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Transfer of Contracts of Employment

The Law

When a company is transferred or sold ‘as is’ to a new owner, the employees’ contracts of employment are transferred to the new company without any changes. The rights and obligations of the old employers and employees are transferred to the new employer, including length of service, unless both parties agree to the terms of the contract.

Buying an existing business

If a new company takes over or buys out an existing company, the
new employer is responsible for all the rights and obligations related to the employees of the old company. In such a case, no agreement is required from the employees before their contracts of employment are transferred.

Anything done before the transfer by or in relation to the old employer, including the dismissal of an employee or the committing of an unfair labour practice or act of unfair discrimination is considered to have been done in relation to the new employer.

Unless otherwise agreed, the new employer is similarly bound by
any collective agreement concluded with the union or bargaining
council .The new employer is also obligated to comply with any
arbitration award made in terms of the LRA, unless otherwise

An agreement on the transfer of business should be concluded
between the old employer and the new employer and all relevant
information should be disclosed. The agreement should be in writing and should include the dates at transfer of the following issues:
• The leave accrued by the employees from the old employer;
• The severance pay that would have been payable to the transferred employees in the event of dismissal for operational
• Any other payments that the employees have accrued but have
not been paid to the employees by the old employer,
• Which employer is liable to which payments as well as which
employee should receive what.
• The transferred employees should be informed of the terms of
the agreement between the old and new employer.
If the new owner wants to change any terms and conditions of
employment, he/she would need to consult with the employees, and get their agreement to those changes. Any conditions that are not changed in the new contract must stay the same as they were under the old contract.

If the new owner wants to retrench, he/she would need to consider
when the employees joined the old company, in order to calculate
severance pay.

Buying a busines that is being liquidated

In circumstances where a company buys a business that is being
liquidated or where the employer is being sequestrated, the
company is bought in order to prevent it from being liquidated, in this event the employees’ contracts of employment can be transferred to the new owner without the consent of the employees.

Unless otherwise agreed, the new employer automatically
substitutes the old employer in all contracts of employment.

However, all the rights and obligations between the old employer
and each employee at the time of the transfer, remain the rights and obligations between the old employer and each employee.

Anything done before the transfer in respect of each employee is
considered to have been done by the old employer.

If a company sells off whole or part of a division of its business, the
new company that is formed by this sale becomes the new  employer of all the employees, and takes over their contracts of employment.

The same conditions would apply in such a case, as if the whole
business had been sold.

Outstanding as Transfer of Business

Outsourcing is explained as a procedure of hiring outside consultants, trainers, technicians and other professionals that take
over the complete function of a particular department rather than
employing full-time personnel e.g. catering, cleaning, data processing of a company. It has become commonplace for companies to outsource part of their enterprise in order to focus on
their core business.

The opinions on the interpretation of s197 pertaining to“outsourcing” differ substantially. However, there has been a broad
consensus and these views are mentioned below.

There may be a transfer for the purposes of the relevant regulations even though the outsourcer retains a “very considerable degree of control” over the manner in which the contractor provides services under the contract with the outsourcer. The fact that there is a form of control is enough to indicate that there has been a transfer.

Therefore the only test that could be applied to determine whether a company has been transferred as “a going concern” would be to
examine the substance of the transfer and not the form thereof.
It is important that there must be an assessment of the facts.
Therefore, one should not treat any one fact as conclusive in itself
but to consider all facts when deciding on whether there was a
transfer of business.

Relevant legislation: Labour Relations Act, s197