The protection of employees and employees’ rights is a fundamental aspect of labour law in South Africa. South Africa, partly as a result of its history of past human rights abuses, is specifically aware of the rights of employees in relation to the employment relationship with employers. The abundance of ready labour in South Africa, both skilled and semiskilled, makes the protection of employees rights and the necessity to balance those rights against the economic interests of the employer of vital importance. The rights of employees have therefore been specifically protected within the Constitution of the Republic of South Africa, 1996 (“Constitution”) as well as in the Labour Relations Act No. 66 of 1995 (“LRA”) and the Basic Conditions of Employment Act No.75 of 1997.

Section 23 of the Constitution affords everyone the right to fair labour practices. It was under the umbrella of this right that the LRA was born. At the heart of employment law lies an innate tension between the interests of the employer and the interests of the employees. Employment law attempts to balance these interests by promoting the advancement of economic development on the one hand, and social justice on the other. Included in the right to fair labour practices is the right that every employee is not to be unfairly dismissed.  A contentious aspect of our labour law is the balancing of rights of an employer and its employees during the transfer of a business as a going concern.

In NEHAWU v University of Cape Town 2003 (2) BCLR 154 (CC) (“NEHAWU”) Ngcobo J stated that “[w]hat lies at the heart of disputes on transfers of businesses is a clash between, on the one hand, the employer’s interest in the profitability, efficiency or survival of the business, or if need be its effective disposal of it, and the worker’s interest in job security and the right to freely choose an employer on the other hand”. The provisions relating to unfair dismissal and unfair labour practices are contained in Chapter VIII of the LRA. Within that chapter, Section 197 of the LRA (“Section 197”) sets out the legal position for both the employer and the employee under circumstances where a business is transferred as a going concern and attempts to balance the interests of both the employer and the employees.

At common law, employees enjoyed little protection with respect to their rights and entitlements when a business underwent a change of ownership. The natural or juristic person acquiring the business (“New Employer”) was not compelled to retain the existing employees of the target business. This position did not promote job security nor did it ensure the continuity of terms of the employees’ employment contract with its previous employer (“Previous Employer”). In an environment where the unemployment rate is exceptionally high, a change in this legal position was desperately required and this is where Section 197 was greatly welcomed.

Section 197 of the LRA is only applicable if there is the transfer of a business by one employer to another where the transferred business includes the whole or a part of any business, trade, undertaking or service and the business is transferred as a going concern. “Transfer” in terms of Section 197 encompasses a wide definition. According to Schutte & Others v Powerplus Performance (Pty) Ltd & Another (1999) 20 ILJ 655 the meaning of transfer includes not only a sale of a business but also mergers, takeovers, exchanges of assets, donations, broader strategies of restructuring as well as the first and second generation outsourcing of services. In NEHAWU it was held that the term “going concern” does not simply mean the sale of shares or assets but rather the transfer of an operational business that continues to operate albeit under a different caretaker. In order to determine whether a business has been transferred as a going concern the Constitutional Court noted that regard must be had to the substance rather than the form of the transaction.

In terms of Section 197, the New Employer steps into the shoes of the Previous Employer, in so far as the relationship with the employees is concerned, when a business is transferred as a going concern. The contracts of employment therefore continue to exist post acquisition. The New Employer cannot force the existing employees to agree to new terms of employment that are less favourable than those contained in their employment contract with the Previous Employer. There is nothing, however, preventing the New Employer from offering new terms of employment to the employees that are different to those in the existing employment contract on condition that these new terms are more favourable for the employee. The only restriction in this regard is that if an employee does not want to agree to the new terms, the New Employer may not terminate that employee’s employment contract and must adhere to the terms of the existing employment contract. The LRA provides further protection for employees in Section 187(1)(g)  in terms of which the dismissal of an employee based on the transfer of a business or a reason related thereto is an automatically unfair dismissal to the extent that the real or dominant cause for the dismissal was the transfer of the business.[1]

It is for this reason that it is important for the New and Previous Employer to comprehensively consult on the existing rights and obligations in respect of all employment contracts. Prior to transfer the Previous and New Employer must achieve consensus as to the value of accrued leave pay, entitlement to severance pay as well as any other payments that may have accrued to an employee, if any. Section 197(7) of the LRA actually provides that the New and Previous Employer must conclude a written agreement which confirms who will bear the liability in respect of any payment owing to employees. To the extent that there is an apportionment of liability, the written agreement must specify on what terms such apportionment is based. Such an agreement must be disclosed by the Previous Employer to all employees that will be transferred. Notably, the LRA attempts to ensure that transferred employees will receive the benefits owed to them as there is an obligation placed on the Previous Employer to take reasonable measures to ensure that the New Employer can meet its liabilities. In the event that a transferred employee becomes unemployed by virtue of operational requirements, liquidation or sequestration of the business post acquisition and the Previous Employer failed to comply with its obligations in terms of Section 197(8), the Previous Employer will be deemed to be jointly and severally liable with the New Employer to the extent that the unemployment for the abovementioned reasons occurs within a period of 12 months from the date of acquisition,

In the event that a dispute between the employee and the Previous Employer pertaining to the dismissal of that employee prior to acquisition is found to be unfair, and such employee is awarded reinstatement and/or compensation, such an award would be enforceable against the New Employer. In so far as severance pay is concerned and to the extent applicable the calculation of such pay would include the years of service with the Previous Employer as well as the years of service with the New Employer.

Whilst the advancement of economic development and the promotion of employers’ interests in profitability are of grave importance, the implementation of same should not come at the detriment of employees. As much as it is important for employers to take note of the rights afforded to employees under circumstances where a business is being transferred as a going concern, it is just as important for the New Employer to ensure that he/she/it fully understands, prior to acquiring the relevant business, the terms of employment to which such New Employer will be bound. South Africa has attempted, through its Constitution and legislation, to strike a balance between the individual rights of the employee and the commercial interests of employers.

[1] Van der Velde v Business and Design Software (Pty) Ltd & Another (2006) 10 BLLR 995 (LC)