BUSINESS SOLD ‘AS A GOING CONCERN’ – LEGAL OBLIGATIONS OF ‘THE OLD’ AND ‘THE NEW EMPLOYER’

SOLD AS GOING CONCERN

“The phrase “going concern” is not defined in the LRA. It must, therefore, be given its ordinary meaning unless the context indicates otherwise. What is transferred must be a business in operation ‘so that the business remains the same but in different hands’. Whether that has occurred is a matter of fact which must be determined objectively in the light of the circumstances of each transaction.

In deciding whether a business has been transferred as a going concern, regard must be had to the substance and not the form of the transaction. A number of factors will be relevant to the question whether a transfer of a business as a going concern has occurred such as the transfer or otherwise of assets both tangible and intangible, whether or not workers are taken over by the new employer, whether customers are transferred and whether or not the same business is being carried on by the new employer.

What must be stressed is that this list of factors is not exhaustive and none of them is decisive individually. They must all be considered in the overall assessment and therefore should not be considered in isolation.”

[NEHAWU v the University of Cape Town and Others (2003) 24 ILJ 95 (CC)]

1. INTRODUCTION:

I have recently been requested by a Labor Consultant to submit a brief memorandum pertaining to the statutory rights and obligations as stipulated in Section 197 of the Labour Relations Act, Act 66 of 1995 (as amended) (the LRA).

In short: Sections 197, 197A & 197B of the LRA are applicable in the event of business closures, mergers, transfers, and sales of businesses.

The facts, as well as the questions of law that may arise, have been provided by Consultant.

For the purpose of the memorandum and according to the brief by the Consultant an entity Co X (hereinafter referred to as “the new employer”), purchased Co Y (hereinafter referred to as “the old employer”).

The question that arises is whether Section 197 of the LRA is applicable?

“197. Transfer of contract of employment:

 (1) In this section and in section 197A –

 (a) “business” includes the whole or a part of any business, trade, undertaking or service; and

 (b) “transfer” means the transfer of a business by one employer (“the old employer”) to another employer (“the new employer”) as a going concern.

 (2) If a transfer of a business takes place, unless otherwise agreed in terms of subsection (6) –

 (a) the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer;

 (b) all the rights and obligations between the old employer and an employee at the time of the transfer continue in force as if they had been rights and obligations between the new employer and the employee;

 (c) anything done before the transfer by or in relation to the old employer, including the dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination, is considered to have been done by or in relation to the new employer; and

 (d) the transfer does not interrupt an employee’s continuity of employment, and an employee’s contract of employment continues with the new employer as if with the old employer.”

 If answered in the affirmative, the legal obligations that arise, if any as a result of the purchase by Co X of Co Y, or rather between the new employer [Co X] and the old employer [Co Y] .

Also of relevance is the security of tenure of the employees of the old employer vis-à-vis the statutory obligations of the new employer. 

In other words, considerations as to joint and several liability in terms of the provisions of Section 197 of the LRA.

2. SECTION 197 TRANSFERS

Applicability of section 197? 

Section 197 is triggered if all three of the following conditions are met: 

A transfer from one employer to another,

The transferred entity must be the whole or part of a business (here, the test is whether there is an economic entity capable of being transferred), and

The business must be transferred as a going concern (here, the test is whether the economic entity that is transferred retained its identity after the transfer.

[See Douglas & others v Gauteng MEC for Health [2008] 5 BLLR 401 (LC)].

When is a business transferred as a going concern?

“The phrase ‘going concern’ is not defined in the LRA. It must, therefore, be given its ordinary meaning unless the context indicates otherwise. What is transferred must be a business in operation ‘so that the business remains the same but in different hands’. Whether that has occurred is a matter of fact which must be determined objectively in the light of the circumstances of each transaction.

In deciding whether a business has been transferred as a going concern, regard must be had to the substance and not the form of the transaction. A number of factors will be relevant to the question whether a transfer of a business as a going concern has occurred such as the transfer or otherwise of assets both tangible and intangible, whether or not workers are taken over by the new employer, whether customers are transferred and whether or not the same business is being carried on by the new employer.

What must be stressed is that this list of factors is not exhaustive and none of them is decisive individually. They must all be considered in the overall assessment and therefore should not be considered in isolation.”

[NEHAWU v University of Cape Town & others (2003) 24 ILJ 95 (CC)].

[See, also, SAMWU & others v Rand Airport Management Company (Pty) Ltd & others (2005) 26 ILJ 67 (LAC)].

