The human element to selling a business

When selling a business as a going concern, Section 197 of the Labour Relations Act (LRA) applies and regulates the transfer of employment contracts where the whole or part of a business is sold (transferred) as a going concern to a purchaser.

When selling a business as a going concern, Section 197 of the Labour Relations Act (LRA) applies and regulates the transfer of employment contracts where the whole or part of a business is sold (transferred) as a going concern to a purchaser.

Simply put, the new employer (the purchaser) is automatically substituted in the place of the old employer (the seller) in respect of all contracts of employment in existence immediately before the date of transfer. This means that all the rights and obligations between the old employer and his employees at the time of the sale, transfer to the new employer as rights and obligations between the new employer and the employees.

The purchaser must thus employ the transferred employees on terms and conditions that are the same or at least not less favourable than the terms and conditions under which they were employed by the seller. This protects the rights of each employee by ensuring that his or her conditions of service are not changed when the business is sold. This includes recognition of years of service, bonuses payable, accrued leave and disputes with the old employer.

Often a purchaser, when negotiating the sale of a business as a going concern, attempts to exclude this transfer of employee rights by placing the onus on the seller to ‘make a plan’ with employees and thereby excluding them from the sale transaction.

The seller, attempting to ‘make a plan’ and subsequently dismissing his employees before the transfer, may find himself liable for unfair dismissal. At the same time, the purchaser will not be off the hook either. The LRA is clear that the liability of the old employer for acts done before the sale, including the dismissal of an employee or an unfair labour practice, is transferred to the new employer and considered to have been done by the new employer. The purchaser can therefore also be held liable for the seller’s actions.

The LRA further provides that the old employer and the new employer should conclude an agreement regarding leave and other payments that have accrued to the transferring employees, severance pay that would have been payable to the transferring employees in the event of a dismissal for operational requirements, as well as the allocation of responsibility for payment between the seller and purchaser for these costs should any employee be entitled to payment of any of these amounts. The seller must also disclose the terms of this agreement to each transferring employee.

Importantly, the LRA determines that for a period of twelve months after the date of the transfer, the seller remains liable on his own as well as jointly with the purchaser for the payment of any  amounts due to a transferred employee in respect of leave and severance pay in the event of retrenchment or dismissal due to the purchaser’s liquidation or sequestration, unless the seller can show that it has fully complied with the provisions of section 197 of the LRA.

So, seller beware! In selling your business you may find yourself liable for unanticipated employment claims, even after the transfer of the business when you think you have ‘washed your hands of the affair’.

Likewise, purchasers must also be extremely careful, as they may find themselves liable for costly employment claims for the actions of the previous employer prior to the transfer.

To address the potential liabilities faced by both parties, the parties should ensure that their agreement of sale comprehensively addresses the allocation of risk and responsibility between them in respect of the important human element of selling a business as a going concern.

March 19, 2012
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