Section 197 of the Labour Relations Act No. 99 of 1995 (“the Labour Relations Act”) provides that if a transfer of a business takes place –

  • the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer;
  • all the rights and obligations between the old employer and an employee at the time of the transfer continue in force as if they had been rights and obligations between the new employer and the employee;
  • anything done before the transfer by or in relation to the old employer, including the dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination, is considered to have been done by or in relation to the new employer; and
  • the transfer does not interrupt an employee’s continuity of employment, and an employee’s contract of employment continues with the new employer as if with the old employer.

business‘ is defined in the Labour Relation Act to include the whole or a part of any business, trade, undertaking or service and ‘transfer‘ is defined to mean the transfer of a business by one employer (the old employer) to another employer (the new employer) as a going concern.

In Schutte & Others v Powerplus Performance Proprietary Limited & Another, the court held that “a business or part of a business may be transferred in circumstances other than a sale. These may arise in the case of a merger, takeover or as a part of a border process of restructuring within a company or group of companies.”

The ambit of ‘transfer‘ under section 197 of the Labour Rations Act is therefore much wider than a ‘transfer‘ stemming strictly from a sale of business (as is implied by the use of “going concern” used in the definition of ‘transfer‘) and is interpreted loosely by the courts to extend to mergers, takeovers and other group (re)structuring.

In situations of group (re)structuring, companies should be wary of the wide interpretation and broad application of section 197 which may lead to the ipso facto transfer of the employment contracts related to one ‘business‘ to the another entity notwithstanding that the transfer of such contracts were not intended to take place.

Costs related to employees are often an entities largest expense and is it important to take cognisance of the broad application of section 197 when drafting any contract which may possibly fall within the ambit of ‘transfer‘ in terms of the Labour Relations Act to prevent an acquiring entity being unintentionally vested with a unwanted workforce together with the expenses and obligations thereof.