty may arise if an agreement cannot he reached with certain employees on the new terms and conditions of employment. The seller may then be faced with having to retrench those employees. In this regard section 196(3) is of relevance which provides that an employee who unreasonably refuses to accept an employer's offer of alternative employment either with that employer or with any other employer, will not be entitled to the minimum retrenchment payment now provided for by the Act.

If the refusal to accept new conditions of employment is unreasonable there will then be no statutory obligation to make severance payments. This provision should serve to encourage employees to accept new conditions of employment provided that they are reasonable when compared with those that previously applied.

Where no agreement is reached and an automatic transfer of rights and obligations takes place, it will be the purchaser who may be most at risk if unanticipated difficulties arise which were not adequately dealt with at the time of the transfer. While in the past the seller was exposed to residual claims it is new the purchaser who in particular should ensure that he is adequately protected by way of suitable warranties and indemnities in the agreement of sale.

Clearly the LRA requires that labour law considerations have been made directly relevant when selling businesses. Agreements of sale must take account of this.

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The material contained in this article 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.

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