The labour law consequences of a transfer of a business

The burden that South African labour law has to bear in relation to the economy is very heavy by international standards. In most industrially developed countries, the economy is strong enough either to provide jobs for most work-seekers or, failing that, an adequate social security system for households without breadwinners in place. In most developing countries with high unemployment rates, the labour law system makes only perfunctory effort to reach out to those facing economic marginalisation. South Africa, essentially a developing country, is not like that. The legal system is strong, works off a firm human rights base, and sets out to grapple with the issues. That is how it should be, but it comes at a price – an oftengraphic exposure of the limits of the law in a stressed society. Businesses operate for profit and survival according to the unsentimental ways of the market, and employees back in a bid to save jobs, lifestyles and livelihoods. The stakeholders use power when they have it, and make claims on the law when they don’t. The legislation and the case law reflect, add to and, to a degree, shape the complexities of these contests, and no more so than in the area of business restructuring.1 The new South Africa has quickly become the destination for foreign investment. The weakness of the rand against the dollar, pound, euro and with the “cost to sell and produce” being so low against these currencies, players on the corporate stage constantly change their make-up and composition. The larger engulfs the smaller, one company buys shares in another, or buys it out entirely, or all or part of its assets, and others are liquidated. In all these situations, employees in South Africa may find themselves with new bosses on the morning after. Under common law employees in this situation were deemed to have been discharged by the former employer, whether or not they have been offered positions in the transformed structure. If they did not want to work under it, they could not be forced to do so. That was because an employment contract was deemed in law to be one of a personal nature that could not be transferred from one employer to another without the employees consent. This research is conducted at an interesting time, when the amendments to the Labour Relations Act 66 of 1995 in respect of the transfer of a business, and in particular section 197, dealing with such matters comes into effect. It is also interesting in the sense that most judgements of the Commission for Conciliation, Mediation and Arbitration (CCMA) and judgements of the Labour Court were moving more or less to a common approach or interpretation of section 197 of the Labour Relations Act 66 of 1995 (hereinafter “the LRA”). Section 197 of the LRA sought to regulate the transfer of a business as a going concern and altered the common law regarding the transfer of a business in two situations – firstly when there is no insolvency, factual or legal, concerned, and secondly in the instance where the transferor is insolvent. The first extreme was when an employer is declared insolvent and the contracts of employment terminated automatically. The second extreme was from the first whereby the employer has to terminate the services of his employees and be liable to pay severance pay in terms of section 1893 of the LRA, which has also been amended along with section 197 of the LRA. It is as if this section was introduced to remedy these extremes. These extremes will be dealt with in detail in this paper. The transfer of goodwill and assets from the seller to the buyer occurs when a business is sold as a going concern. At common law the employees of a business cannot be transferred in the same manner. The Labour Relations Act 66 of 1995 altered this position. By enacting this section the legislature wanted to protect the interest of the employees in such transactions. Whether the legislature has succeeded or not is a matter that will be dealt with in this paper. It is all dependent on the interpretation of this section by the commissioners and judges. By including section 197 in the LRA, the legislature’s intention was to resolve the common law problem where employment contract terminated upon the sale of a business, and this section was intended to be an effective tool for protecting the employment of employees. In order to understand the labour law consequences of the transfer of a business, it is important to understand the provisions of sections 197 and 197A of the Labour Relations Amendment Act 2002. This will be dealt with and each section will be discussed in detail using relevant case law and literature. In considering investing in a South African based company by way of purchasing a share of the company and giving it your own flavour, one has to carefully consider the effects of this transaction. Companies wishing to restructure, outsource, merge or transfer some of its operations will need to understand what the implications of the labour legislation will have on their commercial rationale. Section 197 regulates the employment consequences when a transfer of a business takes place. This is defined to mean the transfer of a business by one employer (the old employer) to another employer (the new employer) as a going concern. Business is defined to include the whole or part of the business, trade undertaking or service. Like the current provision, the new provision referrers to the transfer of a business. It is therefore a wider concept than the sale of a business.4 No attempt is made to define what constitutes a going concern and the controversial issue of whether an outsourcing exercise can constitute a going concern transfer is also not explicitly dealt with. The fact that a business is defined to include a service may be an indication that it was intended to typify outsourcing as a going concern transfer, but this is not necessarily the case.5 The amendments to the Act6 came into effect on 1 August 2002. Sections 197 and 197(A) of the Act consequently seeks to regulate the transfer of a business. These regulations will be dealt with individually and in a format that would make each of the sections in sections 197 and 197(A), easy to understand and interpret. It will also become clear as to what the implications of each of the subsections will have on that commercial rationale. The issues highlighted above will be dealt with detail in this paper giving an overview of the Common Law, the Labour Relations Act 66 of 1995 and the new Labour Relations Amendment Act 2002