For buyers and sellers of South African businesses, section 197 of the Labour Relations Act 66 of 1995 ("the LRA") is not optional reading — it is mandatory compliance. Misunderstanding or ignoring it exposes the new employer to inherited liability, automatically unfair dismissal claims, and protracted CCMA litigation.
Whether you are acquiring a manufacturing plant, a retail chain, or a professional services practice, section 197 operates automatically whenever the transaction constitutes a transfer of a business as a going concern. This guide unpacks every element of the provision — from the threshold test to retrenchment after transfer, pension fund obligations, and the contractual protections that belong in every sale of business agreement.
What is Section 197?
Section 197 of the LRA provides that, when a business is transferred as a going concern, the employment contracts of all employees employed in that business transfer automatically to the new employer. The new employer steps into the shoes of the old employer in every respect — the employment relationship continues as if the transfer had never happened from the employees' perspective.
The Core Principle
- Automatic operation: s197 operates by force of law — the parties cannot contract out of it, and employee consent to the transfer is not required
- Continuity of employment: the new employer inherits the employee's full employment history — service, seniority, and accrued entitlements all carry over
- Same terms: the new employer is bound by the same terms and conditions of employment that applied immediately before the transfer — no unilateral variation is permitted
- Liability transfers: the new employer assumes all outstanding obligations to employees — including unpaid wages, leave pay, and pending disciplinary or grievance matters
The provision is remedial in nature — it was enacted to protect employees from losing their jobs, benefits, and service record simply because the business they work for changes hands. Courts have consistently interpreted it broadly and in favour of employees, which means commercial structuring that attempts to circumvent its operation is seldom successful.
When Does s197 Apply?
Section 197 applies whenever there is a "transfer of a business as a going concern." Not every commercial transaction involving assets or business interests reaches this threshold. The question is whether an economic entity — an organised grouping of resources and employees — has been transferred in a way that retains its identity in the hands of the transferee.
The Noonan v MacFarlane Test
South African courts apply a multi-factor test, drawing on the Labour Appeal Court's guidance, to determine whether a transfer qualifies as a going concern. The factors are not exhaustive and no single factor is decisive:
Type of undertaking
Whether the business before and after the transfer is of the same or similar type — a bakery being sold as a bakery, for example
Transfer of tangible assets
Whether physical assets such as equipment, stock, and premises transferred along with the business
Transfer of intangible assets
Whether goodwill, customer lists, intellectual property, and know-how transferred to the buyer
Majority of employees taken over
Whether the new employer retained the same workforce — a strong indicator but not determinative on its own
Transfer of customers
Whether the customer base and contracts followed the business to the new owner
Similarity of activity
Whether the activity carried on after the transfer is the same or substantially similar to what was carried on before
Period of interruption
Whether the business continued operating without material interruption around the time of transfer
Retention of goodwill
Whether the economic value, brand, or market position of the enterprise was preserved in the hands of the buyer
A bare asset purchase — where only plant and equipment are acquired without goodwill, employees, or customers — will typically not trigger s197. Conversely, acquiring a business unit complete with its staff, clients, premises, and brand almost certainly will, regardless of how the agreement labels the transaction.
What Transfers Automatically?
When s197 applies, the new employer inherits each employment relationship in its entirety. The following elements transfer by operation of law on the effective date of the transfer:
All Employment Contracts
Every contract of employment — whether permanent, fixed-term, or part-time — transfers to the new employer. The new employer cannot cherry-pick which employees to inherit. Employees who were employed in the business immediately before the transfer date transfer automatically, and those employed in that business unit at the time are all included.
Accrued Annual Leave
Any annual leave entitlement that had accrued but not been taken at the date of transfer passes to the new employer. The new employer cannot require these employees to forfeit untaken leave as a condition of employment, nor can the parties agree in the SPA that the seller will pay out all leave before transfer without the actual liability following the employee.
Service Record and Seniority
The employee's continuous service record carries over in full. For purposes of calculating notice periods, retrenchment packages, and leave entitlements, the new employer counts service from the date the employee first joined the old employer — not from the transfer date. A 15-year employee remains a 15-year employee after the sale.
