Protection of employees in the event of the insolvency of their employer : a comparative study of South Africa and the European Union

Abstract

This study is concerned with protection of the rights of employees in the event of insolvency of their employer. The investigation has been prompted by the coming into operation of the new Labour Relations Act 66 of 1995, the inclusion of the labour rights in the Constitution of the Republic of South Africa, Act 108 of 1996 and the amendments to the Insolvency Act 24 of 1936. The aim is to investigate as to what extent these legislative measures protect the labour rights of employees in the event of the insolvency of their employer. The provisions of company law affecting the employments rights of employees have been discussed as well. For the purposes of comparison the position at International level and in the European Union has been discussed. Previously the insolvency of the employer automatically terminated contracts of employment of employees. Termination of contracts of employment was treated as being brought about by operation of law for which nobody could be blamed. Employees had no right of action against the insolvent employer except to lodge their claims against his insolvent estate. In the case where the insolvent undertaking was sold and transferred as a going concern, the new employer was not bound to take them over. He could take them over if he so wished but on terms and conditions dictated by him. In terms of the new Labour Relations Act, the new employer is now bound to take them over. Where there is a doubt as to whether a particular sale of an undertaking or part thereof constitutes a transfer the courts resort to the provisions of the Constitution to come to the rescue of the employees. The problem with the new dispensation is that the accrued rights of employees such as arrears of pay, payment in respect of leave or holidays and severance pay are not transferred together with contracts of employment to the new employer. The employees are expected to lodge their claims against the insolvent estate of the insolvent employer which might not have anything after the claims of the secured creditors have been met. The same position obtains in the European Union when an insolvent undertaking is transferred but in the European Union the claims of employees are protected by way of institutions guaranteeing payments of claims of the employees in the event of insolvency of their employer. In the case where an insolvent employer fails to meet the

claims of the employees the guarantee institutions pay them. There are no such institutions in South Africa. There are ways in which an insolvent company could be saved from being liquidated and employees jobs saved. This could be done by placing a company under judicial management or by compromise or arrangement. These mechanisms in terms of which the company may be rescued from being liquidated have been reported to be a total failure. They are outdated and not in touch with the new developments in the world of business. My conclusion is that the present protections of the labour rights of the employees are inadequate, companies are still being liquidated on a large scale and employees are still losing a lot when it comes to arrears of salaries and severance pay. It is recommended that guarantee institutions be established to guarantee the unpaid claims of the employees. The rescue methods should in the corporate world be reformed to be in line with the present day realities and trends elsewhere, especially those in the European Union.