South Africa: Transfer Of A Business - Employment Law Issues

Last Updated: 12 January 2000

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.

For further information, please contact us.


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.

© Copyright Webber Wentzel Bowens 1999. All Rights reserved.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions