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Home RA Newsletters What Is The Employee’s Rights When A Business Is Transferred.

 What Is The Employee’s Rights When  A Business Is Transferred?

9 th November 2009

Dear Reader

The Labour Relations Act (LRA) in section 197 makes provision for the transfer of a contract of employment when a business is transferred from an old employer to a new employer as a going concern. 

When a transfer takes place the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer:

  • Thus all the rights and obligations that existed at the time of the transfer between the employee and the old employer remain in force as if they were rights and obligations between the employee and the new employer.
  • Furthermore anything done before the transfer relating to the old employer, which include the dismissal of an employee, the committing of an unfair labour practice or act of unfair discrimination will be considered to have been done by the new employer
  • The transfer does not affect the continuity of an employee’s employment and the employment contract continues with the new employer.  Thus the employee’s years of service with the old employer  carries over to the new employer and should the new employer dismiss an employee based on operational requirements , the severance pay will have to be calculated taking into account the years of service the employee had with the old employer,

Important to note that the above might be contracted out by means of an agreement between:

  • either the old employer, the new employer, or the old and new employer acting jointly


  • the employees, a workplace forum, or an union

Thus employees can insist on their employment contracts being transferred to the new employer, but the right to be afforded the same terms and conditions of employment as what they had with the old employer are subject to agreement.  Critical is the fact that any agreement which interferes with the employee’s existing terms and conditions, as enjoyed with the old employer, has to involve the employees to be valid.  Thus there have to be involvement from the employees and changes can’t be made or implemented unilaterally.

The new employer is to employ all the employees on terms and conditions that are on the whole not less favourable than those they were employed on with the old employer.  The new employer can thus alter the terms and conditions but it has to be on the whole not less favourable.    It is important to note that it is only the rights of employees that existed at the time of the transfer become the obligations of the new employer.  This implies that the employees cannot use the section 197 transfer as a form of statutory bargaining to obtain better terms and conditions of employment.

If there is a collective agreement in place the new employer is bound by it and cannot change any terms and conditions regulated by that collective agreement.

A word on Transfer of Pension Fund:  the transfer from one Pension Fund to another after the transfer of the business is allowed under section 197(4) as long as the criteria of section 14 of the Pension Funds Act 1956 are met.

Section 197(8) stipulates that the old employer will only be free of liability for the payment of any of the following that might become payable due to the dismissal of an employee based on the employer’s operational requirements or the employer’s liquidation or sequestration:

  • leave pay accrued to the transferred employee of the old employer
  • severance pay, that would have been payable to the transferred employee of the old employer in the event of dismissal based on operational requirements
  • any other payments accrued to the transferred employees, but have not been paid to the employees of the old employer

after a period of 12 months.  During this period the old employer is jointly and severally liable with the new employer.

Section 187(g) of the LRA makes a dismissal that is based on the reason of a transfer or any reason relating to a transfer contemplated in section 197 or 197A automatically unfair.  This can include the retrenchment of the employees who are subjected to a transfer of a business as a going concern.  But the retrenchment can be fair if there was compliance with section 189 of the LRA.  Thus there will have to be true operational requirements as defined in section 213 read together with the Code of Good Practice as well compliance with the procedural guidelines stipulated in section 189(2) – (7) before it can be said that such a dismissal would be fair.

Section 197 transfers are not as straight forward as it may seem on the surface and our courts and legislature are still developing the law and jurisprudence in this regard. Special reference is made here to the amendment of the LRA in 2002 to include the transfer of a service in the definition of a “business”.  Our courts are also turning to decisions made in the European Courts for guidance as to what constitutes a business or a service. 

Transfers and the subsequent dismissal of employees due to transfers have even made a turn in the highest court in South Africa, namely the Constitutional Court.  Please visit our Case Law Library on our website if you want to read a summary of the judgment delivered by the Constitutional Court in the case of v University of Cape Town (2003) 24 ILJ 95 (CC).  We will include a discussion of this case as well as other cases relating to section 197 transfers in next week’s newsletter when we discuss the issue of outsourcing and whether it constitutes a transfer of a business as a going concern.

Me. Lezanne Bouwer
General Manager: Legal Assistance

Downloads available

  2. NEHAWU v University of Cape Town constitutional court judgment.pdf

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