Business Transfer – Section 197 of Labour Relations Act

Jun 4, 2024

Introduction

A transfer entails the movement of a business from one party to another and is a concept that was intended to be widely construed. A transfer under Section 197 of the Labour Relations Act, 66 of 1995 (the LRA) can take the form of a myriad of legal transactions, including mergers, takeovers, restructuring within companies, donations and exchanges of assets.

 

The Law

The introduction of Section 197 marked a significant departure from South Africa’s common law principles regarding employee rights during business transfers. Prior to this amendment, employees typically had the right to choose their employer. However, with the enactment of Section 197, the law stipulated that in cases where there is a transfer of a business as a going concern from one party to another, the employment contracts associated with that business automatically transfer to the acquiring party.

This legislative change aimed to provide protection to employees during business transfers, ensuring continuity of employment and safeguarding their rights. However, the application of Section 197 has not been without challenges. The lack of clarity surrounding its implementation has led to confusion and uncertainty, prompting extensive legal scrutiny by various courts in South Africa, including the Labour Court, Labour Appeal Court, and even the Constitutional Court.

While the application of Section 197 in standard business transfers, where transactions occur between consenting parties, generally operates with certainty, its application in cases of second-generation outsourcing has been less straightforward. Second-generation outsourcing involves the transfer of business operations from one service provider to another, introducing complexities in determining the application of employment laws.

 

Case Law

A notable case shedding light on the importance and application of Section 197 is Njokweni and Others v Mobile Telephone Networks (2023). In this case, Mobile Telephone Networks (MTN) took over the operation of a prepaid support call centre from Interaction Call Centres. The termination of the service agreement between MTN and Interaction triggered the application of Section 197 obliging MTN to take over the employment contracts of Interaction’s employees. However, MTN contested this obligation and attempted to selectively offer employment to certain employees while dismissing others who failed to comply with instructions.

The legal battle between the parties lasted several years, with MTN arguing that the employees were not entitled to back payment of salaries and that any amounts owed had prescribed in law. However, the Labour Court ruled in favour of the employees, emphasizing that Section 197 operates automatically, requiring no further action from the affected employees. Additionally, the court dismissed MTN’s technical objections regarding prescription, highlighting the interruption of the prescription period due to ongoing litigation.

 The Njokweni case serves as a clear demonstration of the Labour Court’s stance on the application of Section 197 based on factual circumstances rather than the preferences of involved parties. MTN was ordered to pay full salaries to the employees entitled to transfer, reaffirming the importance of compliance with employment laws during business transactions.

 

Conclusion

Employers are urged to seek legal guidance to navigate situations where Section 197 may apply, ensuring compliance with their obligations and making informed commercial decisions. This case underscores the significance of legal clarity and adherence to employment regulations to mitigate risks associated with business transfers

The content does not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. Kindly contact us on info@labourman.co.za or 021 556 1075 to speak to one of our consultants.

Author:

Wallace Albertyn

Wallace Albertyn is a Senior Associate and Legal Advisor at LabourMan Consultants.

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