RETRENCHMENTS & TRANSFER OF CONTRACTS

When a business is sold, it often raises questions for owners and employees about what happens to existing employment contracts and what to expect if the new owner cannot keep all staff. Here are some of the most common questions, illustrated through a scenario involving Owner A (the seller) and Owner B (the buyer).

What happens to employee contracts when a business is sold?

When a business is sold as a going concern, Section 197 of the Labour Relations Act (LRA) states that employment contracts are automatically transferred from the old employer (Owner A) to the new employer (Owner B) under the same terms and conditions. This protects employees from losing their jobs simply because of the sale.

Is the new owner obliged to keep existing staff?

The new employer must take over all employees, but if Owner B genuinely cannot accommodate a specific employee due to redundancy or operational reasons — for example, duplicate positions — the employee may face retrenchment.

Example Scenario

Owner A sells the business to Owner B, during the transfer:

• All employment contracts and existing terms and conditions of employment move to Owner B automatically.

• Suppose Owner B already has someone in the position such as Salon/Spa Manager at another branch and does not need another manager.

• Now a transferred manager faces a situation where there is no position for them.

What is the correct procedure if the new owner cannot keep an employee?

Retrenchment is the process where an employee is dismissed due to operational requirements, and not for misconduct. The procedure is as follows:

1. Consultation:

Owner B must consult meaningfully with the affected employee to discuss alternatives to retrenchment.

2. Fair Processes:

There must be a genuine operational reason(s) (overstaffing, no need for duplicate positions or position is redundant).

3. Consider Alternatives:

Possible alternatives need to be explored.

4. Notice and Severance:

If retrenchment is unavoidable, the employee is entitled to notice pay, severance pay (Severance of 1 week's salary per completed year of service), and any outstanding leave.

Can Owner A retrench employees before the sale?

It is risky for Owner A to retrench employees simply because the business is being sold. If the sale is as a going concern, the contracts should transfer to Owner B. Exceptions apply if both owners and the employees agree as part of the sale agreement.

Who is responsible for retrenchment costs?

After the transfer, Owner B is responsible for any subsequent retrenchments unless otherwise agreed in the sale contract. Sometimes, the cost of potential is factored into the sale negotiations.

Do employees have to agree to contract transfers?

No, employment contracts transfer automatically under section 197 without employees consent.

Can terms and conditions of employment be changed after transfer?

Changes to terms and conditions require agreement from employees. Without agreement, terms remain unchanged. Unilateral changes may result in unfair labour practice disputes.

What protection exist if retrenchment occurs immediately after transfer?

Retrenchment must be for valid operational reasons unrelated to the transfer, ensuring fair treatment which includes consultation and appropriate compensation.

Key Takeaway:

Section 197 of the LRA safeguards employees in business sales by automatically transferring contracts while allowing retrenchments only through a fair, lawful process. Salon and Spa business owners must navigate this carefully to comply legally and maintain good labour relations.

Should an employer require assistances with Section 197 transfers and or retrenchments, contact your EOHCB representative.