Buying A Business? Don’t Forget Your Potential Obligations In Terms Of Section 197 Of The Labour Relations Act

Gary Warne | Legal Services Manager

The sale of a business has consequences not only for its owners but also for the employees of such business.

The rights of employees is protected by, amongst others, the Labour Relations Act, Act 66 of 1995 (“the LRA”).

In terms of section 197(2)(a) of the LRA, if the transfer of a business takes place, unless otherwise agreed, the new employer is automatically substituted in the place of the old employer for all contracts of employment in existence, immediately before the date of transfer.

The question arising whether the transfer of a business could be classified as the transfer of a going concern for purposes of section of 197 of the Labour Relations Act was recently argued before the Constitutional Court in the matter of Tasima and the Road Traffic Management Corporation (“RTMC”).

Background

In 2001 Tasima (Pty) Ltd (“Tasima”) was awarded a tender by the Department of Transport to provide services relating to the eNaTIS system.

Tasima and the Department of Transport entered into an agreement in terms of which Tasima would develop, implement, support and operate the system for a period of 5 years.

After extending the agreement for a further 5 years the Department attempted to terminate the agreement and transfer the system back to it.

Litigation ensued and the High Court held that the handover be effected back to the RTMC.

The RTMC however refused to take over the employees which had been employed by Tasima in respect of the eNaTIS system resulting in an urgent application being launched in the Labour Court to compel the RTMC to comply with its obligations under section 197 of the LRA and to take transfer of the employees that had been rendering the services.

The Labour Court found in Tasima’s favour and the judgment was subsequently taken on appeal by the RTMC.

The issue to be decided by the Constitutional Court was whether the handover from Tasima to the RTMC constituted a transfer as a going concern.

MAJORITY JUDGMENT

In reaching its majority judgment the court held that where services are involved it’s not just the services that need to be transferred but rather the business that provides such services is required to be transferred in order to fall within the ambit of section 197 of the LRA.

The court held that it was the substance rather than the form of the transaction which was relevant and the test for determining whether there was a transfer was whether the economic entity retained its identity after the transfer.

The majority of the Judges accordingly held that the RTMC ran the entire function which Tasima had previously run as its sole business and accordingly it was a transfer as a going concern which meant that the RTMC had to comply with the provisions of section 197 of the LRA.

MINORITY JUDGMENT

The minority judgment held that the transfer from Tasima to the RTMC did not qualify as a going concern and relied on the terms of the initial agreement concluded when the tender was awarded in 2001.

WHAT DOES THIS MEAN WHEN SELLING YOUR BUSINESS ?

When selling your business you have to consider the provisions of section 197 of the LRA and whether they apply to you.

In this regard the test for determining whether the transfer can be regarded as being a going concern, as per the Constitutional Court in the above matter, is that one has to consider the substance of the transaction rather than its form and whether the transferring entity retained its identity after the transfer. In other words, did the components of the business as well as its nature and format remain largely unchanged after the sale? If so, then the provisions of section 197 of the LRA will have to be complied with.

When selling (or acquiring) a business it is essential that you remember the provisions of section 197 of the LRA and if in any doubt exists whether same applies or not it is recommended that you seek clarity and an opinion from a suitably qualified expert in the field in order to confirm your rights and obligations pertaining to the employees of the business.