Are you thinking about buying a business that has employees? If so, then make sure that you know about and comply with the provisions of the Labour Relations Act. In particular, you need to be aware of section 197 which deals with the transfer of the employment contract from the old employer to the new employer. Section 197 of the Labour Relations Act states the following:
S197. Transfer of contract of employment
(1) In this section and in section 197A –
(a) ‘business’ includes the whole or a part of any business, trade, undertaking or service; and
(b) ‘transfer’ means the transfer of a business by one employer (‘the old employer’) to another employer (‘the new employer’) as a going concern.
(2) If a transfer of a business takes place, unless otherwise agreed in terms of subsection (6) –
(a) the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer;
(b) all the 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;
(c) 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; and
(d) 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.
(a) The new employer complies with subsection (2) if that employer employs transferred employees on terms and conditions that are on the whole not less favourable to the employees than those on which they were employed by the old employer.
(b) Paragraph (a) does not apply to employees if any of their conditions of employment are determined by a collective agreement.
(4) Subsection (2) does not prevent an employee from being transferred to a pension, provident, retirement or similar fund other than the fund to which the employee belonged prior to the transfer, if the criteria in section 14(1)(c) of the Pension Funds Act, 1956 (Act No. 24 of 1956), are satisfied. [Section 14(1)(c) of the Pensions Funds Act requires the registrar to be satisfied that any scheme to amalgamate or transfer funds is reasonable and equitable, and accords full recognition to the rights and reasonable benefit expectations of the persons concerned in terms of the fund rules, and to additional benefits which have become established practice].
(a) For the purposes of this subsection, the collective agreements and arbitration awards referred to in paragraph (b) are agreements and awards that bound the old employer in respect of the employees to be transferred, immediately before the date of transfer.
(b) Unless otherwise agreed in terms of subsection (6), the new employer is bound by –
(i) any arbitration award made in terms of this Act, the common law or any other law;
(ii) any collective agreement binding in terms of section 23; and
(iii) any collective agreement binding in terms of section 32, unless a commissioner acting in terms of section 62 decides otherwise.
(a) An agreement contemplated in subsection (2) must be in writing and concluded between –
(i) either the old employer, the new employer, or the old and new employers acting jointly, on the one hand; and
(ii) the appropriate person or body referred to in section 189(1), on the other.
(b) In any negotiations to conclude an agreement contemplated by paragraph (a), the employer or employers contemplated in subparagraph (i), all relevant information that will allow it to engage effectively in the negotiations.
(c) Section 16(4) to (14) applies, read with the changes required by the context, to the disclosure of information in terms of paragraph (b).
(7) The old employer must –
(a) agree with the new employer to a valuation as at the date of transfer of –
(i) the leave pay accrued to the transferred employees of the old employer;
(ii) the severance pay that would have been payable to the transferred employees of the old employer in the event of a dismissal by reason of the employer’s operational requirements; and
(iii) any other payments that have accrued to the transferred employees but have not been paid to employees of the old employer.
(b) conclude a written agreement that specifies –
(i) which employer is liable for paying any amount referred to in paragraph (a), and in the case of the apportionment of liability between them, the terms of the apportionment; and
(ii) what provision has been made for any payment contemplated in paragraph (a) if any employee becomes entitled to receive a payment;
(c) disclose the terms of the agreement contemplated in paragraph (b) to each employee who after the transfer becomes employed by the new employer; and
(d) take any other measure that may be reasonable in the circumstances to ensure that adequate provision is made for any obligation on the new employer that may arise in terms of paragraph (a).
(8) 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 a payment contemplated in subsection (7)(a) 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 is able to show that it has complied with the provisions of this section.
(9) The old and new employer are jointly and severally liable in respect of any claim concerning any term or condition of employment that arose prior to the transfer.
(10) This section does not affect the liability of any person to be prosecuted for, convicted of and sentenced for, any offence.
Note that this section applies when you’re buying a business from a sole proprietor or partnership, or if you’re buying the business out of an existing close corporation or private company (without buying shares or members interest), including if you’re buying only a portion of a business, eg. the division of a company. You need to make sure that your Sale of Business Agreement deals with the provisions of section 197 of the LRA.
Section 197 LRA does not apply if you’re buying shares in a private company or members interest in a close corporation. In these cases, there is no transfer of the contract of employment. This is because the employees remain employed by the same employer (being the close corporation or the private company) on the same terms and conditions. If a new shareholder or member wants to implement changes to employment terms and conditions, they would need to go about it in the same way as the seller would have been required to: through consultation, and in line with South African labour law.
Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.