For any global company transitioning its South African team from an Employer of Record arrangement to a directly owned entity, the section 197 transfer is not simply a legal formality. It is the mechanism that determines whether your employees move across smoothly, with their rights intact, or whether the transition creates disputes, disruption, or legal exposure. Understanding what a section 197 transfer involves and how to navigate it correctly is essential before you begin the entity transition process.
What is a section 197 transfer?
Section 197 of the South African Labour Relations Act (LRA) governs the automatic transfer of employees when a business, or a part of a business, is transferred from one employer to another as a going concern. In the context of international expansion, this most commonly applies when a global company moves its South African team from an Employer of Record (EOR) platform or another existing entity into a newly established, directly owned South African company.
The section 197 transfer protects employees by ensuring that the terms and conditions of their employment are preserved through the transition. The new employer steps into the shoes of the previous one. Employees retain their accrued leave, their length of service recognition, and the key conditions of their existing contracts. Critically, the transfer is automatic under the Act, which means it happens by operation of law, not merely by agreement.
Why do global companies face this situation?
Many international businesses start their South African journey using an Employer of Record, which allows them to employ South African staff without having a local registered entity. EOR models are a sensible starting point for small teams. However, as teams grow beyond five to eight people, EOR solutions become expensive. Priced per employee, they cost significantly more at scale than running a directly owned entity. Moreover, EOR arrangements don’t give the international company direct ownership of its South African operations, which means IP can become contested, and contracts remain under the EOR provider’s control.
The transition from an EOR arrangement to a directly owned entity is where the section 197 transfer becomes relevant. The employees who were technically employed by the EOR provider need to be moved across to the new entity. Because this constitutes a transfer of a business or part of a business as a going concern, it falls squarely within the section 197 framework.
What the section 197 transfer process requires
A proper section 197 transfer involves several distinct steps, and each must be handled correctly to avoid creating labour law exposure.
First, both the old employer (the EOR) and the new employer (the international company’s South African entity) must notify affected employees of the transfer. This notification must be done in writing and must explain the reasons for the transfer, its timing, and its implications for terms and conditions of employment.
Second, the new employment contracts offered to employees must preserve conditions that are at least as favourable as those under the previous arrangement. You cannot use a section 197 transfer as an opportunity to reduce salaries, alter notice periods, or remove benefits. Employees have the right to refuse a transfer that materially worsens their position, and doing so can create unfair dismissal exposure for the new employer.
Third, meaningful consultation with employees is not optional. South African labour law requires genuine engagement throughout the process. Where a recognised trade union is in place, consultation must happen with union representatives. For most international companies operating in professional services or technology, trade unions are typically not a factor, but the consultation obligation remains regardless.
Common mistakes in section 197 transfers
Several mistakes are common among international businesses navigating this process for the first time:
- Treating the transfer as an administrative formality is the most frequent error. A section 197 transfer is a legal process with specific notification, consultation, and documentation requirements. Companies that skip the formal steps create real risk, including exposure to claims of unfair dismissal or breach of contract.
- Offering inferior contracts is another common issue. Even small changes to employment terms, such as altering a bonus structure or adjusting leave accrual, can constitute a breach of the section 197 protections. Therefore, any proposed changes need to be handled through a separate, voluntary process, not embedded in the transfer itself.
- Failing to manage the EOR relationship properly during the transition is also a problem. The EOR typically has its own offboarding requirements, and misalignment between the EOR’s process and the new employer’s timeline can create gaps in payroll coverage or leave employees in a legal grey area between the two entities.
How Finovate manages the section 197 transfer
At Finovate, the section 197 transfer is a structured component of our Inward Expansion process. Our in-house industrial relations capability handles the full transfer: drafting compliant transfer notifications and new employment contracts, running employee consultation sessions, and coordinating with the existing EOR throughout.
We also manage the payroll transition so that there is no gap in employee compensation during the handover period. The goal is for employees to experience the transition as a positive development, moving into a structure that offers greater stability and direct employment with their actual employer, rather than a third-party intermediary.
For global companies that have built strong teams in South Africa, protecting those teams during a structural transition is not just a legal requirement. It is a business imperative. Employees who feel insecure during a structural change are more likely to explore other opportunities, and replacing skilled South African professionals carries real cost and operational disruption.
The broader Inward Expansion context
A section 197 transfer is typically one step within a larger entity setup process. By the time you’re executing the employee transfer, you should also have your CIPC registration in place, your SARS profile active, your corporate bank account operational, and your intercompany agreements signed. These elements need to come together in a specific sequence, and managing that sequence is exactly what Finovate’s Inward Expansion solution is built for.
We take global companies from a pre-built, compliant South African entity all the way to a live, operational structure with tested payroll, in under two months. The section 197 transfer is one part of a managed, end-to-end process, not an isolated challenge.
If you’re approaching the point where your EOR structure is no longer the right fit for your South African team, start with our Inward Expansion Diagnostic. It takes less than five minutes and will help you understand exactly where you are in the journey. Alternatively, speak to the Finovate team directly.