What rights do employees have when an employer is insolvent?
In the normal course of employment, employees' rights are protected by the Labour Relations Act 66 of 1995 (LRA), and the Basic Conditions of Employment Act 75 of 1997.
Some employers and employees may be surprised to know that employee's rights are still capable of being enforced even when an employer runs into economic trouble and becomes insolvent.
However, in insolvency circumstances there are some cases in which the liquidator would be able to terminate contracts of employment where an employer would normally not be allowed to do so.
Before examining employees' rights, some insolvency related concepts should be explained.
An employer may be an individual, natural person, such as a private person who is the employer of a domestic servant; if there is an application to court for a natural person to be declared insolvent, the process is referred to as sequestration.
An employer may also be a juristic person, such as a company or close corporation; if there is an application to court for a juristic person to be declared insolvent, the process is referred to as liquidation, or winding-up.
Both sequestrations and liquidations can be voluntary (initiated by the person themselves), or initiated by a creditor who is owed money by the person.
In either case, after the person has applied to court for sequestration/liquidation, a liquidator is appointed to realise and distribute the assets of the insolvent estate to the benefit of the creditors.
The first point regarding employment rights is to note that employees' rights are different depending on whether the application to sequestration/liquidation is voluntary or by creditors.
In the case of a voluntary sequestration/liquidation, the labour courts have expressed the view that because the act which brings about the sequestration/liquidation is controlled by the employer, if the employer wishes to dismiss employees after the sequestration/liquidation, the liquidator must follow the requirements of the LRA and ensure it has a fair reason relating to either the employee's misconduct or incapacity, or the employer's operational requirements, and that the liquidator followed a fair procedure in dismissing any employees.
But in the case of a creditor's sequestration/liquidation, because the act of sequestration/liquidation is not controlled by the employer and is brought about by a third party creditor, the liquidator has additional rights.
In this case, the Insolvency Act 24 of 1936 provides that when a court grants a provisional order of sequestration/liquidation, the contracts of employment are suspended.
The liquidator then has the power to terminate any contract on notice only, or can enter into new contracts with employees to assist in the sequestration/liquidation process; these are normally fixed term contracts.
When the final order of sequestration/liquidation is granted by the court, the liquidator can terminate on notice, and if he fails to do so, section 38(9) of the Insolvency Act provides that any contracts of employment still in existence will terminate by operation of law 45 days after the granting of the final order.
If any employee's services are terminated when a creditor's sequestration/liquidation takes place, either by the liquidator or by law in terms of section 38 (9) of the Insolvency Act, the employee will have a claim in the insolvent estate for loss suffered as a result of the termination, and for severance benefits that are usually payable to an employee when a retrenchment takes place.