Introduction

Since the enactment of the 2007 labour laws, Kenya has had one of the most robust labour law regimes in the world. The Employment and Labour Relations Court, which enjoys exclusive jurisdiction to determine all labour disputes in Kenya, is famed worldwide for its pro-employee ideology. The court is known to bend backwards to ensure that employees who call on it do not go home empty handed, unless their case is completely hopeless.

It is therefore surprising to note that unlike many other countries, Kenya has not enacted legislation to regulate the seamless transfer of employees from one company to another following the merger or acquisition of their employer by another entity.

Existing situation

During a merger or acquisition, employees are normally left at the mercy of the acquirer which, by law, has no obligation to absorb or retain them. Unsurprisingly, news of a potential merger or acquisition invariably sends shivers down the spines of Kenyan employees. The whole process is characterised by uncertainty and panic among employees.

There is currently no law obliging the acquirer of a business to retain any existing employees or honour any employment terms agreed between the acquired company and its employees. The fate of employees is consequently determined by the contractual terms agreed between the two companies. Further, employees are generally not privy to the negotiations concerning the transaction and their views are rarely sought.

Employees must contend with one of two options when their employer is bought out:

  • agree to be employed afresh by the acquirer on the terms determined by the acquirer; or
  • accept a redundancy package from their employer and become unemployed.

In the absence of a law regulating the matter and imposing obligations on the transacting parties, employees are left in a vulnerable situation.

As a middle ground and to avoid a labour dispute, the two companies normally agree that the acquirer will select some of the existing staff, as it wishes to retain and offer them new contracts of employment on terms that are substantially similar to those contained in their existing contracts. In addition, the acquirer will seek to recognise past years of service rendered by the employees to their former employer in order to compute redundancy dues in future. Employees who do not make the cut or decline the offer are normally declared redundant and paid off by their employer.

In a country with a high employment rate like Kenya, employees should not have to lose employment due to the merger or acquisition of their employer. Countries such as the United Kingdom, Singapore, South Africa and even Uganda have enacted legislation to protect employees in this eventuality. The import of such laws is that the merger or acquisition has practically no impact on employees. By law, existing employment contracts are automatically transferred to the new employer, which thereafter assumes all of the obligations of the employer going forward. The acquirer therefore inherits all of the rights and obligations of the previous employer, thereby ensuring that employees are not adversely affected by the commercial transaction.

The laws also provide that before any merger or acquisition is undertaken, statutory notification must be given to the regulator of the labour sector at least two months before the date of the intended merger or acquisition of the business. This gives the regulator visibility into the transaction to ensure that employee rights are safeguarded throughout.

Comment

The current legal position in Kenya is most unsatisfactory. The law imposes no obligation on the transacting parties to consult with employees or take any measures to protect their welfare. During the approval of the merger or acquisition, the Competition Authority will occasionally require the acquirer to absorb a certain percentage of employees. However, this is a pyrrhic consolation in the sense that the condition does not usually set any minimum duration within which the acquirer should retain the stated proportion of employees after the transaction.

A law regulating the transfer of employees would also assist employers in fostering certainty during negotiations. At present, companies are forced to make huge provisions in their books for redundancy payments for employees who decline the new contracts. Even where they accept new contracts but the acquirer is unwilling to record the redundancy liability in its books by recognising the past years of service, employees are entitled to a redundancy package before transiting to the new employer. A good law would provide that since, in practical terms, there is no loss of employment as such, any employee who declines to transfer will not be entitled to a redundancy package.

This legal mechanism, if introduced, would significantly reduce the cost of mergers and acquisitions and provide employees with the much-needed certainty and peace of mind. It can only be a win-win situation.

For further information on this topic please contact William Ikutha Maema at Iseme, Kamau & Maema Advocates by telephone (+254 20 271 1021) or email (wmaema@ikm.co.ke). The Iseme, Kamau & Maema Advocates website can be accessed at www.ikm.co.ke.

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