Pension and Provident Fund Contributions
Outstanding or accrued fund contributions that had not yet been paid at the transfer date become the new employer's liability. The new employer must also enrol the transferred employees in equivalent or better fund arrangements going forward — or reach agreement with employees and the applicable fund on how their benefits will be preserved.
Disciplinary and Grievance History
Active disciplinary proceedings, pending grievances, and the employees' disciplinary records transfer to the new employer. If the old employer has issued a final written warning, that warning remains valid in the hands of the new employer for its remaining duration. Pending CCMA referrals may also attach to the new employer.
Restraints of Trade
Whether restraints of trade in employment contracts transfer under s197 is contested in South African law. The prevailing view is that restraints — being personal obligations — may not automatically bind the new employer as the enforcing party, although the employee's own obligations under the restraint may endure. Advice on specific restraints should always be obtained before and after a transfer.
Same Terms and Conditions
Section 197(2) is explicit: the new employer is bound by the same terms and conditions of employment that applied immediately before the transfer. The new employer cannot unilaterally worsen any employee's remuneration, benefits, job title, location, or working hours on the basis of the transfer alone.
What is Protected
- •Basic salary and all remuneration components
- •Leave entitlements (annual, sick, family responsibility)
- •Medical aid and retirement fund contributions
- •Job title, grade, and seniority
- •Working hours and overtime arrangements
- •Notice period for termination
- •Bonus and incentive arrangements
- •Any agreed benefits (car allowances, housing allowances, etc.)
How Terms Can Change
Terms can only be changed in limited ways after transfer:
- •By agreement: the employee must genuinely consent to the variation — economic duress or take-it-or-leave-it ultimatums will not suffice
- •By collective agreement: a registered trade union may agree to variations on behalf of members
- •Operational requirements: substantive changes based on genuine operational needs may be pursued through proper s189 consultation — but not as a disguised consequence of the transfer itself
Buyers who intend to rationalise the workforce or harmonise employment terms across their group must do so through proper process — not by treating the transfer itself as a pretext. Attempting to impose new terms at the moment of transfer is both unlawful and tactically counterproductive.
Consultation Obligations
Section 197(6) of the LRA imposes a consultation obligation on both the old and new employers before the transfer takes effect. This obligation is often overlooked or treated superficially, exposing both parties to claims.
What s197(6) Requires
Who Must Consult?
Both the old employer (the seller) and the new employer (the buyer) must consult with the affected employees or, if they are unionised, with the registered trade union that represents them. The consultation must be meaningful — it cannot be a mere notification.
What Must Be Disclosed?
The employer must disclose, in writing, all relevant information including:
- •The date and nature of the transfer
- •The reasons for the transfer
- •The legal, economic, and social implications of the transfer for employees
- •Any measures the new employer intends to take in relation to employees
Consultation is Not Consent
The obligation is to consult — to genuinely engage with and consider employee concerns — but not to obtain consent. The transfer can proceed even if employees object, provided the consultation process was genuine and in good faith.
Consequences of Failure
A failure to consult does not invalidate the transfer or allow employees to refuse the transfer. However, it gives employees grounds to approach the CCMA for an order compelling consultation, or to claim damages for losses suffered as a result of the failure to consult.
Section 197B — Outsourcing and Insourcing
Section 197B of the LRA — introduced in 2014 — extends similar protections to employees affected by outsourcing (externalisation of services) and insourcing (bringing outsourced services back in-house). It applies to the transfer of a service from one employer to another, even where the "business" being transferred is simply a service function rather than a self-standing enterprise.
Key Differences from s197
- Scope: s197B applies specifically to the transfer of a service — cleaning, security, catering, IT support — as opposed to a going concern business
- Same automatic transfer principle: employment contracts transfer automatically to the incoming service provider or the insourcing employer on the same terms
- Consultation: the same consultation obligations apply — the outgoing and incoming service providers must both consult with affected employees
- Dismissal protection: the same prohibition on dismissal in connection with the service transfer applies under s197B
Businesses that regularly outsource or insource service functions — whether as part of an acquisition or independently — must ensure that their service agreements and change-of-provider arrangements comply with s197B. Procurement teams that treat labour law compliance as an afterthought in outsourcing transactions expose their organisations to significant liability.
