Is retrenching employees after the transfer of a business automatically unfair?
Consultant at Klopper Attorneys Inc.
The severe economic aftermath caused by Covid-19 has resulted in several companies changing hands and business operations being downsized in an attempt at recreating a profitable business. This ultimately results in a reduction in the workforce after the sale of the business takes place. If these retrenchments are not done properly, the new business owner could find themself facing Labour Court referrals from disgruntled employees alleging that they have been automatically unfairly dismissed. This is because section 187(1)(g) of the Labour Relations Act 66 of 1995 (LRA) provides that a dismissal related to the transfer of a business, as contemplated in section 197, is deemed to be automatically unfair.
As will be discussed below, this section does not prevent new owners from retrenching employees after the transfer of the business has taken place if there are clear and justifiable operational reasons for doing so. However, it is important for new owners to understand the test that the Labour Court applies in determining whether a dismissal is automatically unfair in order to successfully defend a claim under these circumstances.
The legal implications of the transfer of a business on employees
To fall under section 197 of the LRA, a business, including a part of the business, needs to be transferred between two parties as a going concern. If a transfer has taken place the legal implications of this transfer are as follows:
- The employees’ contracts are automatically transferred to the new employer who needs to keep them on terms and conditions that are on the whole not less favourable than their previous terms and conditions.
- All rights and obligations of the employees with the old employer continue with the new employer.
- Anything done before the transfer by the old employer, including dismissals, unfair labour practices or discrimination, is considered to have been done by the new employer.
- The employees’ employment contracts continue to run and do not start afresh with the new employer.
The test applied in determining an automatically unfair dismissal
As stated above, if an employee is dismissed due to a transfer or a reason related to the transfer of a business as contemplated by section 197, such a dismissal will be regarded as automatically unfair in terms of section 187(1)(g) of the LRA. From the wording of this section, it appears that any dismissal for whatever reason within the context of a transfer would be automatically unfair. This however could not have been the intention of the legislature as it would have absurd consequences for new business owners if they were prohibited from restructuring the business following a transfer.
It is suggested that the purpose of this section is to prevent employers from dismissing employees as a means to avoid their obligations under section 197. Employees therefore may not be dismissed prior to the transfer of the business based on the new owner’s operational requirements as this will be seen as the new owner avoiding their obligations under section 197, however it does not prevent dismissals based on the new owner’s legitimate operational requirements following the transfer taking place.
The test to establish whether a dismissal is automatically unfair was laid down in Van der Velde v Business & Design Software (Pty) Ltd  10 BLLR 1004 (LC) and consists of an objective two-stage causation test. The first leg of the test relates to factual causation which is established by the court asking the question: would the dismissal have taken place but for the transfer? The second leg of the test relates to legal causation which is established by the court considering whether the transfer is the main, dominant, proximate or most likely cause of the dismissal. If the answer to both of these questions is in the affirmative, then the employee will succeed with their claim.
The employee will therefore have to make out a case that their dismissal was causally related to the transfer of the business to prove an automatically unfair dismissal and the employer will have to prove that the dismissal was causally related to its operational requirements in order to prove that the dismissal was fair. The court will then have to weigh up the objective factors relied on by the parties and exercise its discretion in making a finding.
The reason for the dismissal is therefore ultimately the deciding factor which needs to be proven with objective factors. Should new employers need to retrench employees in order to ensure the success of their new business, they will need to ensure that there are clear and justifiable operational reasons for doing so which they will be able to prove in court. Should they fail to prove clear operational reasons for the retrenchments, the dismissals may be held to be automatically unfair.