Dismissals a no-no in takeovers

By Ivan Israelstam, chief executive of Labour Law Management Consulting

Section 197 of the Labour Relations Act (LRA) requires the new employer, in a takeover as a going concern, to take over all the employees of the old employer. A take over of an enterprise “as a going concern” essentially means that the new employer is carrying on the same business as the old employer after a takeover.

In such a case the new employer is required to take over the old employer’s staff with all their years of service and all their old terms and conditions intact. Due to this heavy burden and for other reasons, the new employer often wishes to retrench excess employees or requires the old employer to carry out the retrenchments before the takeover.

However, section 187(1)(g) of the LRA prohibits any retrenchment (or any other dismissal) related to a takeover as a going concern. Such terminations are deemed to be automatically unfair dismissals. This means that the dismissed employees could claim reinstatement or up to 24 months remuneration in compensation. It is important to stress that the provisions of sections 197 and 187 of the LRA apply not only to businesses but to all employers including government departments, welfare organisations, NGOs and all other enterprises that employ staff.

The purpose of this legislation is to preserve jobs by preventing employers from rationalising their workforces in circumstances of a takeover. However, because such legislation tends to discourage takeovers, rescue bids for enterprises that are going under will also be discouraged. Such enterprises will often have to close down. Then, instead of a limited number of employees being retrenched during a rationalisation, all the employees will lose their jobs.

In the case of Cash Paymaster Services (Pty) Ltd vs Browne (2006, 2 BLLR 131). The employer was ordered to pay most of the employee’s legal costs plus compensation in the amount of R684 621 because they had been dismissed as a result of a section n197 takeover.

In SAMWU vs Rand Airport Management Company (Pty) Ltd and Others (2005, 3 BLLR 241) the employer wished to outsource it security and gardening services to contractors without having to transfer their gardeners and security staff to the contractors. The Labour appeal Court, responding to an appeal from a declaratory order made by the Labour Court, decided that:

• If the outsourcing went ahead it would constitute a transfer as a going concern

• The employer would not be allowed to dismiss any of its employees as a result of the transfer.

The combination of sections 187 and 197 of the LRA have all but closed the door on the practice of selling a business or outsourcing a service and then retrenching employees whose jobs become redundant as a result. Those employers who ignore this law will do so to their cost. Employers considering takeovers, buy outs, mergers or contracting/outsourcing arrangements are therefore advised, before implementing any transfers, to utilise their labour law experts to:

• Analyse and explain the meaning of sections 197 and 187 of the LRA as well as of the developing case law in this area

• Explain the significance of these laws for the specific circumstances of the employer

• Work out a strategy for completing the takeover without infringing the ever tightening labour legislation.

To access our expert debate on thorny labour law topics please go to www.labourlawadvice.co.za and click on the Labour Law Debate icon in the top menu.

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