HomeOpinion & AnalysisColumnistsSale of businesses: what are the labour implications?

Sale of businesses: what are the labour implications?


This week’s instalment will tackle the controversial issue of what happens to employees when businesses change hands.

This matter is dealt with under Section 16 of the Labour Act. I will also refer to local and foreign case law to highlight the labour rights of workers under such circumstances and the obligations of the buyers and sellers of such businesses.

When business is transferred as a going concern, either partly or wholly, a number of labour implications arise. I will look at the five major implications:

The change of ownership does not interrupt an employee’s continuity of employment and an employee’s contract of employment continues with the new employer as if with the old employer.

Put in another way, this simply means that the new employer inherits the transferred employees as if they had always been on its payroll.

It is not permissible to ask employees from the old employer to apply for jobs in the new company, the contracts of employment transfer automatically.

One obvious implication of this is that any benefits the employees might derive from the length of service, for instance, severance pay if the employees are later retrenched by the new employer, are not affected by the transfer of ownership.

For the purpose of calculating the employee’s length of service, the years served with the old employer are added to those served with the new employer.

Employees can only be subjected to similar or more favourable conditions under the new employer. They cannot earn less; neither can the new employer unilaterally withdraw benefits which the workers enjoyed under their previous employer.

By mutual agreement, the law does not stop the transferred employees and their new employer from agreeing to less favourable conditions. However, if such agreement has the effect of diminishing the employees’ rights to social security, pensions, gratuities or other retirement benefits, prior written authority of the Minister of Labour and Social Services has to be sought.

Anything done before the transfer by or in relation to the old employer, including dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination is considered to have been done by or in relation to the new employer.

For example, an employee dismissed by an old employer can still bring a claim for reinstatement or damages against the new employer. As a further example, the new employer is also bound by any arbitration awards or collective bargaining agreements that were binding on the old employer before the transfer.

The rights of the transferred employees can be enforced against the buyer or seller of the business at any time prior to, on or after the transfer. This means that depending on the circumstances, the old employer can still be liable at law after the business has already been sold to the new employer.

In similar vein, the prospective employer can also be liable even before the ownership of business has been transferred to it!

It would be unfair labour practice to violate or evade in any way these provisions of Section 16 of the Act.
A typical local case relating to the matter under discussion was handled by the Supreme Court in Premier Wholesalers vs Regional Hearing Officer & 15 Others (case number 83/93).

The facts of the matter were that Premier Wholesalers took over the operations, including staff of Premier Milling in Mutare with effect from January 1 1991.

However, on January 2 1991, it terminated the employment of some of the workers. Premier Wholesalers was ordered to reinstate them, which it did. However, the employer unilaterally reduced their pay.

The Supreme Court ruled that Premier Wholesalers had acted unlawfully by terminating the employees and then later subjecting them to less favourable conditions without their consent.

The lesson from the Premier Wholesalers case is that if you intend to purchase a business but do not wish to take over the employees, confirm this in writing before signing the agreement of sale/purchase.

The responsibility of what to do with the employees then lies with the current owner. This means that an employer wishing to sell its business may have to retrench its employees if the purchaser does not wish to engage the seller’s employees.

A controversial case is where an employer decides to sell a portion of its business and then enters into a contract to outsource the product or service from the new owner.

What then happens to employees if their old employer decides to terminate the outsourcing arrangement?

This was the issue dealt with by the court in Aviation Union SA vs South African Airways and Others (2008).

South African Airways cancelled an outsourcing deal with a service provider which it had contracted a few years before and advertised for fresh tenders.

Aviation Union sought an order declaring that the termination of the outsourcing contract would constitute the transfer of undertaking back to South African Airways.

The court decided that it had no jurisdiction to restrain South African Airways from taking on a new service provider.

It was also held that the successful tenderer would not become the employer of the old subcontractor’s employees, even though they had all been transferred to it from South African Airways when it subcontracted the services concerned.

It remains to be seen whether Zimbabwean courts would hold the same view under similar circumstances.

There are situations where a group of companies decides to close one of its subsidiary companies due to viability problems. Employees of the closed company may then be transferred to other sister companies within the group.

Courts have held that the closure of one company in a group and the transfer of its business to another does not amount to the transfer of business in the manner envisaged in section 16 of the Labour Act.

In mergers and acquisitions, the provisions of Section 16 do apply. As in Forecourt Express (Pty) Limited vs SA Transport and Allied Workers’ Union and Another, the courts are prepared to accept that new employers are entitled to restructure their business to the extent necessary to accommodate the acquisition of another company, even if it entails the retrenchment of employees of the old employer.

However, everything must be done in a manner that doesn’t prejudice the rights and benefits of the affected employees.

In Telkom SA vs Blom and Others (2003), the Supreme Court of Appeal held that pension fund holdings and benefits of employees transferred do not remain in the pension fund of the old employer.

The court decided that the automatic transfer of employment contracts “does not prevent an employee from being transferred to a pension, provident, retirement or similar fund other than the fund to which the employee belonged prior to the transfer . . .”

While the Labour Act is not explicit on how pension funds are handled on transfer of business, I guess, in terms of pension laws, the Director of Pensions would need to be satisfied that any scheme to amalgamate or transfer funds is reasonable and equitable and accords with the full recognition of the rights and reasonable benefit expectations of the persons concerned.

Under the law relating to insolvency, the benefits and rights conferred upon employees will be handled differently. Professional legal advice has to be sought.

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