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Transferring employees as a result of a sale of business in the United Kingdom and South Africa

1 January 2003
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When acquiring another company (whether it be by a purchase of the assets or the shares of the company) the purchaser will often restructure certain areas of the newly acquired company and this will inevitably have an affect on the current employees of such a company. However, before a purchaser proceeds with a transaction it must be aware that it will not be permitted to pick and choose what employees stay on with the newly acquired company and the terms under which those employees remain employed. This article will set out the legal position in the United Kingdom and South Africa in relation to employees who are transferred to a new employer as a result of the acquisition of a business as a going concern.
United Kingdom
The relevant legislation governing employee transfers in the United Kingdom is the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE 2006”) which came into force on 6 April 2006 (replacing the 1981 TUPE Regulations). Prior to the implementation of TUPE, the position in the United Kingdom was that where there was no change in the identity of the employer the employees’ contracts of employment would continue unamended. Therefore, if a company is acquired by purchasing the shares of that company there is no change in the identity of the employer (as it remains the company) and consequently no change in the employees’ contracts of employment. However, where the business is purchased by an asset sale the original UK common law position was that the employees were left behind and the purchaser was entitled to pick and choose what employees it would offer employment to and the terms of such employment.
TUPE altered this common law position by providing that where an asset sale amounts to the transfer of a business as a going concern, all rights, duties and liabilities in relation to the acquired company’s employees are transferred with the business. The purchaser is therefore obliged to continue with the employment of such employees on their current terms and conditions of employment.
Purchasers need to be aware that TUPE protects employees against any changes to their terms of employment which are connected to the transfer even if the employees agree to such changes. The only exception to this rule are changes that are an economic, technical or organisational reason entailing changes to the workforce. However, few contractual changes will meet this requirement, with the UK courts having held that a “change in the workforce” must involve a change to the numbers, functions or levels of the employees. While TUPE 2006 has relaxed the provisions dealing with amendments to employees’ terms of employment where the selling business is subject to certain insolvency proceedings, the proposed changes must still be agreed with a representative of the relevant employees.
As TUPE only governs asset and not share sales no similar provisions exist for a sale of shares and employers are free to amend the terms and conditions of employment of employees (provided of course that they obtain the employee’s consent). It is hard to rationalise such a distinction and it is certainly an aspect that a purchaser will need to take into consideration when deciding whether to acquire a business in the United Kingdom by way of its assets or by way of its shares.
South Africa:
In South Africa, as in the United Kingdom, if a company is acquired by purchasing the shares of that company there is no change in the identity of the employer and consequently no change in the employees’ contracts of employment. However, should a company be acquired by way of an asset purchase then such purchase will be subject to Section 197 of the Labour Relations Act, 1995 (“the LRA”) which governs transfers of contracts of employment on the sale of a business. Section 197 provides that if the whole or a part of a business is transferred as a going concern to a purchaser then the purchaser is automatically substituted in the place of the old employer (the seller) in respect of all contracts of employment in existence immediately prior to the date of the transfer. This means that anything done before the transfer by or in relation to the old employer is considered to have been done by the new employer (the purchaser), although the old and new employer are jointly and severally liable in respect of any claim concerning any term or condition of employment that arose prior to the transfer (although liability for any criminal actions will remain with the entity responsible for such actions).
The new employer will comply with section 197 if it employs the transferred employees on terms and conditions that are “on the whole not less favourable to the employees” than those on which they were employed by the old employer. However, if the employees’ conditions of employment are determined by a collective agreement then the new employer is required to honour such an agreement and not entitled to offer terms that are “on the whole not less favourable”. Should the old and/or the new employer wish to alter the terms and conditions of employment of certain employees they may do so by entering into an agreement with the affected employees.
Where the new employer employs the transferring employees on terms and conditions that are less favourable and an employee resigns as a result thereof, such a resignation will be regarded as an unfair dismissal by the new employer.

Section 197 also requires the old employer to conclude a written agreement with the new employer setting out the amounts and which employer (the old or the new) will be liable for accrued leave pay, severance pay that would have been payable to the transferred employees in the event of a dismissal by reason of operational requirements and any other payments that have accrued to the transferred employees but have not yet been paid by the old employer.
Regardless of whether the entity to be purchased is carried on in South Africa or the United Kingdom and regardless of whether the transaction is carried out by means of an asset or a share purchase, purchasers will take over the rights, obligations and liabilities of the seller in regard to their employees. While there are certain differences that exist in both South Africa and the United Kingdom between asset and share purchases, whatever route a purchaser decides to take it will require adequate warranties and indemnities in the purchase agreement as well as a comprehensive due diligence in order to highlight any onerous liabilities that the selling company may possess.