By PwC
In the high-stakes world of mergers, acquisitions, and corporate restructuring, the workforce is often the largest (silent) stakeholder. They hold significant influence, and regardless of the type of industry, without a productive and engaged workforce, the organisation can come to an immediate halt should the correct legal processes not be followed.
The South African Labour Relations Act (LRA) is the law governing labour relations, specifically between employee and employer. The LRA ensures the protection of employees and provides clear structures to establish fair labour practices, regardless of the industry.
Given the upheaval and uncertainty that is often experienced in a deal environment, the LRA provides two distinct mechanisms for managing and protecting the workforce within a deal environment:
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Section 189 (S189) provides a legal framework to be followed when retrenchments are necessitated due to operational requirements (i.e. technological advancements, business restructuring, and/or financial instability of the business)
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Section 197 (S197) provides a legal framework to be followed for the transfer of employees when a business is transferred as a going concern (i.e. there must be a transfer of economic activity capable of being transferred, such as a business, part of a business, or a service)
However, employee protection is not only limited to these labour requirements set by the LRA. The Competition Commission, through its public interest mandate, plays a pivotal role in safeguarding jobs during transactions. To prevent misuse of these mechanisms, the Commission frequently imposes conditions on a transaction that restricts retrenchments for a defined period, particularly those that appear to be directly linked to the transaction rather than operational needs. Understanding how and when to appropriately implement S189 and S197 is essential for dealmakers aiming to design smarter, more people-focused transactions that avoid legal complications and support long-term success.
S189 is designed to ensure that dismissals are not only substantively justified, but also procedurally fair.
Employers are required to engage in a meaningful consultation process with affected employees or their representatives to explore alternatives to retrenchment. They need to show that they are applying fair and objective selection criteria and considering measures to mitigate the impact, such as redeployment or severance packages.
In a deal environment, S189 can be applied both before and after a deal closes (this is only if the Commission has not implemented a condition that restricts this).
It is important to note that employers cannot ‘pick and choose’ who they want from the workforce either during the transaction, they must be able to clearly articulate the rationale for retrenchment and demonstrate that dismissal is a last resort, not a default outcome.
Failure to comply with these obligations can render the retrenchment both procedurally and substantively unfair, exposing the employer to legal risk, reputational damage, and operational disruption post-deal.
Enabling continuity in workforce transitions
S197 mandates the automatic transfer of employees from the seller to the buyer, ensuring that employment contracts, benefits, and obligations remain intact. This legal mechanism protects employees from dismissals (unless justified by operational requirements under S189) and safeguards employees’ existing rights such as salaries and accrued benefits, i.e. pension contributions and leave entitlements. This also ensures that institutional knowledge, operational stability, and employee morale are maintained during periods of transition.
As such, the new employer steps into the shoes of the old employer, assuming all responsibilities of the workforce without interruptions, unless otherwise agreed with the affected employees. With the protection of the S197, an employee can never be, on the whole, worse off after the transaction, and that is why it is so important for a buyer to complete a comprehensive people due diligence of the workforce before the transaction is closed to understand all the associated costs, benefits, and obligations.
If the transaction involves a carve-out, and there are shared employees, then a rule needs to be set, i.e. everyone who spends +50% of their time on the going concern being disposed of is included in the S197. Should an employee choose not to accept the S197 transfer, then an S189 may be implemented.
The Competition Commission of South Africa plays a pivotal role in protecting employment through its public interest mandate when assessing mergers
In a country grappling with stubbornly-high unemployment, the Commission is legally obligated under Section 12A of the Competition Act to assess not only the commercially competitive effects of a merger but also its broader socio-economic impact, including potential job losses. To prevent harmful outcomes, the Commission may impose conditions that limit retrenchments directly linked to the transaction for a defined period, ensuring that employment is not compromised for the sake of a deal. This regulatory oversight serves as a safeguard, promoting ethical dealmaking, and requires companies to consider the full human capital impact of their decisions.
The need for workforce planning in a transaction
Workforce transitions are not just a legal checkpoint; they are the strategic lever that can shape the success of a deal. Early identification of employees affected by a transaction, whether through retrenchment under S189 or the transfer under S197, allows deal teams to structure transactions with greater clarity and foresight. It is critical to identify employment risks, obligations, union agreements, legacy benefits, and opportunities tied to the workforce. This insight informs everything from valuation and deal structure to post-deal integration or separation. When workforce planning is embedded into the deal timeline from the outset, rather than treated as a post-signing formality, it enables smoother transitions and reduces the risk of disruption. Today, strategic workforce planning is no longer optional; it’s essential.
To learn more about how our team can support you in a deal process, visit our People in Deals page here.
