Selling your business. Should you be concerned about outsourcing?

The Labour Relations Act is considered to be particularly in favour of the employee and offers several measures to ensure that employees are protected in all matters relating to their employment. It may be the case that an employer, whose business plan is to build and sell a business or any part thereof, thinks he/she is taking the smart route and simply sticks to outsourcing his/her business functions so that they do not have to commit to a particular workforce. This idea is flawed.

Outsourcing does not simply mean that once you sell a business, workers who work on that service of the business must just go find employment elsewhere. The Labour Relations Act 66 of 1995 (now referred to as the “LRA”) and the Labour Relations Amendment Act 16 of 2002 ensure that no such shortcuts may be taken.

Section 197 of the LRA provides that when an owner sells their business as a “going concern” (Please see the article explaining what is selling your business as a going concern for a more detailed explanation) the new operator takes on over all labour law obligations of the old undertaking. This includes:

1) The rights and obligations that existed with the old employer exists between the new employer and the employee at the time of the transfer.

2) Any decision made by the old employer before the transfer is considered to have been done by the new employer.

3) Such a transfer may not interrupt the continuity of the employee’s contract.

A business is classified as a business in terms of section 197 as “…the whole or any part of the business, trade or undertaking of service.” This definition is worded loosely to allow even the sale of a service of the business and not necessarily the business as a whole. This means that, for example, even the cleaning service of a University is covered by the LRA, even though it’s not considered a “core service” (which in the case of a University is teaching). A legal transfer of the business or any service therefore will be subject to section 197. The same principles are applicable to second generation outsourcing where the first outsourcing party outsources their contract with the employer to a second outsourcer. The employees of the second (generation) outsourcer are similarly protected.

Therefore in terms of section 197, when the new employer takes over the business as a going concern, the work practices may change but not the terms and conditions of the employee’s or in this case, the outsourced employees.