Buying or selling a business is often viewed primarily as a commercial transaction. However, employers frequently overlook one of the most significant legal consequences of such a transaction: the automatic transfer of employees in terms of section 197 of the Labour Relations Act (LRA). Failing to consider section 197 at the outset can expose both the seller and the purchaser to unnecessary legal, financial and operational risk.
Section 197 applies where a business, trade, undertaking or service is transferred as a going concern from one employer to another. Where the section applies, employees do not need to resign or apply for employment with the new employer. Instead, their employment transfers automatically by operation of law.
The effect of the transfer is that the new employer steps into the shoes of the old employer. Existing contracts of employment continue on the same terms and conditions, employees retain their continuity of service, and their rights and obligations remain intact unless lawfully varied through agreement or another lawful process.
Whether section 197 applies depends on the substance of the transaction rather than its description. Courts consider a number of factors, including whether assets, customers, goodwill, infrastructure or employees are transferred and whether the business retains its identity after the transaction. Outsourcing arrangements, insourcing exercises and changes of service providers may also trigger section 197 where the transferred operation remains substantially the same.
Employers who incorrectly assume that section 197 does not apply may face significant consequences, including unfair dismissal claims, disputes regarding continuity of employment, contractual claims, litigation costs and disruption to business operations.
Before concluding any transaction, employers should consider whether section 197 may apply and obtain specialist legal advice. Where appropriate, the parties should conclude a comprehensive section 197 agreement regulating the transfer, allocating liabilities, addressing employee information, consultation obligations and practical implementation arrangements. Proper planning can significantly reduce disputes and provide certainty for all parties involved.
In every acquisition, outsourcing or business restructuring, the employment law implications should be considered alongside the commercial and financial aspects. Early planning is considerably less costly than resolving disputes after the transaction has been implemented.