Dismissal in Connection with Transfer
Section 187(1)(g) of the LRA provides that a dismissal is automatically unfair if the reason for the dismissal is a transfer as contemplated in section 197. This is one of the most severe provisions in the LRA — automatically unfair dismissals attract compensation of up to 24 months' remuneration, with no upper cap for dismissals found to be for a prohibited reason.
Automatically Unfair Dismissal — Up to 24 Months' Compensation
A dismissal — whether by the old or new employer — whose reason is connected to the s197 transfer is automatically unfair under s187(1)(g). Unlike ordinary unfair dismissal (capped at 12 months), automatically unfair dismissals attract compensation of up to 24 months' remuneration. There is no need to prove procedural unfairness — the substantive reason alone triggers the full penalty.
Buyers who instruct the seller to "clean up the headcount" before effective date, and sellers who comply, expose both parties to jointly and severally liability for automatically unfair dismissal claims.
The NUMSA v Henred Fruehauf Exception
South African courts have recognised a narrow exception to the automatic unfair dismissal rule where the dismissal is based on genuine operational requirements that are unrelated to the transfer. The NUMSA v Henred Fruehauf line of authority confirms that an employer may dismiss for operational requirements — including retrenchment — provided the transfer is not the reason or even a reason for the dismissal.
In practice, the exception is difficult to invoke. If the restructuring and the transfer occur close in time, tribunals will scrutinise the connection carefully. A retrenchment motivated even partly by the desire to make the business more attractive to a buyer, or to reduce the headcount inherited by the new employer, will likely fail the test.
The safe approach is to complete any pre-transfer retrenchments well in advance of the transaction, document the operational rationale thoroughly, and ensure that the retrenchment process is entirely independent of the sale negotiations.
Retrenchment After Transfer
Retrenchment after a s197 transfer is permissible, but the new employer must navigate carefully. The key distinction is between retrenchment that is necessitated by genuine post-transfer operational requirements — permissible, provided s189 is fully complied with — and retrenchment that is in substance a continuation of the transfer itself.
The Post-Transfer Retrenchment Rules
- Full s189 compliance required: the new employer must follow the complete statutory retrenchment consultation process — disclosure, consultation, consideration of alternatives, and fair selection criteria
- Transfer cannot be the reason: the retrenchment must be based on the new employer's own post-transfer operational requirements — not on the buyer's desire to rationalise what it inherited
- Timing risk: retrenchments implemented immediately after transfer (within weeks or months) will attract scrutiny — the closer in time to the transfer, the stronger the inference of connection
- Severance pay on full service: where retrenchment does occur, the employee's severance package is calculated on their full years of service — including service with the old employer — not just service with the new employer
- "A consideration" vs "the reason": courts apply the "but for" test — if the transfer is even one of the reasons for the retrenchment, the s187(1)(g) protection is engaged
Pension and Provident Funds
The fund obligations triggered by a s197 transfer are among the most technically complex — and most frequently overlooked — aspects of a business sale. Both the LRA and the Pension Funds Act 24 of 1956 create obligations that must be attended to carefully.
Fund Transfer Obligations
No Benefit Diminution
Section 197(3)(b) prohibits the new employer from providing transferred employees with pension, provident, or retirement fund benefits that are on the whole less favourable than those they enjoyed under the old employer. The new employer must either admit employees to an equivalent fund or make alternative arrangements that are at least as beneficial.
Transfer of Fund Benefits
Where transferred employees were members of the old employer's fund, their accrued benefits must be transferred to the new employer's fund or preserved in a preservation fund. This requires the funds' trustees to engage with each other and with the Financial Sector Conduct Authority (FSCA) where applicable. Timing can be significant — the process takes longer than many transactions anticipate.
