Section 197 of the Labour Relations Act (LRA) 66 of 1995 represents a landmark shift in South African employment law, governing the transfer of employment contracts during the sale or transfer of a business. It ensures that employees’ rights are protected when a business changes hands as a going concern. This article delves into the detailed workings of section 197, exploring its historical evolution, key provisions, and its interpretation in recent case law. Special attention is given to section 197(6), its impact, and the obligations it imposes on both employers.

The Evolution of Section 197

Under South Africa’s historical common law and the Labour Relations Act of 1956, the sale, transfer, or merger of a business resulted in the automatic termination of employees' contracts. This meant employees were retrenched, and employers were legally bound to pay severance packages. At the time, there was no continuity of employment when businesses were sold, which often placed employees in a precarious position, forcing them to seek new employment and compensation for lost jobs.

This changed dramatically with the introduction of section 197 in the Labour Relations Act of 1995. Section 197 introduced the automatic transfer of employment contracts when a business is transferred as a going concern. This negated the need for employees to be retrenched and entitled them to retain their jobs with the new employer, under the same terms and conditions as their original contracts. This legal shift also removed the employer’s discretion to terminate employment contracts without cause, a radical departure from the previous regime.

The Importance of Continuity of Employment

The essence of section 197 is to preserve the continuity of employment. When a business is sold, the employees working in that business automatically transfer to the new employer, regardless of the new employer's preferences. This protects employees from arbitrary dismissals or forced retrenchments and ensures that they maintain their rights and entitlements post-transfer.

Section 197(2) confirms that all rights and obligations between the old employer and the employees are transferred to the new employer. These rights include salaries, leave entitlements, pension contributions, and other benefits accrued before the transfer. The new employer steps into the shoes of the old employer, taking on the employment relationships and responsibilities without alteration unless otherwise agreed upon by the parties.

Section 197(6) – The Option for Termination Agreements

While section 197 mandates the automatic transfer of employment contracts, it also provides a limited exception under section 197(6). This section allows for the old and new employer to contract out of the automatic transfer provision by entering into an agreement with the affected employees. However, section 197(6) imposes strict requirements on the process for such agreements, which are critical to ensure fairness and legality.

Conditions Under Section 197(6)

Consultation Requirement

Section 197(6), read with subsection (2), requires that both the old and new employer engage in a consultation process with the affected employees before any termination agreement can be finalized. This process mirrors the consultation requirements under section 189 of the LRA, which deals with retrenchments and dismissals for operational requirements. The consultation must include written notification to the employees, explaining the reasons for the proposed terminations, the number of employees affected, and the process to be followed.

No-Fault Termination

Section 197(6) allows for a “no-fault” termination agreement, where employees can be dismissed not due to their conduct or performance, but because of the operational requirements of the business transfer. However, this dismissal must be agreed upon by the employees, and they must be given severance pay in accordance with section 41 of the Basic Conditions of Employment Act (BCEA).

Employee Rights to Consultation

Employees have a right to consult on the terms of any agreement under section 197(6). This right ensures that employees are fully informed and able to participate in discussions about the impact of the transfer on their employment. Failure to conduct meaningful consultations could result in the process being deemed procedurally unfair.

The scope of section 197(6) is limited and must be exercised carefully. The new employer cannot selectively choose which employees to retain or dismiss without going through the necessary legal steps. Failure to comply with section 197(6) may result in the dismissal being deemed unfair, triggering significant compensation liabilities for the employer.

Risks of Misapplying Section 197(6)

Employers should exercise caution when attempting to rely on section 197(6) to exclude employees from the transfer. A failure to properly adhere to the procedural requirements of consultation, notice, and agreement could render the terminations unfair. Additionally, section 197(7) specifies that any agreement to contract out of the automatic transfer must be made in good faith and cannot be imposed unilaterally by the employer.

Section 197(3) – Protecting Employee Terms and Conditions

Section 197(3) is another critical provision that protects employees during a business transfer. It ensures that the new employer cannot change the terms and conditions of employment to make them less favorable than those under the old employer. This protection is vital because it prevents the new employer from altering key employment terms, such as salary, working hours, or benefits, to the detriment of the employees.

The old employer is also required to disclose any amounts owing to the employees before the transfer takes place. These amounts may include unpaid wages, leave pay, or pension fund contributions. The new employer must take over these liabilities as part of the transfer, ensuring that employees do not lose out on any accrued benefits.

Automatic Substitution: Legal Obligations of The New Employer

In the absence of an agreement under section 197(6), the new employer is automatically substituted in place of the old employer. This substitution means that the new employer inherits all employment contracts, whether written or verbal, as well as any disputes or pending claims between the old employer and the employees.

The new employer must understand that any attempts to alter or dismiss employees without following the proper legal channels will be deemed automatically unfair. For example, dismissing employees for refusing to relocate or refusing to accept unfavorable terms can lead to automatic unfair dismissal claims under section 187(1)(g) of the LRA.

Njokweni and Others V Mobile Telephone Networks (2023)

The case of Njokweni and Others v Mobile Telephone Networks (MTN) highlights the importance of adhering to section 197. In this case, MTN took over a call center previously managed by Interaction Call Centres. The cancellation of the service agreement between the two companies triggered the application of section 197, requiring MTN to take over the employment contracts of Interaction's employees.

However, MTN failed to follow section 197’s requirements and selectively offered employment to some, but not all, of the employees. The Labour Court ruled that section 197 applied automatically, and MTN could not choose which employees to transfer. Additionally, the employees were unfairly dismissed when they refused to relocate to Randburg from Durban, leading to a significant back-pay order for MTN.

This case demonstrates that section 197 operates automatically, and employers cannot sidestep its provisions without legal consequences. Any attempt to dismiss or transfer employees without following the correct legal procedure can result in financial and reputational damage.

Second-Generation Outsourcing and Section 197

While section 197 generally applies to business transfers, its application to second-generation outsourcing arrangements can be complex. In these cases, where a service is outsourced from one provider to another, the Labour Courts have often been called upon to determine whether the outsourcing constitutes a transfer of a business as a going concern. The courts look at factors such as the nature of the services provided, the transfer of assets, and the continuity of the business operations.

Employers involved in outsourcing arrangements must seek legal advice to understand whether section 197 applies, as failure to do so could result in significant liabilities for unfair dismissal or failure to transfer employees.

Conclusion

Section 197 of the Labour Relations Act provides a comprehensive framework for the transfer of employees when a business is sold as a going concern. It aims to protect employees by ensuring continuity of employment and preventing arbitrary dismissals. However, the provisions of section 197, particularly sections 197(6) and 197(3), require careful attention from both employers and employees.

Employers must ensure they comply with the legal requirements of section 197, including consultation, disclosure, and agreement processes. Failing to do so can result in unfair dismissal claims and costly legal battles, as demonstrated by the Njokweni case. Given the complexity of section 197, employers are strongly advised to consult with experienced labor law attorneys to navigate the potential pitfalls and protect both the business and its employees.

Written by Ross Hendriks, Attorney, SchoemanLaw