What are the legal requirements and obligations re Staff in the sale of a business in South Africa, the legal requirements and obligations regarding staff in the sale of a business are primarily governed by Section 197 of the Labour Relations Act (LRA), No. 66 of 1995. This section applies when a business is sold as a “going concern,” meaning it is transferred as an operational entity with the intention of continuing its activities. Below is an overview of the key legal requirements and obligations concerning staff in such a transaction:
Applicability of Section 197
Section 197 of the LRA comes into effect when:
A business (or part of it) is transferred from one employer (the “old employer”) to another employer (the “new employer”).
The transfer involves the whole or part of a business, trade, undertaking, or service.
The business is transferred as a “going concern,” meaning it remains sufficiently the same after the transfer (e.g., it retains its operational capacity, assets, and staff).
If these conditions are met, the transfer has significant implications for the employees.
Key Legal Obligations for Staff
Automatic Transfer of Employment Contracts
All employment contracts in existence immediately before the transfer are automatically transferred from the old employer to the new employer.
The new employer steps into the shoes of the old employer, inheriting all rights and obligations under those contracts.
Continuity of Employment
Employees’ years of service are preserved, and their employment is not interrupted by the transfer.
The new employer must recognize the employees’ length of service with the old employer for purposes like leave entitlements, severance pay, and other benefits.
Terms and Conditions of Employment
The terms and conditions of employment must remain the same or become more favorable under the new employer. They cannot be less favorable unless agreed otherwise (see below).
This includes wages, benefits, working hours, and other contractual terms.
Substitution of the Employer
The new employer replaces the old employer in all respects. Any actions taken by the old employer (e.g., disciplinary proceedings, unfair dismissal claims, or ongoing disputes) are deemed to have been taken by the new employer.
Employee Consent
Employees are not required to consent to the transfer of their contracts under Section 197. However, they retain the right to resign if the transfer results in significantly less favorable conditions, which could potentially be deemed a constructive dismissal.
Joint Liability
The old employer and new employer may be held jointly and severally liable for certain obligations (e.g., unfair dismissal claims or severance payments) for up to 12 months after the transfer, depending on the circumstances of any dismissal related to the transfer.
Exceptions and Variations
Agreement to Vary Conditions: The old employer, new employer, and employees (or their representatives, such as a trade union) may agree to vary the terms of employment, provided the overall package is not less favorable. Such agreements must be in writing.
Insolvency: If the business is transferred due to insolvency, Section 197A of the LRA applies instead. This modifies the obligations to provide greater flexibility to the new employer, but employees still retain certain protections.
Dismissals and Restructuring
Dismissals Related to the Transfer: Any dismissal directly linked to the transfer (e.g., to avoid transferring employees) is automatically considered unfair unless it can be justified for operational requirements (e.g., economic, technical, or organizational reasons). The employer must follow a fair retrenchment process under Section 189 of the LRA.
Post-Transfer Restructuring: The new employer may restructure the business after the transfer, which could involve retrenchments. However, these must be based on fair and valid operational reasons, not the transfer itself, and must comply with retrenchment procedures.
Employee Options
Employees cannot be forced to work for the new employer. They may:
Accept the transfer and continue employment with the new employer under the same or agreed terms.
Resign voluntarily if they do not wish to transfer. However, resignation due to significantly worse conditions may be treated as constructive dismissal, entitling them to claim unfair dismissal.
Obligations of the Old and New Employers
Consultation: Both employers must consult with affected employees or their representatives (e.g., trade unions) before the transfer. This includes discussing the transfer’s implications, any proposed changes, and measures to mitigate adverse effects.
Disclosure: The old employer must provide the new employer with relevant employee information (e.g., contracts, disciplinary records) to ensure a smooth transition.
Pending Disputes: The new employer inherits any ongoing labor disputes or negotiations (e.g., with trade unions) from the old employer.
Practical Considerations
Written Agreement: The sale agreement between the old and new employers should address staff-related matters, such as the transfer of contracts, liability for existing claims, and any agreed variations to employment terms.
Due Diligence: The new employer should conduct due diligence to understand the staff’s terms, pending disputes, and potential liabilities they will inherit.
Notification: Employees should be informed of the transfer in advance to ensure transparency and compliance with consultation requirements.
Conclusion
When a business is sold as a going concern in South Africa, Section 197 of the LRA ensures that employees’ rights are protected by automatically transferring their contracts to the new employer with continuity of service and no less favorable conditions. Both the old and new employers have obligations to consult with staff and manage the transition fairly, while employees retain the right to challenge unfair treatment or resign if conditions worsen significantly. For specific cases, it’s advisable to consult a legal or labor expert to ensure full compliance with the LRA and other applicable laws.
What are the legal requirements and obligations re Staff in the sale of a business in South Africa
