Warning: Take care when selling a business

[manhav]

Hi guys and girls. I thought that I want to share this little bit of info with you of a actual matter that came before the CCMA yesterday.

The Seller decided to sell a portion of his business as a going concern to the Purchaser. The agreement was concluded and signed on 13 August 2009. The sales agreement did not make provision for the take-over of the existing service agreements.

A week prior to the conclusion of the sales agreement, the Seller and the Purchaser had a meeting with the staff. The Seller informed the staff that the business is about to be closed due to financial considerations. He also informed them that the Purchaser is interested in buying the business, but in the event of the Purchaser buying the business, he will not take over the staff. The Purchaser then said that he will give all the staff fixed terms contracts, valid for a month at a time for a 3 month period, until he has decided whether he is going to retain the services of all the staff or only some of them.

On the day of conclusion of the sales agreement, the Seller informed the staff that the business is sold, he calculated their severance packages according to the requirements of the law, and paid out the severance packages.

The Purchaser immediately entered into fixed term contracts with the staff. However, the following day the one manager's fixed term contract was terminated on notice, and she received her full pay.

A month later she referred a dispute to the CCMA, and yesterday, during arbitration proceedings, she was awarded compensation equal to 4 month's salary.

The fact is that both the Seller and the Purchaser failed to comply with the procedural requirements of the Labour Relations Act (LRA).

Firstly, the Seller should have followed the procedures set out in Section 189, giving of notices and follow due consultation procedures. Such consultation process take between 4 - 6 weeks.

The other problem was that the sales agreement, no matter how it was worded, constituted the transfer of a business as a going concern. Section 197 is clear, and state that the new employer shall take over the employees on the same terms and conditions.

The changing of a permanent contract into a fixed term contract is regarded as a material change to the terms and conditions of the contract.

The moral of the story is this: Please take care when you are considering selling your business, or are interested in buying a business. Follow the correct procedures, and any subsequent dismissals should then not be regarded as automatically unfair.

Manie Havenga
Havenga & Viljoen Attorneys

[Dave A]

So the employee got -

• The severance payout from the seller,
• The notice payout from the purchaser, and
• 4 months pay for the process being unprocedural.

Would that be right?

[manhav]

Spot on, Dave, spot on.

You know that this situation may have severe repurcusions for both the Seller and the Purchaser, especially if the other employees come to hear of the decision.

[Dave A]

Who has been ordered to pay the 4 months of salary? The seller or the purchaser?

[sterne.law@gmail.com]

In this case the purchaser affected the dismissal and is liable.Effectively all the liability and obligations pass to the Purchaser unless the sales agreement has a clause dealing with specifics. Important is that where retrenchments occur the Seller is liable for up to 6months from a financial viewpoint.
This case highlights a number of legal issues, excellent post. Important for buyers and sellers to be aware of the staff issues that arise and dealing with it in deed of sale. too often the parties are worried about all the other major details and over look this. It is also imperative that people are aware that when a sale occurs the employees are often a whole whack of extra protection against such tactics as highlighted above, where the parties simply want to use the sale as a mechanism to get rid of staff and then re-employ the good ones. Although this may be a contentious issue, most employers feel getting rid of under performers etc,etc should be easy to encourage better productivity, it is the law and as per most laws was written in because of employers who exploit. In particular the tactic would be using the threat of no job to simply reduce the wages and salaries.

[Dave A]

You know, this is when serious questions need to be asked about the wisdom on the LRA. These payouts will affect the availability of funds to grow the business. In fact any hobbling is taking away from that kitty.

Now where do new jobs come from?
I'd like to suggest business (and economic) growth.

Is the LRA creating a better environment for more jobs and more employement - or ultimately does it cause there being fewer jobs?

[sterne.law@gmail.com]

You know, this is when serious questions need to be asked about the wisdom on the LRA. These payouts will affect the availability of funds to grow the business. In fact any hobbling is taking away from that kitty.

Now where do new jobs come from?
I'd like to suggest business (and economic) growth.

Is the LRA creating a better environment for more jobs and more employement - or ultimately does it cause there being fewer jobs?

While I do not deny that the LRA has some drawback, the situation arose because of the business owners failure to follow the rules. The employees could have been retrenched or salary's adjusted etc, there is no legislation that does not allow that, there is however a procedure, which is not neccessary a long one. This not withstanding, a sale would take a week or two to put together plus a further 3 or 4 weeks for financing etc, leaving more than enough time to effect the neccessary procedures.

The business owner either did not know or, and more likely, chose to ignore the laws. While, no person can know every law, if a business owner is not aware that retrenching or changing salaries has rules, then they have only themselves to blame. Any businessman or person needs to know what they are good at and what they are not good at, and get the advice in the areas of weakness.

[manhav]

I do not think that the LRA is aimed at ruining the business owner. The LRA's main purpose is to regulate the employment relationship between employer and employee.

We must not forget that it was the conduct and dealings of unscrupulous employers which actually led to the introduction of the LRA into our law.

The question we have to ask ourselves is not whether the LRA is against the employer, because it is not. Unscrupulous employers hired and fired at will, sold businesses without considering the effects that such a decision will have on the employees, closed and liquidated businesses when it suited them, etc. This conduct actually contributed to unemployment.

The problem we are, however, facing is the interpretation of the LRA by the CCMA and its commissioners when a matter does go for arbitration. One does get the idea that most of the commissioners are pro-employee, and that the employer is always pulling the short end of the stick.

