This article was written by Amelia Berman , a senior associate at Norton Rose Fulbright South Africa

Section 197 of the Labour Relations Act, 1995 (the LRA) was enacted to regulate the employment consequences where the whole or a part of a business or service is transferred as a going concern.  The section is essentially aimed at minimising the conflict that arises from the transfer of a business and the negative impact it may have upon economic development and labour stability.

What is a transfer?

The transfer of a business refers not only to the sale of the business but may include “merger, take-over or … part of a broader process of restructuring within a company or group of companies.  Transfer can take place by virtue of an exchange of assets or a donation” (Schutte v Power Plus Performance [1999] 20 ILJ 655 (LC)).

In the case of NEHAWU v University of Cape Town & Others [2003] 24 ILJ 95 (CC), the Constitutional Court summarised the position by stating that section 197 of the LRA has a dual purpose – “it facilitates the commercial transactions while at the same time protecting the workers against unfair job losses”.

New employer substituted

Section 197(2)(a) of the LRA envisages that if the transfer of a business takes place, unless otherwise agreed, the new employer is automatically substituted in the place of the old employer for all contracts of employment in existence immediately before the date of transfer.  Section 197(2) further says the following:

  • All the rights and existing obligations between the old employer and an employee at the time of the transfer remain in force but as 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 an 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.

The employees must be transferred to the new employer on terms on the whole not less favourable than the terms that they enjoyed when they were employed by the old employer.

There is no requirement to consult with transferring employees (or their representatives) in section 197 of the LRA.  The transfer occurs automatically by operation of law and the new employer steps into the shoes of the old employer.  Employees do not usually get a say in the matter.

Contracting out

The only circumstances where consultation is required is where the old and new employers wish to deviate from the provisions of section 197(2) of the LRA.  Either the old employer, the new employer, or the old and new employers acting jointly may conclude an agreement with the employees (or their representatives) to contract out of section 197(2) of the LRA.  Section 197(6)(b) of the LRA requires that in any negotiations to conclude an agreement the old and new employers provide the employees (or their representatives) all relevant information that will allow them to engage effectively in the negotiations. 

Valuation of leave pay etc.

Where there is no agreement to deviate from the provisions of section 197(2) of the LRA, the old and new employers are required, in terms of section 197(7) of the LRA, to conclude a valuation as at the date of transfer of, amongst other things, the following:

  • The leave pay accrued to the transferring employees;
  • The severance pay that would have been payable to the transferring employees in the event of a dismissal by reason of the employer’s operational requirements; and
  • Any other payments that have accrued to the transferring employees but have not been paid.

Section 197(7) of the LRA also requires the employers to conclude a written agreement that specifies which employer is liable for paying any of those amounts and in the case of the apportionment of liability between them, the terms of the apportionment.  The employers are required to disclose the terms of the agreement to the transferring employees (or their representatives).  As such, there is a limited obligation to consult with employees (or their representatives) in relation to the terms of the agreement between the old and new employers.

Consultation recommended

Despite the above, it is good practice to consult with employees (or their representatives) so as to ensure harmonious industrial relations.  It must, however, be stressed that such process is merely a consultation process and not a negotiation process because there is no legal obligation to consult (save for sharing  the terms of the agreement between the old and new employers).

Joint employer liability for 12 months

Section 197 (8) of the LRA states that for a period of 12 months after the date of the transfer, the old employer is jointly and severally liable with the new employer to any employee who 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, unless the old employer can show that it has complied with the provisions of this section.  Furthermore, section 197(9) of the LRA states that the old and new employer are jointly and severally liable for any claim concerning any term or condition of employment that arose prior to the transfer.  The risk of any liability being placed on the new employer may be mitigated by obtaining an indemnity from the old employer. 

Labour Court’s role

If there is a dispute as to the applicability of section 197 of the LRA to a particular transaction then the employees of the old employer may approach the Labour Court on an urgent basis seeking a declaration that section 197 of the LRA is applicable to the transaction and that the employees should be transferred to the new employer on terms on the whole not less favourable.