Transfer – relevant factors?

Factors to be taken into account in deciding whether a transfer envisaged by Section 197 has occurred are amongst others:

 What happened to the goodwill of the business?

 What happened to the stock-in-trade?

 Did the business premises change?

 Were the contracts with clients or customers taken over by the new employer?

 Is the business continuing to service the same customers?

 Was the workforce or part of it taken over?

 What happened to the assets of the business including assets leased by the   business?

 Did the new employer take over responsibility for the debts of the old employer?

 Has the operation of the business been interrupted and, if so, the duration thereof?

 Did the same or similar activities continue after the transfer?

See Ponties Panel Beaters Partnership v NUMSA & others [2009] 2 BLLR 99 (LAC) –

An example of a case that can dramatically be referred to or termed as, “A sad and expensive exercise in avoiding ‘the long arm of the law’”.

[Special acknowledgement to LexisNexis South Africa – “Current Labour Law – 20th Annual Seminar on Labour Law – Restructuring and retrenchment” at 84 – 88 Presented by Professors Halton Cheadle, PAK le Roux, and Clive Thompson].

The Ponties case concerned a rather convoluted set of transactions between related corporate entities. The litigation issue was whether the same underlying business had been transferred as a going concern, so attracting the obligations of section 197 of the LRA.

In brief, a number of employees who had been engaged by what the Court described as “Ponties 1”, a panel beating concern (and close corporation), were dismissed because of the apparent operational requirements of the business. The fairness of these dismissals was challenged in the Labour Court.

However, while proceedings were still pending, Ponties 1 ceased trading and another close corporation, “Ponties 2”, commenced operations as a panel beater from the same premises, using the same personnel and the same telephone and fax numbers that had been used by  Ponties 1. Ponties 2 employed several of the workers who had been dismissed by Ponties 1.

Ponties 2 then changed its name to Triponza Trading. A common set of personalities figured behind all of these chameleon-like trading entities.

The Labour Court matter between the now joined respondents Ponties 1 and Ponties 2 was heard by Zilwa AJ during May 2002 and on 3 June 2003, he handed down his judgment.

He found the dismissal of the employees to be automatically unfair and ordered Ponties 1 and Ponties 2, jointly and severally, to pay a total amount of R706 113,84 plus costs.

The judgment debt was not settled. Instead, Triponza informed its staff that it was going into liquidation and that in consequence, everyone was to be dismissed. On 13 June 2003, Landman J granted an interim order interdicting Triponza from dismissing its employees, and the interim order was confirmed by Gamble AJ on 6 August 2003.

On 15 July 2003, another trading entity, the appellant in this matter, purchased from a yet another entity, Pontie Esterhuizen (Pty) Ltd, the assets which Pontie 1 and Pontie 2 (aka Triponza) had previously leased from Pontie Esterhuizen to run the panel beating concern.

Around June 2003, one Pierre Johan Potgieter – who was conducting the business of the appellant as a sole proprietor informed the employees of Triponza that he was taking over the business of Triponza.

Potgieter, however, aware of the debts overhanging Ponties and Triponza, denied that he had actually bought the business of Ponties 1, Ponties 2 or Triponza. He stated that he only purchased the assets of a panel beating business. Ten of the 23 employees were then engaged by the appellant, and the remainder retrenched.

Potgieter claimed an agreement with a trade union NUMSA to the effect that his new business would not be responsible for “any claim whosoever [sic] arising out of the employment relationship between Triponza or its predecessors”.

Against this tortuous background, the Labour Court and on appeal, the Labour Appeal Court, had to decide whether the earlier panel beating business had been transferred to Ponties Panel Beaters Partnership as a going concern, meaning that the latter was burdened with the earlier judgment debt of over R700 000.

The Labour Court having found for the union and the individual workers, the Labour Appeal Court in its turn considered that the following facts were common cause:

a) The appellant conducts a panel beating business which is the same business that was conducted by Triponza, Ponties 1 and Ponties 2.

(b) The appellant’s business is operated from the same premises that Triponza, Ponties 1 and Ponties 2 conducted their business.

(c) The appellant employs a substantial number of the employees who were previously employed by Triponza, Ponties 1 and Ponties 2.

(d) The appellant paid severance packages to employees of Triponza that it did not employ and, in doing so, took into account their period of service with Triponza.

(e) The employees employed by the appellant were paid at the same rate of pay and using the same clock numbers and machinery as were used during Triponza time.

