Dismissal related to transfer of business

Sales of businesses are a regular feature of the modern economy. Mergers and acquisitions occur all too often as businesses position themselves for a better share of the market. In all these commercial transactions, the interests of the employees should not be forgotten.

It is for this reason that section 197 of the Labour Relations Act (LRA) requires that contracts of employees be transferred to the new employer whenever a business or part of it is transferred as a going concern. But what if a potential buyer does not want a certain employee? Can the current employer dismiss the unwanted employee in order to make the business attractive to the buyer? Can the two employers agree that the business to be transferred should not have certain employees?

The answer is found in section 187(1)(g). It is automatically unfair to dismiss an employee because a business or part thereof is transferred as a going concern. The dismissal may result from the transfer itself or from another reason related to the transfer.

The LRA only recognises three grounds for a valid dismissal, and transfer of a business is not one of them. So if it is shown that the reason for dismissal was related to transfer of a business, the dismissal would be automatically unfair, with serious consequences, including a compensation order of up to 24 months remunerationHowever, it is not always easy to connect the dismissal to the transfer. If the dismissal occurs at the time of the transfer or quite close to it, it may be relatively easier to show the connection. Where the receiving employer has indicated it has no position for the employee in its business, the connection would be easier to establish (see Business & Design Software (Pty) Ltd & another v Van der Velde [2009] 8 BLLR 746 (LAC).

But what if the transfer leads to slightly increased responsibilities that eventually cause the employee to miss performance targets and a dismissal for incapacity? What if the transfer results in excess capacity and the employer restructures to reduce headcount? Does it matter whether retrenchment occurs immediately after the transfer or after, say, one year? What about incidental redundancy? In each case, whether dismissal is a result of the transfer must be established from the facts. If it is shown on the facts that an employer artificially made a job redundant in order to make its business acceptable to a buyer, the retrenchment would be related to the transfer and therefore automatically unfair

If a job genuinely becomes redundant due to the transfer of part of an employer’s business, the retrenchment would be related to the transfer. This may occur where, for example, support staff are retained while the core functions and staff are transferred, leaving the support staff with little or nothing to do and therefore redundant.

To conclude, if the reason for dismissal is linked to transfer of a business as a going concern, it contravenes the LRA. The penalties may not be worth the benefits of the transfer. So employers should tread with care. If staff reduction occurs, it should be for genuine operational requirements.

Lesson: Transferring a business as a going concern should not undermine job security. 


The content in this article was provided by Sanlam – a diversified financial services group, headquartered in South Africa, operating across a number of selected global markets.

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