What happens to employees when a business is sold?

When a business changes hands, the staff usually hear about it late, and the first question is always the same: do we still have jobs?

This guide is part of our Your rights at work: pay, contracts, resigning and retrenchment, which links every guide on the topic.

For most sales the answer is yes, automatically, and without anybody having to negotiate for it. Section 197 of the Labour Relations Act 66 of 1995 is one of the strongest protections in South African employment law, and it is routinely misunderstood by employees, by sellers, and quite often by buyers who discover the position only after signing.

The rule

If a business, or a part of a business, is transferred as a going concern, the new employer is automatically substituted for the old employer in all existing employment contracts.

That is the whole mechanism, and the word doing the work is "automatically". It means:

• No employee needs to sign anything.
• No employee needs to consent.
• No offer of employment is made, because no offer is required.
• Nobody is dismissed, and nobody is re-hired.
• The contract that existed on Friday with the old owner is the same contract that exists on Monday with the new one.

Employees transfer on terms and conditions that are, on the whole, not less favourable than those they enjoyed before. Continuity of employment is preserved, so years of service carry over for leave, notice, severance and anything else that depends on length of service.

What "as a going concern" means

Section 197 does not apply to every transaction. It applies where what changes hands is a business capable of operating on its own, rather than a collection of assets.

Courts look at the substance rather than the label: whether the operation transferred keeps its identity, whether goodwill, customer contracts, stock, equipment and staff move together, and whether the buyer carries on the same activity. A restaurant sold with its premises, kitchen, suppliers, bookings and staff is a going concern. The same restaurant's fridges sold at auction are not.

This is also why the section reaches transactions people do not think of as sales. Outsourcing a function, bringing an outsourced function back in-house, and moving a contract from one service provider to another have all been held to be section 197 transfers in appropriate circumstances. The label on the agreement does not decide it.

What it means if you are an employee

You keep your job, your terms and your service. You do not need to apply for your own position, and you should be wary of any process that asks you to.

You cannot be required to sign a new contract on worse terms. A new employer may propose changes, and you may agree to them, but that is a variation you consent to, not something the transfer entitles them to impose. Our guide on whether your employer can change your contract without your consent sets out the position.

A sale is not a reason to retrench you. Retrenchment requires a genuine operational reason. "We are selling the business" is not one, because the law has already decided what happens to you on a sale. Dismissing employees so that a business can be sold without them is an automatically unfair dismissal under section 187(1)(g), which carries compensation of up to 24 months' remuneration rather than the ordinary 12.

Watch for the resignation trap. Employees are sometimes told that the old company is closing and they should take a package and re-apply to the new one. Where the transaction is in truth a going-concern transfer, that is often an attempt to dress up a section 197 transfer as a fresh start, and it costs employees their service and their terms. Ask directly whether the business is being transferred as a going concern, and put the question in writing.

What it means if you are selling

You cannot deliver a business free of its staff simply by dismissing them first. A dismissal for that purpose is automatically unfair, and the liability follows the transaction.

You also do not get a clean break. On the transfer the new employer takes over everything done by or in relation to the old employer, including obligations that had already arisen, so the employees' claims follow the business. But under section 197(8) the old employer remains jointly and severally liable with the new employer, for twelve months after the transfer, to any employee who becomes entitled to accrued leave pay, severance pay or other accrued amounts as a result of a dismissal for operational requirements, liquidation or sequestration, unless the old employer shows it complied with the section. A seller who ignores this finds that a debt they believed they had handed over comes back within the year.

Sellers and buyers are expected to agree, in writing, on how these obligations are valued and apportioned between them. That agreement governs the relationship between the parties, but it does not bind the employees, who may still enforce against either.

What it means if you are buying

You inherit the workforce, and you inherit the history.

That means accrued leave, long service, existing disciplinary records, current CCMA cases, any collective agreement in place, and the terms in every individual contract including restraints, allowances and benefits. Due diligence on employment is not a formality: the employment liabilities that come with a going concern are often larger than the price of the assets.

If your plan depends on a smaller workforce, that is a retrenchment you run yourself, after the transfer, for your own operational reasons, following the ordinary section 189 process, which our guide on retrenching fairly as a small business walks through. It is not something you can achieve by structuring the purchase agreement, and buyers who try usually end up paying for both the restructuring and the unfair dismissal.

Our retrenchment package calculator works out what a lawful retrenchment costs, and our guide on rights during a retrenchment consultation sets out the process.

When the seller is insolvent

Section 197 assumes a solvent seller. Where the old employer is insolvent, a separate provision, section 197A, governs the transfer instead, and the balance is struck differently.

The protection that survives is the important one: employees still transfer to the new employer, and their contracts still continue. What changes is the treatment of what was owed before. Section 197 exists partly to stop a buyer walking away from the old employer's obligations; section 197A recognises that in an insolvency those obligations are already caught up in the insolvency process, where a concursus creditorum determines who is paid and in what order. Employees have preferent claims in that process for wages, leave and severance up to statutory limits, and those claims are pursued against the insolvent estate rather than against the buyer.

The practical consequence for an employee is that you are likely to keep your job but may have to prove for arrear money in the insolvency, which pays out later and often pays out less. For a buyer, a business acquired out of insolvency carries a materially different liability profile from the same business bought as a solvent going concern, and the price should reflect that.

These transactions need advice on both the labour and the insolvency side, because the interaction between the two statutes is where the money is decided. The same applies to a transfer out of business rescue, where the rescue plan itself may deal with employment obligations.

Pensions, medical aid and benefits

Benefits are where transfers get technical. The general position is that employees must not be worse off overall, but a new employer may not have the identical fund or scheme.

In practice this is handled by transferring members to a comparable arrangement, and the comparison is done on the whole rather than item by item. An employee cannot insist on the identical product; they can insist on not being left materially worse off. Where a fund transfer is involved, the Pension Funds Act process applies on top of section 197, and these transfers need proper advice on both sides. A section 197 transfer is not a resignation, and the choices a resigning member faces do not arise in the same way; our guide on what happens to your pension or provident fund when you resign explains what applies when you do resign.

Worked example

This example is illustrative. A cleaning company holds a contract to service an office park and employs fourteen cleaners on that site. The office park puts the contract out to tender and awards it to a different company, which takes over the same work, at the same site, using the same equipment.

The new contractor tells the cleaners they must apply for positions, and that four of them will not be needed.

On these facts there is a strong argument that this is a section 197 transfer, even though no business was "sold" in the ordinary sense and the two contractors have no agreement with each other. The service transferred as a going concern: the same operation, the same site, the same work. If that is right, all fourteen transferred automatically on their existing terms, nobody had to apply for anything, and the four who were told they were not needed were dismissed rather than simply not hired.

The remedy is a dispute referred to the CCMA, and the compensation depends on whether the dismissal was merely unfair or automatically unfair. Our guide on referring an unfair dismissal to the CCMA sets out the timeline, which is short.

The practical advice

For employees: do not resign, do not sign anything that resets your service, and ask in writing whether the business is transferring as a going concern.

For sellers: deal with employment liabilities in the agreement, and understand that you remain exposed for a period whatever the agreement says.

For buyers: price the workforce as carefully as the assets, and plan any restructuring as your own process afterwards rather than as a condition of the deal.