2 March 2010

Transfer of a business or service as a going concern: know the basics

"It is not the despair - I can stand despair, it's the hope." - John Cleese in Clockwise.

The economic crisis focused attention on transfers of a business or service as a going concern. Many businesses look favourably at outsourcing, as it is colloquially known, as a viable alternative to retrenchments during business restructuring.

In terms of the common law, where a business is sold as a going concern, the contracts of employment are terminated. Should the new owners wish to employ any of the old employees previously employed by the previous owner, it would have to conclude new contracts of employment with such employees.

Section 197 of the LRA has altered the common law. It now stipulates that where a business is sold as a going concern, all the rights and obligations between the old employer and each employee at the time of the transfer continue between the new employer and each employee. This transfer occurs automatically and takes place by operation of law. The employees' consent is not required.

Broadly speaking, these provisions apply where a business, trade or undertaking in whole or in part is transferred from the old employer to the new. Where the transfer involves an identifiable component or unit of a business, be it a division, a branch, a department, a store or a production unit, the transfer of that component or unit as an integral whole to another, brings Section 197 into play.

In order to understand the concept better, let us take the sale of a chemical plant as an example. If the plant is in full production and a sale occurs, it is clear that Section 197 applies. Where the plant has been mothballed and is being sold for scrap, Section 197 is clearly inapplicable even though the two sale agreements may be substantially similar. One can envisage a range of possibilities. If the plant has been closed for two months due to financial difficulties, and is sold in order to be reopened, Section 197 will apply again.

A sale with a view to re-erecting the plant on a site other than where the old employer did business, would again bring Section 197 into play.

Our Courts have consistently looked at substance rather than the form of the transfer. To dress up a sale of a business as a sale of assets would not be helpful, in that the Court would, substance over form, deal with it as a sale of business. There are many instances where asset stripping has occurred where our courts have held that Section 197 applies.

The words "as a going concern", are helpful in demarcating the transactions that fall within Section 197.Taking the example of the chemical plant, they assist in identifying to which transactions Section 197 would apply because of the need that this business be a going concern. Secondly, and importantly, in the light of the overriding purpose of security of employment, they convey the fact that the object of the transfer must have been a place where people were working before the transfer, and will continue to be a place where people are working after the transfer.

When such a transfer occurs, the employees must be employed by the new employer on terms no less onerous than what applied to them at the old employer. Given that their years of service are recognised there is no need for the old employer to pay severance to employees prior to transfer, and when retrenchments occur, the new employer will be liable to pick up such severance costs.

As a final word of caution, remember that the LRA prohibits the dismissal of an employee for a reason related to the transfer. Such a dismissal is deemed to be automatically unfair, which may result in compensation of up to two years' remuneration being awarded to the dismissed employee/s. Employers should proceed with caution where they intend dismissing employees shortly before or after a transfer.

Danie Pretorius, Director, Employment

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