(f) The former manager of Triponza, one Mr Van Rooyen, was retained by the appellant and continued as manager of the business.

(g) The appellant is using the same telefax and telephone numbers that were used by Triponza.

(h) The appellant is operating under a trading name which has some striking similarity with that of Ponties 1 and Ponties 2.

(i) Naturally, the appellant’s clientele is the same as that which used to be Triponza’s clientele.

The Labour Appeal Court was not swayed by the fact that there may have been an interruption in business activities from the time Triponza was closed down to the start-up date of the appellant:

“Even if it could be said that there was an interruption in the business, same could not have been for such a long period that it could be said that it broke the connection between the business of Triponza and that of the appellant . . . The fact that the business was closed should not in itself be a factor that would prevent the applicability of section 197 of the Act.”

Furthermore:

There is also the fact that assets which the appellant bought which it needed for the business were bought not from Triponza but “Pontie Esterhuizen (Pty) Ltd”.

“In my view, this does not change the picture at all. The fact of the matter is that Triponza had leased the same assets to conduct the business. The appellant did not lease them but bought them. Indeed, as stated in paragraph 9 above, the agreement between the appellant and Pontie Esterhuizen (Pty) Ltd reflects a provision to the effect that the appellant was purchasing all the assets necessary for the conduct of the business.

In that agreement, it was stated that the assets in question were still on the premises from which Triponza had conducted the business and from which the appellant sought to conduct its business too.”

“In my view, the fact that the assets which the appellant bought in order to run the business were not bought from Ponties 2 but from a third party is no basis, on the facts this case, to conclude that Triponza’s business was not transferred to the appellant as a going concern.” (At 110–111)

The Court concluded that there had indeed been a transfer of a business as a going concern and that the alleged deal between the appellant and the union (in terms of which the latter allegedly accepted that the appellant would not be responsible for any claim arising out of the employment relationship between Triponza or its predecessors) was not a binding agreement.

The appeal was dismissed.

The lessons arising from the  Ponties case are fourfold:

  • The labour courts can be very single-minded in pursuing a business as it morphs its way over time through multiple guises, ever alert to assessing whether the underlying business entity is still essentially travelling on intact.
  • An interruption in business operations does not necessarily break the nexus between successor entities for section 197 purposes.
  • A change in the ownership attributes of the assets that make up the business is not decisive in breaking the succession obligations.
  • Section 197 obligations are difficult to avoid, and the courts intend to keep things that way.

In Transport and Allied Workers Union of SA v Transnet and others (J175/2011)ZALCJHB (Delivered on 20 June 2013) it was confirmed that for a transfer to be established there must be components of the original business which are passed on to the third party. These may be in the form of assets or the taking over of workers who are assigned to provide the service.

3. Automatically unfair dismissals related to Section 197

3.1  In Douglas & others v Gauteng MEC for Health [2008] 5 BLLR 401 (LC) the court held a section 197 transfer had occurred and as such the employees were automatically transferred by operation of law to the Gauteng Department of Health.

It held further that unless there was an agreement reached between the old employer, the new employer, and the affected employees to vary terms and conditions of employment, that the transferred employees were to transfer on terms and conditions that were on the whole not less favourable to those they previously enjoyed.

If an employee is offered a contract which is substantially less favourable and he/she is dismissed thereafter it would constitute an automatically unfair dismissal which would entitle the employee to maximum compensation (24 months).

[See City Power (Pty) Ltd v Grinpal Energy Management Services (Pty) Ltd and Others [2015] ZACC 9, where the Constitutional Court held that Section 197 provides that where there is a transfer of a business as a going concern, there is an automatic transfer of employees to the new employer.

Once a transfer of the kind identified by section 197(1) ‘as a going concern’ occurs, it automatically carries with it all contracts of employment that existed immediately before the transfer took place.

The employment contracts are automatically transferred together with the business. This happens by operation of law. The person to whom the business is transferred replaces the employer in terms of the contracts of employment and assumes all obligations of the previous employer].

 

HALLO I AM THE BOSS

4. Liability of the old and the new employer

4.1  In Anglo Office Supplies (Pty) Ltd v Lotz (2008) 29 ILJ 953 (LAC) it was held that the new employer will be liable even if the old employer dismissed employees, where the dismissal occurs in relation to section 197(2)(c) of the LRA.

[See also Business & Design Software (Pty) Ltd & another v Van der Velde [2009] 8 BLLR 8 746 (LAC)].

