Hundreds, if not thousands, of businesses change hands in South Africa every year, yet there is nothing run-of-the-mill about the legal requirements that apply to business transfers, especially when employees are affected.

This has again been brought home by a recent Constitutional Court decision, which has put the employment law consequences of business transfers in South Africa back into the spotlight – with an interesting twist.

When a business is transferred as a going concern in terms of a sale of business agreement, there is often little if any doubt that such a transaction triggers the application of section 197 of the Labour Relations Act (LRA). Part or whole of the business would have been sold, commercial contracts signed, and the employment contracts of the employees automatically transferred to the new owner of the business.

But what if there is no sale and no contracts, and instead, a company goes into voluntary liquidation and the services previously provided by the liquidated company are then shifted to another company in the group and run by some of the former employees of the liquidated company? What impact does this have on employees of the liquidated company?

While this might not look like a straightforward transfer of business as a going concern, there might be more to such situations than meets the eye.

Transfer of a service

In a similar situation, the Constitutional Court in early August 2024 had the final word on a matter that had already been through the Labour Court and the Labour Appeal Court.

Both courts had found in favour of 12 employees dismissed after their employer, Echo International Management Services (Pty) Ltd (EIMS), went into voluntary liquidation in March 2020.

This entity provided shared management services to the Echo group of companies, such as human resources, legal, finance and sales and marketing functions. In 2020, it was decided that this centralised model would no longer apply and that EIMS had no future economic prospects.

Shortly after EIMS was placed into voluntary liquidation, however, another company in the Echo Group, Africa Online Operations (Mauritius) Ltd (AOOML), started performing the function of providing the shared services and a communication went out to the various Echo companies confirming that AOOML would honour at least some of the shared services previously rendered by EIMS and that it would be business as usual.

The dismissed employees went to the Labour Court, where they successfully argued that the provision of the shared management services had been transferred as a going concern from EIMS to AOOML.

Some of the key facts raised were that the main obligations of the business in liquidation were assumed by AOOML, AOOML continued to perform substantially the same shared services to the same customers (namely other group entities), AOOML used the same IT platform for the express purpose of ensuring business continuity and it contracted the services of the key personnel to perform the same activities as they had for the entity in liquidation.

They argued that since these services had transferred as a going concern, the consequence was that their employment contracts had also transferred to AOOL. This was as a result of section 197A of the LRA, which applies in circumstances of insolvency.

The Labour Court ordered that the 12 employees be reinstated with full backpay. This order was upheld by the Labour Appeal Court in January 2024 and, six months later, the Constitutional Court refused AOOL leave to appeal.

This matter highlights several key points for employers to keep in mind when it comes to the employment consequences of business transfers, including those involving employees from a company in voluntary liquidation.

Some considerations for employers

In section 197 of the LRA, a ‘business’ includes the whole or a part of any business, trade, undertaking or service. The employment consequences set out in section 197 (or section 197A, where the old employer is insolvent) apply where such a business, part of a business or a service is transferred as a going concern.

In assessing whether a going concern transfer is taking place, all the relevant factors are taken into account. What needs to be answered, is the question of whether the business or service retains its identity, but in different hands. This is normally the case where the very same activity is being performed, using the very same assets, providing services to the very same customers.

In such circumstances, the employment contracts of all the employees who are predominantly involved in the business or service being transferred, automatically transfer to the new employer. Any dismissal related to the transfer of a business as a going concern would be automatically unfair under Section 187(1)(g) of the LRA.

Second, a business transfer need not be based on a formal sale. Legally speaking, it is the substance of a transfer and not the form that matters.

Third, the new employer steps into the shoes of the old employer and must recognise the employees’ past service with the old employer. Should the employees subsequently be retrenched, they are entitled to severance pay calculated with reference to all their years of service, including those at the old employer.

Finally, the only difference when it comes to the employment consequences of a transfer that occurs in circumstances of insolvency is that the rights and obligations between the old employer and the employees do not transfer across – they remain rights and obligations between the old employer and the employees.

The business transfer landscape in South Africa is complex from an employment law perspective, with many i’s to dot and t’s to cross. An oversight or misstep can be costly. Attention to detail and a long-term view of the implications of business transfer strategies and the relevant legislation are critical for success.

Written by Helen Wilsenach, Head of Employment and Benefits, Talita Laubscher, Partner, and Chloë Loubser, Knowledge and Learning Lawyer, Bowmans South Africa