According to common law, the sale, transfer or merger of a business results in the termination of existing employment contracts between the business and its employees, on the basis that parties may not assign their contractual rights and obligations to a third party without the other party’s consent. This position was changed significantly by Section 197 (S179) of the Labour Relations Act, No 66 of 1995 (LRA) in an attempt to protect the interest of employees to continuity of employment and to facilitate transfers of business. S179 provides for an automatic transfer of the contracts of employment to the acquiring company.
For S179 to apply the following legal requirements must be established:
- there must be a transfer by the old to the new employer;
- the transfer must be the whole or part of the business; and
- the business must be transferred as a going concern.
In NUMSA obo Members v Sacks Packaging (Pty) Ltd and others  JOL 48572 (LC)  the applicant Trade Union sought a declaration that the transfer of its members’ employment contracts from the first respondent to the second respondent was invalid and unlawful. It also sought to have the transfer interdicted on the basis that the legal requirements of S179 had not been met.
The significant issue in this case revolved around whether the non-core functions that the first respondent intended to transfer were, in fact, “a going concern”.
The first respondent manufactures bags. It claimed that as the packing and transport of bags could be separated from the core manufacturing functions, these functions could be separated out to constitute a discrete business. In determining whether a business has been transferred as a ‘going concern’, regard must be had to the substance and not the form of the transaction. (National Education Health and Allied Workers Union (NEHAWU) v University of Cape Town and Others).
The Labour Court found for the applicant and held that the transfer of the employment contracts was invalid and unlawful. The facts showed that while the actual processes could conceivably be separated, in this particular case, the employees would work predominantly on non-core functions, but that they would also continue to work on the first respondent’s core processes, in the same workplace, even reporting to the same manager. There was insufficient separation of the functions to constitute a going concern and it was concluded that no transfer of business had in fact occurred.
Key Take Away
The separation of functions to be transferred as a going concern, need to be logical, distinct, and supported by factual evidence for S179 of the LRA to apply.
by Janet Askew
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