Consultation and section 197 transfer

5.1  In Irvin & Johnson Ltd v CCMA & others [2002] 12 BLLR 194 (LC), the employer dismissed employees pursuant to a transfer of business. The Court held that this did not relieve the employer from his duty to consult and where employees have accepted unreasonable offers of alternative employment they would not be deprived of severance pay.

In Jenkin v Khumbula Media Connexions (Pty) Ltd [2010] 12 BLLR 1295 (LC) the employee was sent home after a section 197 transfer took place. The employer thereafter took a decision to stop all his benefits.

The Court held that consultation entails more than just a mechanical approach and therefore found that the applicant’s dismissal after only 1 meeting was procedurally unfair.

6.1  In Forecourt Express (Pty) Ltd v SATAWU & others [2007] 2 BLLR 101 (LAC) the court held it was not for it to find that the employer should run its business in a different manner after a takeover had taken place. Even if the employer holds strong views, the union is within its rights to make proposals and it would not automatically mean that retrenchment was a fait accompli.

7. The effects of section 197 transfer

At the heart of s 197 is s 197(2). It provides that if a transfer of a business as a going concern takes place:

  • the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer;
  • all the rights and obligations between the old employer and an employee at the time of the transfer continues in force as if they had been rights and obligations between the new employer and the employee;
  • anything done before the transfer by or in relation to the old employer, including the dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination, is considered to have been done by or in relation to the new employer;
  • the transfer does not interrupt an employee’s continuity of employment and an employee’s contract of employment continues with the new employer as if it were the old employer.
  • The new employer in effect replaces the old employer. Provided that there is, objectively speaking, a going concern transfer, the transfer of employment takes place automatically irrespective of whether or not the two employers characterising the transfer as a going concern transfer;
  • Employees are transferred without their consent. If the employee does not want to be employed by the new employer the employee can resign.

[See  PAK Le Roux “Outsourcing and s197 of the LRA – Going concerns, employment contracts and the transfer of a business or service” Contemporary Employment Law, (2015) Volume 24 No. 7 at 68 – 69].

The above principles are qualified in three ways.

Firstly, the above-mentioned consequences of a transfer can be amended by agreement.

This agreement must be between the old employer, the new employer or both of them acting jointly on the one hand and any appropriate body or person referred to in s189 of the LRA. This is either a trade union representing employees or the employees themselves. This agreement can take various forms.

For example, it can be agreed that the employee will not be transferred or that the employee will be transferred on terms and conditions of employment less favourable to those that the employee enjoyed under the old employer.

Secondly, the new employer will be deemed to have complied with the above requirement if the employees are transferred on terms and conditions of employment that are on the whole not less favourable to the employees than those on which they were employed by the old employer.

However, this does not apply if employees’ conditions of employment are determined by a collective agreement.

Thirdly, special arrangements are made with regard to pension, provident and retirement funds.

The new employer may vary the terms and conditions of employment of transferred employees if the new terms and conditions are ‘on the whole not less favourable to the employees than those on which they were employed by the old employer’.

 Section 197(4) provides that the transferred employees may be transferred to a pension, provident, retirement or similar fund other than to which the employee belonged prior to the transfer.

[See IMATU v Cape Joint Retirement Fund (2008) 29 ILJ 1687 (C)].

However, if the new employer’s conditions of employment are regulated by collective agreement, the terms and conditions prescribed by the agreement prevail.

[See J Grogan ‘Dismissal’ Juta, 2014 2nd ed. at 510; also see, Experion SA (Pty) Ltd v Haynes & another (2013) 34 ILJ 529 (GSJ)]. 

8. CONCLUSION

Also of importance is s197(5) which provides that the new employer is bound by a collective agreement or arbitration award that bound the old employer in respect of the transferred employees.

Section 197 also makes provision for the joint and several liability of the old and new employer in certain circumstances.

Finally, it is necessary to make the point that where a going concern transfer takes place in the context of insolvency, s197A regulates the terms on which a transfer takes place.

 

Johann Scheepers.

August 12, 2016

Copyright:

Copyright reserved by the writer hereof. No part of this article/ guide may be reproduced, without prior written permission of the author.

The content of this article is intended to be general in substance and nature; to provide commentary on contemporary issues and where appropriate constitutes a general guide to the subject matter. Specialist advice should be sought about the reader’s specific circumstances.

The commentary expressed herein is that of the writer and not that of any professional organisation or entity with which the writer may be associated with.

 

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s