Section 197 of the Labour Relations Act (LRA) 66 of 1995 is a pivotal regulation in South African employment law, protecting employees when a business is transferred as a going concern. It ensures that employees’ rights are maintained, and their contracts automatically transfer to the new employer. This article explores the evolution, key provisions, and impact of Section 197, with a special focus on Section 197(6) and its implications.

The Evolution of Section 197

Historically, under South Africa’s common law and the Labour Relations Act of 1956, the sale or transfer of a business would terminate employment contracts, often leading to retrenchment and severance payments. This resulted in significant job losses whenever businesses were sold or restructured.

However, with the introduction of Section 197 in 1995, this changed. The automatic transfer of employment contracts became mandatory when a business was sold as a going concern, ensuring employees retained their jobs under the same terms and conditions with the new employer. This development protected employees from arbitrary dismissals and preserved their rights during corporate transfers.

The Importance of Continuity of Employment

The core principle of Section 197 is the continuity of employment. When a business is transferred, employees are automatically transferred to the new employer with all existing rights and obligations, such as salaries, benefits, and leave entitlements, maintained under the new ownership. The new employer inherits the employment relationship without the need to alter existing terms unless mutually agreed upon.

Section 197(6) – The Option for Termination Agreements

Section 197(6) provides an exception to the automatic transfer provision, allowing the old and new employers to contract out of the automatic transfer through an agreement with affected employees. However, strict conditions must be met to ensure fairness and transparency.

Conditions Under Section 197(6)

1. Consultation Requirement
   Both the old and new employers must consult with affected employees before any termination agreement is finalized. This consultation mirrors the process outlined in Section 189 of the LRA, which deals with retrenchments. It involves notifying employees of the reasons for termination and the number of employees affected.

2. No-Fault Termination
   Section 197(6) allows for a "no-fault" termination, where employees are dismissed due to operational requirements rather than misconduct. Severance pay is mandatory, aligning with the Basic Conditions of Employment Act (BCEA).

3. Employee Rights to Consultation
   Employees have the right to be consulted and actively participate in discussions about the impact of the transfer. Failure to conduct meaningful consultations can lead to claims of procedural unfairness.

Risks of Misapplying Section 197(6)

Employers should exercise caution when using Section 197(6). Failing to adhere to consultation requirements or unilaterally imposing decisions can result in claims of unfair dismissal, leading to significant compensation liabilities.

Section 197(3) – Protecting Employee Terms and Conditions

Section 197(3) protects employees by ensuring that their terms of employment cannot be changed to their detriment by the new employer. Any unpaid wages, leave, or benefits must be disclosed and transferred to the new employer, maintaining employees' accrued rights.

Automatic Substitution: Legal Obligations of The New Employer

In the absence of an agreement under Section 197(6), the new employer is automatically substituted for the old employer, inheriting all employment contracts and disputes. The new employer must follow proper legal channels when altering or terminating contracts, or risk claims of automatic unfair dismissal.

Njokweni and Others V Mobile Telephone Networks (2023)

In the case of Njokweni and Others v Mobile Telephone Networks (MTN), the Labour Court emphasized the importance of adhering to Section 197. MTN, after taking over a call centre, selectively employed some workers and failed to transfer others, violating Section 197. The court ruled in favour of the employees, highlighting that dismissals without following proper procedures result in unfair dismissals and compensation claims.

Second-Generation Outsourcing and Section 197

The application of Section 197 to second-generation outsourcing (when services are outsourced from one provider to another) can be complex. Courts assess the nature of services, transfer of assets, and continuity of operations to determine if Section 197 applies.

Conclusion

Section 197 of the Labour Relations Act is crucial for protecting employees during business transfers. It ensures job security, preserves employment terms, and provides safeguards against unfair dismissals. Employers must comply with its provisions, particularly regarding consultation, disclosure, and agreement processes. The Njokweni case illustrates the importance of following legal procedures to avoid costly legal battles.

Employers and employees alike are advised to seek professional legal advice to navigate the complexities of Section 197 effectively.

Ross Hendriks | SchoemanLaw Inc
Attorney
www.schoemanlaw.co.za

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