We are often approached by clients with a request to facilitate retrenchment proceedings as the client intends on either selling their business (or part of their business) or outsourcing a specific function which is currently being performed by employees within the business. There is a common misconception amongst employers that the sale of a business or part of a business, or the outsourcing of a business function, allows the employer to retrench employees due to redundancy.

Section 197 of the Labour Relations Act 66 of 1995 (hereafter the “LRA”) provides that in the event of a transfer of business as a going concern, all employees who are employed by the old employer should automatically transfer to the new employer based on terms and conditions of employment that are not less favourable than those under which the employees were employed by the old employer. The new employer effectively substitutes the old employer in all aspects. The employees’ years of service and accumulated leave are transferred with the employees as is. This is not something that the parties have to agree to, as it is regulated by law and applies irrespective of whether it was provided for in the sale/transfer agreement.

The transfer of a business

Employers usually believe that the transaction/agreement does not constitute the transfer of a business as the business is not being sold. Business is defined by section 197 of the LRA as: “includes the whole or part of any business, trade, undertaking or service”. The definition makes it clear that section 197 is not limited to the transfer of business where traditionally a business or part of a business is closed and sold to another entity, but also to the transfer of services which could include distribution agreements, client service agreements, etc. Where an entity accordingly transfers or outsources a service to another entity, cognisance must be taken of the fact that the employees who perform the service/function must be transferred to the new entity and enjoy continuous employment on the same terms and conditions of employment.

In the Constitutional Court matter of National Education Health and Allied Workers Union v University of Cape Town and Others (2003) 24 ILJ 95 (CC), the court held that whether a business was transferred as a going concern will be a factual matter which must be determined on a case-to-case basis. For section 197 to apply, it is important that continuity exists in terms of which the business is operated in different hands but remains similar. The court provided the below guidelines in determining whether or not the business was transferred as a going concern:

“In deciding whether a business has been transferred as a going concern, regard must be had to the substance and not the form of the transaction. A number of factors will be relevant to the question whether a transfer of a business as a going concern has occurred, such as the transfer or otherwise of assets both tangible and intangible, whether or not workers are taken over by the new employer, whether customers are transferred and whether or not the same business is being carried on by the new employer. What must be stressed is that this list of factors is not exhaustive and that none of them is decisive individually. They must all be considered in the overall assessment and therefore should not be considered in isolation.”

The above guidelines were considered by the Labour Appeal Court in the matter of SAMWU & Others v Rand Airport Management Company (Pty) Ltd and Others [2005] 3 BLLR 241 (LAC) in which the employer elected to outsource certain functions, such as cleaning and gardening, to external contractors, and retrenched the employees who executed these functions. The Labour Appeal Court found that the outsourcing of these services would amount to the transfer of a business as a going concern in terms of section 197 of the LRA and would accordingly entail that the employees should have been transferred to the external contractor. Following this judgment, there have been numerous findings where outsourcing agreements were found to constitute the transfer of a business as a going concern.

Implications of failing to transfer employees

Should an employer elect to retrench employees based on redundancy instead of transferring the employees to the buyer/contractor/service provider, it will amount to an automatically unfair dismissal. Section 187 of the LRA determines that a dismissal will be automatically unfair if the reason for the dismissal is: “the transfer or a reason related to a transfer, contemplated in section 197”. Should a Commissioner or the Labour Court find a dismissal to be automatically unfair, the employee may be awarded up to 24 months compensation.

In establishing whether the transfer of the business was the reason for the retrenchment, the courts follow the two-step Afrox test (established in SA Chemical Workers Union and Others v Afrox Limited). In terms hereof, the court will follow an objective factual enquiry into the employer’s motive for the dismissal and whether the motive is in any way related to the transfer of the business. In this regard, it must be established whether the dismissal would have occurred if there was no transfer. If the answer is no, the court will then consider whether the transfer was the main or dominant cause of the dismissal. If it is found that the transfer was the most probable cause of the dismissal, said dismissal will be deemed automatically unfair. If an employer can provide sufficient proof/evidence that the dismissal would have taken place irrespective of the transfer, it will not be deemed automatically unfair.

What are your options?

Should the new employer refuse the transfer of the employees or wish to alter the terms and conditions of employment of the new employees, an agreement may be entered into in terms of section 197(6) of the LRA.

In terms of the abovementioned section, a written agreement may be entered into between the employee and either the old or new employer (or both) in which the terms of section 197 may be varied/waived. This agreement will be subject to the full disclosure of all relevant information by the old and new employer during the negotiation process.

This section therefore makes it possible for employers to enter into settlement agreements with employees in cases where a transfer on the same terms and conditions of employment is impossible. It must, however, be taken into account that the parties must agree to the settlement freely and voluntarily.

Do not hesitate to contact Joubert and Associates should you require assistance/guidance with the transfer of employees or any related matter.

Article written by Carla Theron