OVERVIEW
A dismissal for a reason related to a transfer as contemplated in section 197 of the Labour Relations Act (LRA) is deemed an automatically unfair dismissal. Accordingly, where an actual transfer for purposes of section 197 takes place, old and new employers should avoid using retrenchment to evade obligations.
It is not sufficient for an old employer to accept liability, as employees may pursue the new employer for unfair retrenchments initiated by the old employer. The issue that presents itself is what constitutes a transfer of a business as a going concern.
INTRODUCTION
A business, as per section 197, is defined as the whole or part of any business, trade, undertaking, or service. This, inclusive of tangible and intangible assets, goodwill, management staff, general workers, premises, a name, contracts with clients, activities performed, and operating methods.
Section 197(1) provides that where a transfer of a business occurs, unless expressly agreed, the 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.
Business owners who successfully acquire a tender to provide services in terms of a service level agreement should be aware of the comprehensive labour laws and interpretation of employment regulations when a business transfer threatens the job security of employees who rendered a service subject to a prior terminated service agreement.
Additionally, the question arises as to whether such a transition qualifies as a transfer of a business, or part thereof, as a going concern for purposes of section 197 of the LRA.
“The mere fact that there was a prior section 197 transfer by agreement is not decisive.”
LEGAL PRINCIPLES
In the case of Mobile Telephone Networks (Pty) Ltd and Others v CCI SA (Umhlanga) (Pty) Ltd and Others (“Mobile Telephone Networks”), the Labour Appeal Court held that when questioning whether a business has been transferred as a going concern, the court must conduct a fact finding enquiry of the objectively discernible facts, and that the essence of a section 197 concerns a transfer of the operational capacity.
In the case of Road Traffic Management Corporation v Tasima (Pty) Limited, the Constitutional Court established the “snapshot” test whereby it was determined that a business is said to be transferred as a going concern if the business remains the same, only now under new operation, thus comparing the business whilst under the old employer versus the business now operating under the new employer.
Furthermore, the nature of the business should be considered, whether it be asset-reliant or labour-intensive, as a transfer of assets alone does not necessarily qualify as a business being transferred under section 197. Where a transfer is asset-reliant, one should consider the essential operational capacity and whether the business can operate without said assets.
“…where the workforce itself constitutes the primary means by which the service is delivered.”
Where a business loses a service agreement to a third party, however, and is still capable of providing this service to another client, there is no transfer for purposes of section 197, as their workforce is still intact. For a business to be transferred as a going concern, components of the original business are carried over to the new business. Without said components, the new business/ employer cannot operate or provide a service.
“Other indicators – whether clients, assets, or employees were transferred to the new business.”
ANALYSIS
The important distinction is whether the business whose service agreement had been terminated simply loses a contract, without losing its business. In Tasima, the Constitutional Court held that where services are involved, it is not sufficient that only the services themselves are transferred; rather, it is required that the business that supplies the services be transferred to constitute a transfer for purposes of section 197.
Accordingly, where an outgoing service provider does not transfer its business but loses their right to provide a service to a third party, section 197 does not apply.
CONCLUSION
The application of section 197 requires a transfer of operational capacity with reference to the “snapshot” test, whereby a business retains the same identity; however, it falls into different hands. As a result, where a transfer of a business as a going concern takes place, employment of old employees continues automatically after said transfer.
Where no transfer of business is established and the old employer is incapable or unwilling to secure a service agreement with another third party, the old employer remains liable for payment of severance.
FAQs
When I take over a business or contract, do I have to take over the employees?
If the business is transferred as a going concern, employees automatically transfer to the new employer on their existing contracts.
Why it matters to employers: You may be legally required to take on staff whether you planned to or not, which directly impacts costs and operations.
What does it mean when a business is transferred “as a going concern”?
It means the business (or part of it) continues operating in essentially the same way, with its assets, employees, systems, or operations, but under new ownership.
Why it matters to employers: This is the key trigger for whether employee obligations transfer automatically.
Can I retrench employees before or after taking over a business to avoid taking them on?
No. Dismissing employees because of a business transfer is automatically unfair.
Why it matters to employers: This can lead to serious legal consequences and compensation claims.
If the previous employer retrenched staff before I took over, can I still be held responsible?
Yes. Employees may still pursue the new employer for unfair retrenchments linked to the transfer.
Why it matters to employers: You could inherit legal risk from decisions you didn’t make.
How do you determine if a business has actually been transferred?
Courts look at the facts to see whether the operational capacity of the business has moved to the new employer.
Why it matters to employers: There is no simple rule – each situation must be carefully assessed before making decisions.
What is the “snapshot test” in simple terms?
It compares the business before and after the takeover—if it looks like the same business under new management, it is likely a transfer.
Why it matters to employers: If your new operation looks the same, you will likely inherit employees and obligations.
If I only take over assets or equipment, do I have to take over employees?
Not necessarily. A transfer of assets alone does not automatically mean a business has been transferred.
Why it matters to employers: This helps to structure deals – but getting it wrong can still trigger unexpected obligations.
If I lose a contract to another company, do my employees automatically move to them?
No. If your business can still operate and retains its workforce, there is no automatic transfer.
Why it matters to employers: You may still be responsible for your employees, including possible retrenchment costs.
When a contract moves to a new service provider, when do employees transfer?
Employees only transfer if the actual business (not just the service) moves to the new provider, including key components like staff, assets, or clients.
Why it matters to employers: This is critical in tenders and outsourcing – services changing hands alone is not enough.
Who must pay severance if a contract ends and no employees transfer?
If there is no business transfer and the old employer cannot place employees elsewhere, the old employer must pay severance.
Why it matters to employers: Responsibility does not disappear just because the contract ends.