Section 197 of the Labour Relations Act (LRA) requires the new employer, in a takeover as a going concern, to take over all the employees of the old employer. A take over of an enterprise “as a going concern” essentially means that the new employer is carrying on the same business as the old employer after a takeover.
In such a case the new employer is required to take over the old employer’s staff with all their years of service and all their old terms and conditions intact. Due to this heavy burden and for other reasons, the new employer often wishes to retrench excess employees or requires the old employer to carry out the retrenchments before the takeover.
However, section 187(1)(g) of the LRA prohibits any retrenchment (or any other dismissal) related to a takeover as a going concern. Such terminations are deemed to be automatically unfair dismissals. This means that the dismissed employees could claim reinstatement or up to 24 months remuneration in compensation. It is important to stress that the provisions of sections 197 and 187 of the LRA apply not only to businesses but to all employers including government departments, welfare organisations, NGOs and all other enterprises that employ staff.
The purpose of this legislation is to preserve jobs by preventing employers from rationalising their workforces in circumstances of a takeover. However, because such legislation tends to discourage takeovers, rescue bids for enterprises that are going under will also be discouraged. Such enterprises will often have to close down. Then, instead of a limited number of employees being retrenched during a rationalisation, all the employees will lose their jobs.
In the case of Cash Paymaster Services (Pty) Ltd vs Browne (2006, 2 BLLR 131) the Labour Appeal Court found that the employee who lost his job due to the takeover of a business had been unfairly dismissed. The employer was ordered to pay most of the employee’s legal costs plus compensation in the amount of R684 621.
In the case of Van Zyl vs Asanti Safari Trading cc t/a The Hill Kwik Spar and another (2009, 2 BALR 206) the parties consented that the case be heard by the CCMA instead of by the Labour Court. In this case the employee was dismissed shortly before the business was taken over by a new owner. The respondent claimed that the sale agreement between the old and new owners had excluded the requirements section 197 of the LRA. However, the arbitrator found that:
- The sale agreement had not excluded section 197 and that, had it done so, this would have been illegal.
- The old and new employers could have entered into an agreement to vary the requirements of section 197 but only if they had entered into such agreement with the full participation of the employees of the business whose jobs could be affected by the results of the takeover.
- Van Zyl, the dismissed employee, had not been involved in any such agreement with the owners.
- The purchase of the business had constituted a transfer of a going concern as contemplated in section 197 of the LRA
- The reason that the employee was dismissed was the takeover of the business.
- This contravened the provisions of section 187(1)(g) of the LRA effectively prohibiting such dismissal.
- The dismissal was automatically unfair.
- The new employer was required to pay the employee compensation equal to 12 months’ compensation and also to pay the employee’s legal costs.
These cases show that employers considering takeovers, buy outs, mergers or contracting/outsourcing arrangements must, before implementing any transfers, must act with extreme caution. That is, they should utilise their labour law experts to:
- Analyse and explain the meaning of sections 197 and 187 of the LRA as well as of the developing case law in this area.
- Examine the specific circumstances of the intended takeover in the light of the legislation.
- Work out a strategy for completing the takeover without infringing the ever tightening labour legislation.
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