A reminder to buyers & sellers of business; existing contracts are automatically transferred to the new owner
Usually, the sale, closure, joint venture or takeover of a business results in the termination of the contracts of employment or transfer of contracts of employment in existence between the business and its employees. The principle which is applied is that an employer cannot “force” its employees to work for another.
Old 1956 Labour Relations Act (“the LRA”)
An employer who closed or sold their business was deemed to have done so for operational requirements, and was thus obliged to pay a severance pay to its employees.
New Labour Relations Act (“the LRA”)
Section 197 of the LRA states that the contracts of employment of the existing employees are automatically transferred to the new employer subject to the provisions of the section.
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.
Important things to note:
- The rights of the employees are protected from the old employer when they are transferred to the new employer.
- The new employer automatically replaces the previous employer in respect of all contracts of employment (verbal or otherwise) with immediate effect before the transfer.
- All rights and obligations between the old employer and an employee will continue as such between the the new employer and the employee.
- Anything done before the transfer by 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 break the employee’s continuity of employment, and an employee’s contract of employment continues with the new employer.
- The new employer is not allowed to employ the employees on terms and conditions less favourable than those of 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.
- Leave accrued to the employees
- Any severance pay due
- Any other payments due to the employees
The old and new employer need to write a joint written agreement that states the employer is liable for amounts, or in the case of apportionment of liability, the terms of such apportionment.
In the absence of an agreement, 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 7, 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 employee:
(Full list can be found under the provisions of the Act)
- Negotiated salary increases (annually) for union members or 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 or buying 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.
- The old employer may still be held jointly and severally liable for certain obligations to his former employees.
- Section 197A, which deals with the transfer of contracts of employment in circumstances of insolvency, is also important.
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