Sale of business – employee claims

Picture the scenario: you’ve negotiated to buy a business as a going concern. You’ve taken over the staff in addition to all the stock, customers and equipment. Next thing you find yourself on the receiving end of a labour claim by the seller’s ex-employees.   This is what happened in Kunyuza v Ace Wholesalers. Ace Wholesalers entered into an agreement for the sale of business to Temba Big Save CC. The sale included the transfer of employees, which meant that Section 197 LRA applied to the transaction. Before the sale was concluded, Ace Wholesalers dismissed a number of their employees. These employees claimed that their dismissal was automatically unfair, in that they were only dismissed because of the impending S197 transfer to the purchasing entity. They initially commenced a claim against Ace Wholesalers, being their employer at the time of the dismissal. In due course, they decided to join the purchaser, Temba Big Save, as the new employer to the matter. In this case, the court was asked to determine whether Temba Big Save could indeed be joined to the matter.   The Labour Court held that in matters where the labour dispute arises from section 197, the new employee would have a substantial interest in the outcome of the case because if reinstatement was ordered, the employees would be reinstated into positions with the new employer. This is because the net effect of section 197 is that the purchaser of the business, as the new employer, effectively “steps into the shoes” of the seller, the old employer. Apropos the affected employees, the new employer shoulders all liability for the actions of the old employer.   The lesson in this case is for all prospective purchasers of businesses to ensure that due diligence is conducted before signing the contract for the sale of the business. Extra care needs to be taken when it’s intended that employees will be transferred with the business, with the prudent purchaser looking at not only existing employees, but also considering the seller’s recent employment actions to determine if there are any outstanding, imminent or potential labour claims that may impact on the purchaser. And, of course, the Sale of Business Agreement should include provision for the seller to indemnify the purchaser in the event that the purchaser should incur any costs, suffer any damages, or otherwise be impacted by these labour claims.  

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.