FUNGAI CHIMWAMUROMBE & CASPER MATEZA
A business transfer is one of the various ways through which businesses are restructured worldwide.
Various reasons drive owners of established businesses to transfer their undertakings to new and enthusiastic investors.
The need to adjust to new changes in the market or the need to rescue a struggling business often leads to business transfer arrangements.
Of late, business transfers have been prevalent in Zimbabwe and one of the famous ones is that of BP Shell which sold its services as a going concern to Zuva Petroleum.
Another popular example is that of First Capital Bank which took over Barclays Bank operations in Zimbabwe as a going concern. Zimbabwean laws allow for these arrangements and existing labour laws are in place to safeguard the rights of existing employees in the event of the option being adopted by business owners.
Section 16 (1) of the Labour Act, (Cap 28:01) provides that; “subject to this section, whenever any undertaking in which any persons are employed is alienated or transferred in any way whatsoever, the employment of such persons shall, unless otherwise lawfully terminated, be deemed to be transferred to the transferee of the undertaking on terms and conditions which are not less favourable than those which applied immediately before the transfer, and the continuity of employment of such employees shall be deemed not to have been interrupted”.
Firstly, the undertaking contemplated by the above provision is a business or an enterprise. Thus for the above provisions to apply or for an employer to claim a business transfer, there first must exist either a business or an enterprise of separate existence.
It follows from this position that an attempt by an employer to transfer a mere department in its business whose existence cannot be separated from the main business is not covered by the above provisions and consequently cannot be a transfer as envisaged by the Labour Act.
Further to the above, a business that is transferable as contemplated by section 16 of the Labour Act is one that operates as a “going concern” meaning that what will be taken over should be an active and operating business or undertaking.
Thus a dormant business that has since ceased to operate cannot claim the right to transfer and rely on the aforesaid provisions of the Labour Act. The employees thereof have legal grounds to challenge the same.
It is also apparent from the above provisions that in a proper business transfer, the views of the employee do not guide the end result on whether or not an employer can enter into a transfer agreement for such an undertaking.
Thus existing employees of a business have no right per se to resist a business transfer to a new owner. Employees however hold the right to be consulted before an employer executes a business transfer that affects them. Section 25A (5) of the Labour Act stipulates that;
“without prejudice to the provisions of any collective bargaining agreement that may be applicable to the establishment concerned, a Works Council shall be entitled to be consulted by the employer about proposals relating to (c) partial or total plant closures and mergers and transfers of ownership.”
Therefore the employer must conduct a full and meaningful consultation with employees but is however not be bound by the views of the employees that may be expressed through the Works Council. Failure to consult by the employer may be a basis upon which affected employees may challenge the business transfer itself or claim for compensation for loss of employment.
Section 16 of the Labour Act tries to strike a balance between the seemingly absolute right of the employer to enter into a business transfer agreement with the employee’s interest in job security by providing various rights that accrue to an employee on the execution of such an agreement. Some of these rights are as follows;
• The employees enjoy the same conditions of employment not less favourable than those which applied to them immediately before the transfer
• The perpetual continuity of employment for such employees
The above-bundled rights essentially mean that the employees are, at the minimum, entitled to every right and benefit that their previous business owner owed them.
Thus in circumstances where employees affected by the arrangement are then subjected to new and less favourable conditions by the new owner or investor, such employees have the right to legally challenge those conditions.
For instance, the new employer is not legally entitled to reduce the employees’ salaries, accrued leave days, or benefits pursuant to the business transfer arrangement.
Neither is the new owner legally entitled to terminate the affected employees’ contracts of employment on the basis of the transfer arrangement. It is therefore paramount for both the seller and the buyer to be transparent on this position before the agreement is fully executed.
It may be in the interest of the buyer or new investor to ensure either that the seller firsts engage in a Retrenchment exercise envisaged in Section 12C of the Labour Act or pursue mutual termination of employment contracts before the agreement is executed to limit the extent of its liability if need be.
If this option is not taken and the business transfer continues, the buyer or new investor automatically assumes all rights and obligations that the seller had on all existing contracts of employment.
Further, the transfer contemplated by the Labour Act does not cover instances where a business undergoes a change in either its shareholding or management. The sale of shares in a company does not, for the purpose of section 16 of the Act, amount to undertaking transfer.
Moreso, the mere sale of assets of a company does not constitute a transfer of an undertaking as a going concern as contemplated by section 16 of the Act since there will be no operating business that would have been sold.
Fungai Chimwamurombe is a registered legal practitioner and Senior Partner at Chimwamurombe Legal Practice and can be contacted for feedback at email@example.com and WhatsApp 0772 997 889. Casper Mateza is a partner and can be contacted on firstname.lastname@example.org