The effect of a transfer of a business as a going concern on an employer and an employee

05 July 2022 ,  Aqeelah PetersenFanie Botes 1969
The phrase “out with the old, in with the new” is not completely true when it comes to the transfer of a business as a going concern. Although it is true that a new employer is introduced to the business operation, the new employer essentially takes on the duties and obligations of the old employer in respect of the employees and their contracts.
There is a continuity in employment contracts when the transition occurs between the old employer and the new employer. However, in order for this continuity to take effect, the clause relating to employees in the agreement of sale of the business, must be expressly included. It is important for the old employer to convey, in the clause, that the rights and obligations of the old employer is transferred to the new employer.
S197 of the Labour Relations Act 66 of 1995 (“LRA”) will then find application and employees can enjoy the protection afforded to them. This section ensures that employees should not suffer any prejudice as a result of the business being transferred as a going concern. It is important to note that if there is no change in employer, this section does not find application. For example, where the control of the business has been “transferred by way of a share transfer”.

There are certain can’s and can’t do’s for the new employer. 

S197(3)(a) of the LRA provides that the employer cannot conclude a new agreement unless  the terms are “on the whole, not less favourable to the employees than those on which they were employed by the old employer” and this is re-affirmed in the case of Experian South Africa (Pty) Ltd v Haynes and Another 2013 (1) SA 135 (GSJ). On the other side of the coin, keeping in mind S197(4) of the LRA and the Experian case, an employer can conclude a new agreement whereby a restraint of trade is incorporated; the employee is transferred to a different provident, pension or any other similar fund provided that certain criteria of the Pension Funds Act, 1956 are complied with.
Unfortunately, the provisions of S197(3)(a) does not extend to collective agreements. 
It should also be noted that although there is now a new employer, the old employer is not automatically released from his duties and obligations in respect of his former employees, at least for the next 12 months. In the event that any employee becomes entitled to receive payment of leave pay, severance pay or any other amounts owing as a result of the employee’s dismissal for a reason relating to the employer’s operational requirements or the employer’s liquidation or sequestration, the old and new employer is jointly and severally liable for payment thereof, unless the old employer can show that it has complied with the provisions of section 197(8) of the LRA.

There are certain measures that both the old and new employer can take to mitigate their liability in respect of amounts claimed by employees, which accrued to them, prior to the transfer of the business. Amongst others, the two employers must agree which employer is responsible for paying the employee the amount claimed. If the employer agrees to apportionment of the liability, a disclosure of the written terms of the agreement must be conveyed to the employees.

The above demonstrates why it is imperative that an agreement of sale of a transfer of a business as a going concern is drafted with careful consideration and the necessary expertise as there are various factors which can impact both the employees and the old and new employer and requirements that must be met in order for the business to be transferred “as a going concern”.