Business transfers – mergers, acquisitions, takeovers – are increasingly common. Section 197 of the Labour Relations Act (LRA) aims at providing employees with job security when this happens. It states that, if a business is transferred as a going concern, all employees remain employed by the transferee (new employer) on the same terms and conditions as before and without losing any of their acquired rights.

In practice, however, tricky questions continue to arise.

One problem is that employers may not always want the outcome intended by section 197 and may seek ways of bypassing it. One such case was Motor Industry Staff Association (MISA) and Stoffberg v Eastvaal Motors (Pty) Ltd, decided by the Johannesburg Labour Court on 17 July 2024.

The facts were not in dispute. In essence, Eastvaal Motors (EVA) wanted to acquire the Ford and Honda franchises belonging to another car dealership (MM); but, since such franchises cannot be bought on their own, it meant acquiring the MM dealership in which they vested. At the same time, however, EVA wanted to avoid the consequences of section 197.

And the case law of the labour courts appeared to show a way of doing this: in a number of judgments, it had been held that mere sales of assets do not amount to business transfers. In line with this principle, EVA and MM described their contract as a “Sale of Assets Agreement” which covered practically all of MM’s assets, including all vehicles, tools, equipment and parts. However, it also contained a number of provisions intended to demonstrate that EVA was not acquiring MM’s business as a going concern.

For instance, it stipulated that (1) there was no sale of MM’s goodwill in the business; (2) certain assets, e.g. certain computer software, were not included; (3) MM’s business would close down one day prior to the transfer, when MVA would take over; and (4) MVA would offer new contracts of employment to all employees on the same terms and conditions as before.

However, one employee was less fortunate. The second applicant, Ms Stoffberg, who had been employed by MM on a part-time basis, was offered a fulltime position but at the same salary that she got from MM – in other words, at a reduced rate of pay. She did not agree to this and, as a result, EVA eventually dismissed her.

Ms Stoffberg then approached the Labour Court in terms of section 187(1)(g) of the LRA, which states that it is automatically unfair to dismiss an employee for a reason that is related to a business transfer covered by section 197. 

EVA did not deny that Ms Stoffberg’s dismissal was related to their take-over of MM but, since they denied that it amounted to a business transfer, they also felt that her dismissal had been automatically unfair.

The Court accepted that EVA had not intended to enter into a section 197 transfer but noted that this was irrelevant. The law is clear that the question of whether a business is transferred as a going concern must be decided objectively. The test is whether, on the facts, the entity being transferred is “a business in operation” which, after the transfer, “remains the same but in different hands” (para 35 of judgment). Thus, the parties’ intentions or the wording of their agreement can do nothing to alter the factual outcome.

The exclusion of certain assets was equally irrelevant. The question, rather, was the nature of the assets that were included and whether these were sufficient to enable EVA to continue carrying on the “same business” as before. The answer was clearly in the affirmative. None of the excluded assets were essential to the conduct of the business. In fact, EVA’s witness testified that EVA commenced trading on the very day after MM had “closed down” the dealership.

Nor did the non-transfer of the existing goodwill make a difference. The contract included a restraint of trade clause whereby MM undertook not to compete with EVA and, as the Court put it, “abandoned its name and brand” (para 42). EVA thus had no need of MM’s goodwill. It had acquired everything that it needed to continue conducting the same business seamlessly.

The Court therefore concluded that Ms Stoffberg’s dismissal was automatically unfair. It also found that EVA’s conduct in the proceedings had been “vexatious” and, even though it had “no defence”, it had “forced [the applicants] to fight a protracted and unnecessary legal battle” (para 56). As a result, Ms Stoffberg was awarded the maximum compensation, equal to 24 months’ remuneration, plus costs.

This does not mean, however, that the effects of section 197 are carved in stone. All or any of the consequences of a business transfer can be varied by written agreement between one or both of the employers on the one hand and a union representing the affected employees (or, if there is no union, the employees themselves) on the other.

In the present case, too, the dispute could have been avoided if Ms Stoffberg had been offered a retrenchment package, as she had originally requested. At the rate laid down in section 42 of the BCEA, her severance pay would then have amounted to no more than five months’ remuneration and there would have been no legal costs. However, MM refused and EVA apparently did not consider it.

The bottom line is that, when a business is transferred as a going concern, the application of section 197 can only be avoided if the new employer ensures that all employees are accommodated in positions which they find acceptable and that any departures from the requirements of section 197 are covered by written agreements.

Written by Darcy du Toit, BCHC Attorneys