But this does not have to be the case. If the employer follows the procedures set out in the LRA, keeps proper minutes and records, and are guided by a reliable HR department, in association with a reliable labour attorney, he should not be scared of the LRA or the CCMA.

In this particular case we are discussing, the Seller should have started the retrenchment proceedings which are set out in Section 189. If he had given proper notice and if he allowed the necessary consultations to take place, there should not have been a problem. Such a consultation process would have taken between 4 - 6 weeks. The sale of the business could have been postponed, and in this particular instance, the Purchaser would have waited 4 to 6 weeks.

As employers we have to own up for our conduct. We cannot only consider the financial implications which the running of a business has on us as business owners, but also the effect our decisions may have on our employees. If an employee is guilty of misconduct or is not able to do the job at hand, etc, he must be dismissed, I agree. But when we decide to sell a business or restructure the business, the employees are not to blame and they should not be unnecessarily punished by loosing their jobs.

[Dave A]

I agree in this instance it should have been done better. Not taking the regulatory environment into account when conducting business is sheer folly.

I do not think that the LRA is aimed at ruining the business owner. The LRA's main purpose is to regulate the employment relationship between employer and employee.

I also agree with this whole-heartedly.

My concern is the unintended consequences, which are not nearly as simple and clear cut. For example:

Unscrupulous employers hired and fired at will, sold businesses without considering the effects that such a decision will have on the employees, closed and liquidated businesses when it suited them, etc. This conduct actually contributed to unemployment.

I completely disagree. In fact, I'd like to suggest this conduct creates more employment than it costs.

Let's take the one that labour really hates - where the business is wound up while it still has significant resources to continue trading. Why is it being wound up? Because it is making losses and there's no turnaround strategy in sight - the current operation is no longer viable. The options are to continue trading and diminish the capital further, or liquidate and apply that capital to another venture that is viable.

Viable ventures are inclined to grow and employ more people whereas non-viable ventures are compelled to do the exact opposite.

Now who is more likely to apply their funds to employment creating activities, the ex-employee who lost his/her job in this process of realignment, or the capitalist who decided to cash out on that business?

Yep - it's tough on the employees who lose their jobs, but effective deployment of capital is what creates jobs and is what would create an environment where there would be no problem in them finding a new job elsewhere.

Even in the case presented in the original post, the seller is likely to deploy that capital and this should result in more jobs - probably far more than the few lost in the sales process.

[tec0]

I know It sounds like I am always against the employer but the truth is for every system you will get abusers. I can point out 4 business all of them earning between 2 to 6 million per year and not a single person working for them has a contract.

Now I can go on about “hearsay� But I would rather just state that these companies have never gave formal training. They also do not comply with the health and safety regulations set out for them. So yes one can understand the frustration of the employee.

However, the employer can also be a victim to a system because of lack of understanding. Getting everything just right is basically a fulltime job and then you will have countless employees it is just out to milk the boss for more money. This is also a fact!

So I think a list can be drafted and posted by the CCMA along with the laws that every owner and employee can understand. Face it: Lack of understanding will be costly for both the employee and the employer so it seems only just that such a list are drafted and approved by the CCMA and their associates.

[Dave A]

I know It sounds like I am always against the employer but the truth is for every system you will get abusers. I can point out 4 business all of them earning between 2 to 6 million per year and not a single person working for them has a contract.

OK - so why is that?

Why won't these companies make permanent employee appointments?

[manhav]

Let's take the one that labour really hates - where the business is wound up while it still has significant resources to continue trading. Why is it being wound up? Because it is making losses and there's no turnaround strategy in sight - the current operation is no longer viable. The options are to continue trading and diminish the capital further, or liquidate and apply that capital to another venture that is viable.

I wholeheartedly agree with you that no business-owner can continue dumping capital in a venture that is not making a profit. I myself am a business owner, and at the end of every month I have to go the process of determining our loss and profit.

If the processes prescribed by the LRA have been followed, especially those regarding retrenchments, then at least the employer (business owner) is covered against the claims of the retrenched employees.

Experience have, on the other hand, shown that the business owner, especially in the present financial situation, elect not to start with a new venture. He/she winds down the business, and then accepts permanent employment with another company.

I have also seen on 2 occasions that the employer, having followed the retrenchment procedure, winded down the business, only to start a new business with the same capital and assets and even from the same premises, but then with new staff.

The question I have to ask myself is whether this is fair. He got rid of 10 employees, only to employ 5 new employees in the new venture. Where is the fairness in that?

[Dave A]

I have also seen on 2 occasions that the employer, having followed the retrenchment procedure, winded down the business, only to start a new business with the same capital and assets and even from the same premises, but then with new staff.

The question I have to ask myself is whether this is fair. He got rid of 10 employees, only to employ 5 new employees in the new venture. Where is the fairness in that?

Why retrench ten and hire five? Why wind up the business? Why not just retrench five?

There has to be more to that story, and it probably involves the creditors... and/or (ex-)partners

I'm not suggesting business owners don't get up to all kinds of weird antics. What I am suggesting is the idea that the LRA is protecting employment is a fallacy. In fact, I suggest it's achieving the exact opposite - it's costing employment opportunities.

Those unscrupulous types are going to get up to mischief anyway. I suggest rather focus legislative and regulatory efforts on what would constitute fraudulent behavior, or harmful business practices.

[wynn]

And how about rewarding those that comply? say 6 months or a year reduced income tax.