Due to our country’s economic recession closures of SA businesses are increasing. Perhaps the worst of the negative effects of such closures is the wholesale loss of the jobs involving the employees of the business. Sometimes the struggling company is taken over instead of being forced to go into liquidation. The advantage of such a takeover is that it can avoid the wholesale loss of jobs caused by a liquidation.
Surprisingly, the Labour Relations Act (LRA) strongly discourages takeovers (albeit unintentionally), by prohibiting dismissals for reasons related to a takeover as a going concern. Thus, would-be rescue deals are scuppered by the fact that partial retrenchments, resulting from the rationalisation necessitated by takeovers, are prohibited by section 187 read together with section 197.
Where employees are illegally retrenched for reasons related to takeovers it is often difficult to establish whether it is the old entity that is at fault, or whether the new entity should be taken to task in court. This is because the date of the takeover is often unclear. If the employee was retrenched before the takeover, he/she should logically take the old entity to court; but what happens if the old entity does not have the assets necessary to pay the compensation ordered by the court? Section 197(2)(c) effectively allows the employee to sue the new employer even if it was the old employer who retrenched the employee unfairly.
If the retrenchment takes place after the transfer, only the new employer can be sued. However, establishing the date of the transfer for purposes of labour law can be tricky.
This key question arose in the case of Business Design Software (Pty) Ltd & Another vs Van der Velde (CLL Vol. 18, March 2009). The employee was a general manager of AST Group which decided to sell one of its divisions called BDS to the MD of BDS, Mr P Smulders. A few days after this decision was made, Smulders brought his brother into the business at senior level. Smulders then retrenched Van Der Velde. Three days after the retrenchment AST signed the agreement of sale of BDS with a company called WGN, the entity through which Smulders bought BDS. Although the sale agreement was signed on 3 April 2003 the agreement stated that the sale took retrospective effect on 1 January 2003.
Van der Velde took the retrenchment to the Labour Court on the grounds that he had been automatically unfairly dismissed for a reason related to the takeover of a going concern. The Labour Court decided that:
- The sale neither took place as at the April date on which the parties signed the sale agreement nor at the January date stipulated in the contract.
- The takeover had taken effect on 27 February 2003 when Smulders began operating the business.
- The dismissal had taken place in March, after Smulders had taken over the business, and BDS, under its new ownership, was the employer at the time of the retrenchment.
- The retrenchment was an automatically unfair dismissal as the dismissal decision stemmed from the takeover of the business. BDS took this decision to the Labour Appeal Court but that Court upheld the findings of the Labour Court.
This case reinforces the crucial principles that employers:
- need to be cautious about buying or otherwise taking over a business or part of a business as a going concern.
- need to be even more cautious about dismissing any employee for any reason related to such a takeover even if the reason for the dismissal is only indirectly related to the takeover.
- should neither enter takeovers nor dismiss any employees before obtaining advice from a reputable labour law expert.
To register for our 7 May webinar on Lockdown Labour Law please contact Ronni on firstname.lastname@example.org or 0845217492.