When a business is sold what happens to the employees?

When a business is sold what happens to the employees?

It is submitted that it is trite that under common law, the sale, closure, merger or takeover of a business results in the termination of the contracts of employment in existence between the business and its employees.

According to Grogan (Workplace Law, 11th edition. Reprinted 2016) on p. 346, the principle which is applied here is that an employer cannot “force” its employees to work for another. Therefore, under the old 1956 Labour Relations Act (“the LRA”), an employer who wanted to close or sell his business was deemed to have done so for operational requirements, and was thus obliged to pay severance pay to its employees (Grogan).
Under the new LRA, the position is different. Section 197 of the LRA, the contracts of employment of the existing employees, are automatically transferred to the new employer subject to the provisions of the section.

Section 197:

In terms of section 197 of the Labour Relations Act (”the LRA”), the sale of a business as a going concern takes place subject to the provisions of the LRA. The Act in section 197 thereof deals with the transfer of a contract of employment and defines: “Business” to include the whole or part of any business, trade, undertaking or service.

“Transfer” means the transfer of a business by one employer (the old employer) to another employer (the new employer) as a going concern.

In short, the relevant section contains provisions which protects the rights of the employees of the old employer when they are transferred to the new employer. The new employer is automatically substituted in the place of the old employer in respect of all contracts of employment (verbal or otherwise) in existence immediately before the transfer.

All 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.

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. The new employer is not allowed to employ the employees on terms and conditions less favourable to the employees than those on which they were employed by the old employer.

The new employer is bound by any collective agreement (agreement with a union) concluded prior to the transfer. Section 197(7) lists a number of issues that need to be agreed upon by the old and new employer. 

Some of these are:

• Leave accrued to the employees;
• Any severance pay due;
• Any other payments due to the employees.

The old and new employer need to conclude a written agreement on which employer is liable for such amounts or in the case of apportionment of liability, the terms of such apportionment.

In the absence of an agreement to the contrary, the old employer is jointly and severally liable with the new employer to any employee who becomes entitled to receive a payment contemplated in section seven as well as for any claim concerning any term or condition of employment that arose prior to the transfer.

Examples of issues that need to be honoured by a new employer when the business was bought as a going concern: Note: The list below is not exhaustive and the complete provisions of the Act should be studied to ensure compliance.

• Salaries
• Negotiated salary increases (annually) for union members or even non-union members where such practice was established in the past
• Paying over of union membership fees
• Payment of and paying over of any agreed contribution to pension/provident funds of a recognised union
• Compliance with the terms and conditions of any applicable collective agreement
  UIF obligations
• Recognition of previous service with the old employer.

Employers who intend selling their businesses as a going concern as well as the buyers of such business, should take careful note of the provisions of section 197 of the LRA prior to doing so.

Because the new employer steps into the shoes of the old employer, he/she incurs huge liabilities if the provisions of section 197 are ignored or not complied with. Similarly, the old employer may still be held jointly and severally liable for certain obligations to his former employees. This could lead to unpleasant and costly consequences.
Section 197A which deals with the transfer of contracts of employment in circumstances of insolvency is also important, but will not be dealt with herein. Its provisions need however be taken into account under such circumstances.