Surplus Apportionment
Where the old employer's fund has a surplus at the time of transfer, the transferred employees may be entitled to a share of that surplus under the Pension Funds Act. The apportionment of surplus is a technical process that must be dealt with by the fund's actuaries and, in some cases, approved by the Pension Funds Adjudicator or FSCA.
SPA Provisions
The sale agreement should deal expressly with fund arrangements — identifying the applicable funds, the intended treatment of accrued benefits, and the timeline for completing the fund transfer. Parties frequently underestimate the lead time required and discover, well after effective date, that fund arrangements remain incomplete.
Liability Allocation in the SPA
Even where s197 operates automatically, the sale and purchase agreement (SPA) — or business sale agreement — should deal expressly with employment liabilities. The statutory allocation of liability may not reflect the commercial deal the parties intended, and gaps in the SPA create disputes.
Indemnity for Pre-Transfer Claims
The seller should indemnify the buyer for all employment claims arising from events that occurred before the effective date of transfer — even if those claims are only brought against the new employer after the transfer. This includes claims for unfair dismissal (of employees dismissed before transfer), unpaid wages, discrimination, and any labour court or CCMA proceedings arising from pre-transfer conduct.
CCMA Arbitrations and Pending Claims
Any CCMA referral or labour court application filed before the transfer date should be identified during due diligence and dealt with in the SPA. The seller should undertake to defend and settle these at its own cost, or — where the new employer is necessarily substituted as respondent — to indemnify the new employer for any award and legal costs.
Effective Date Alignment
The effective date of the employment transfer under s197 must align precisely with the effective date of the commercial transaction. Where there is a gap — for example, the business assets transfer on one date but the employment effective date is treated as another — employees may have claims against both the old and new employer simultaneously. The SPA must define this date clearly and ensure all parties, including employees, are notified accordingly.
Notification to Employees
Employees must be notified in writing of the transfer, the effective date, and the identity of the new employer. While the LRA does not prescribe a specific form of notice, the notification should be clear, timely, and provided before the transfer date where possible. The SPA should specify who is responsible for issuing this notification — typically the seller, given their existing relationship with employees.
Practical Checklist
Use this checklist when planning or executing a business sale that may trigger section 197:
- 1
Determine at the outset whether the transaction structure (asset sale vs share sale) triggers s197 — and if so, plan the employment component accordingly from day one.
- 2
Conduct thorough employment due diligence — identify all transferred employees, their terms, accrued leave, disciplinary records, and any pending CCMA or court proceedings before signing.
- 3
Include express s197 consultation in the transaction timeline — allow adequate time for genuine consultation with employees or their union before the effective date.
- 4
Negotiate and draft express SPA clauses allocating pre- and post-transfer employment liabilities, with clear indemnities running in the appropriate direction.
- 5
Identify all pension and provident fund obligations — arrange for actuarial assessment of fund transfer requirements and agree on the timeline for completing the fund transfer process.
- 6
Ensure the effective date of the employment transfer aligns exactly with the commercial effective date — avoid any gap between asset transfer and employment transfer.
- 7
Prepare and issue written notification to all transferred employees before the effective date — identifying the new employer, the effective date, and their continuing terms of employment.
- 8
After transfer, ensure that any intended restructuring or headcount rationalisation is based on independent post-transfer operational requirements and is conducted through a full s189 process — separated in time and purpose from the transfer itself.
Section 197 Cannot Be Ignored
Section 197 of the Labour Relations Act is one of the most consequential provisions in South African commercial law — and one of the most frequently underestimated. Its automatic operation, combined with the draconian consequences of s187(1)(g) automatically unfair dismissal, means that buyers and sellers who do not engage with it early and thoroughly face significant financial exposure.
The good news is that s197 is well-understood and manageable when dealt with properly. A thorough employment due diligence, a well-drafted SPA, genuine consultation, and a realistic post-transfer integration plan will address the overwhelming majority of the risks — leaving both buyer and seller to get on with the business of building value in the transferred enterprise.
Navigating Section 197 in Your Transaction?
Whether you are buying or selling a business, MJ Kotze Inc can advise on section 197 compliance, employment due diligence, and the drafting of appropriate SPA protections.