TRANSFER OF BUSINESS AND INSOLVENCY  

TRANSFER OF BUSINESS:

Contracts of employment when a business is transferred:

The Labour Relations Act provides that in the event of a transfer of a business, there is an automatic and obligatory transfer of contracts of employment from the old employer to the new. The transfer does not interrupt an employee's continuity of employment.  This section applies to the transfer of the whole or part of a business, trade or undertaking or service from one employer (the old employer) to another employer (the new employer) if the business is transferred as a going concern. 

Employees who do not wish to transfer to the new employer, may resign but they would not be entitled to severance pay.

Not less favourable transfers:

The new employer complies with the Act if the transferred employees are offered employment on terms and conditions that are "on the whole not less favourable" to the employees than those on which they were employed prior to the transfer.

The section does not preclude an employee from being transferred to a pension, provident, retirement or similar fund if the criteria in section 14(1)(c) of the Pension Funds Act 1956 have been satisfied. 

Collective agreements in force prior to the transfer are binding on the new employer as are the terms of any arbitration award.

Variation by agreement on transfer of business:

The consequences of section 197 may be varied by agreement. The agreement must be in writing and concluded between either the old employer, the new employer, or the old and new employers acting jointly on the one hand, and a relevant consulting party or body or referred to in section 189, on the other hand. 

In any negotiations to conclude an agreement to vary the consequences of section 197, the employer is required to disclose all relevant information that will enable the relevant party to engage effectively in the course of the negotiations.

In a provision that is of critical practical importance, the amendment requires the old employer to agree with the new employer to a valuation, as at the date of transfer, of -

• the leave pay accrued to transferred employees of the old employer;
• the severance pay that would have been payable to the transferred employees in the event of their dismissal for operational requirements; and
• any other payments that have accrued to the transferred employees eg bonuses, etc.

The old and the new employers are required to conclude a written agreement that specifies which of them is liable to pay the amounts referred to and in the event of any apportionment of liability between them, the terms of that apportionment. The agreement is required to reflect further what provision has been made for any payment contemplated if any employee becomes entitled to receive such a payment. The agreement must also disclose the terms on which agreement has been reached between the respective employers and the old employer must take any other measure that may be reasonable in the circumstances to ensure that adequate provision is made for any obligation that the new employer assumes. 

For a period of twelve months after the date of the transfer, the old employer remains jointly and severally liable with the new employer to any employee who becomes entitled to receive a payment as a result of that employee's dismissal for retrenchment related reasons, or as a consequence of the employer's liquidation or sequestration. The old employer can escape this liability if it can show that it has complied with the provisions of this section.

The old and the new employer are jointly and severally liable in respect of any claim concerning any term or condition of employment that arose before the transfer.

INSOLVENCY/ SCHEME OF ARRANGEMENT OR COMPROMISE

The Act provides for the obligatory and automatic transfer of contracts of employment in circumstances where the business is transferred because the old employer is insolvent or because a scheme of arrangement or compromise is entered into to avoid winding up or sequestration for reasons of insolvency. 

If an employer faces financial difficulties that may reasonably result in the winding up or sequestration of that employer, the employer is obliged to advise a consulting party to that effect. If the employer applies to be wound up or sequestrated, the consulting party is entitled to notice of the application. Any copy of the application must be provided to the consulting party within two days of receipt, or if in the case of urgent proceedings, within twelve hours. Contracts of employment are suspended on insolvency rather than immediately being terminated. 

When a business becomes insolvent and a scheme of arrangement is entered into to avoid the winding-up or sequestration of the business, employees' contracts of employment transfer from the old employer to the new.

Employee whose contracts are eventually terminated due to insolvency are entitled to severance pay.

The law provides that the employer must notify trade unions or employees of circumstances or legal proceedings that may result in insolvency. There should be a process of consultation with employees or their representative to explore options of saving the business.  

Information provided on this page is based on the document “Labour Law Amendments 2002” found on the Department of Labour’s website.  

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