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Second generation transfers in terms of section 197 of the LRA

Jan du Toit

Section 197 of the Labour Relations Act deals with the transfer of a business and the rights of employees affected by such a transaction. In terms of section 197 a ‘business’ includes the whole or a part of any business, trade, undertaking or service; and ‘transfer’ means the transfer of a business by one employer (‘the old employer’) to another employer (‘the new employer’) as a going concern.

Under such circumstances, unless otherwise agreed in terms of section 197(6), the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer. The new employer may also not introduce employment conditions that are on the whole less favourable than those offered by the old employer. Should such less favourable conditions lead to the resignation of the employee then such a resignation could be seen as a dismissal in terms of section 186(1)(f).

A vast responsibility is thus placed squarely on the shoulders of the new employer in terms of the employees that were automatically transferred in terms of section 197. All the rights and obligations between the old employer and an employee at the time of the transfer continue in force as if they had been rights and obligations between the new employer and the employee. 

Anything done before the transfer by or in relation to the old employer, including the dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination, is considered to have been done by or in relation to the new employer. The transfer does not interrupt an employee’s continuity of employment and an employee’s contract of employment continues with the new employer as if with the old employer.

Typically a company (company A) would outsource a part of its business to another company (company B). Under such circumstances section 197 of the Labour Relations act may be applicable if the business was transferred as a going concern. As per the definition of a transfer the business was transferred by one employer (‘the old employer’) to another employer (‘the new employer’).

The question that must now be answered is whether section 197 will still be applicable in the event that the outsourcing agreement between company A and B comes to an end. Must the employees now be transferred back to company A, or to company C if a new outsourcing agreement was concluded between companies A and C? 

This is exactly what happened when SAA outsourced its infrastructure and support services departments to LGM for a period of 10 years. SAA transferred the infrastructure of these departments to LGM and allowed LGM to operate on the premises of SAA. Contractually the parties agreed that LGM would transfer the rights and infrastructure to provide these services to SAA back to SAA or to a third party appointed by SAA in the event that the ownership of LGM changes during the contractual period. The ownership of LGM did change during the contractual period in 2007 and the employees that were transferred from SAA now faced retrenchment. The union, UASA, sought confirmation from SAA that the originally transferred employees would be transferred back to SAA or to its newly appointed service provider upon official termination of the outsourcing agreement. SAA responded by indicating that they are under no such obligation in terms of section 197.

UASA approached the Labour Court and requested, inter alia, that the court declare that the appointment of new service provider to SAA would constitute a transfer of the business from LGM and as such the originally transferred employees will have to be transferred to the new service provider. SAA opposed the so-called “second generation” transfer and argued that a transfer in terms of section 197 means “by one employer to another employer”, with emphasis on the word “by”. SAA was no longer the employer and LGM was not the party that was outsourcing, leaving LGM free to retrench the employees based on its operational requirements. 

Judge Basson agreed with SAA and dismissed the application with costs stating that “it certainly could not have been the intention of the Legislature in respect of section 197 of the LRA to grant a blanket or unchecked right to employees to have their contracts transferred from one employer to another.”

In 2009 the Labour Appeal Court disagreed with Judge Basson and adopted a wider interpretation of the word “by”. The LAC was of the opinion that the word “by” could be interpreted to mean “from”. This would signify that in terms of the agreement between SAA and LGM a transfer will take place in terms of section 197 upon the expiry of the outsourcing agreement between them.

The LAC went on to explain what could happen if a narrow interpretation of the word “by” in section 197 is adopted.

“[58] A - Company wishes to rid itself of a group of employees who form a discrete business unit within A. It enters into an agreement with B Company whereby the particular business unit which forms a part of A’s overall business is transferred as a going concern to B. In short, B will now ensure performance of the operations of that unit. This transaction between A and B can be classified as an outsourcing agreement. The agreement includes the right of A to cancel the outsourcing within a year which would thereby obligate B to transfer the business back to A. If the literal interpretation adopted by Basson J [in the Labour Court] were to be applied, the entire protection of section 197 afforded to employees in the unit could be circumvented in that, once the business is retransferred to A, the latter would have no obligations to any of the employees pursuant to section 197 of LRA. This result would surely be subversive of the very purpose of section 197 and can only be sustained if the wording of the section could plausibly bear no other interpretation. As noted earlier in this judgment, the wording of the section cannot be construed only to bear the meaning contended for by SAA.”

In 2010 the Supreme Court of Appeal held that the LAC crooked the interpretation of section 197 and agreed with the strict and narrow approach taken by the Labour Court in 2008. No transfer will take place by LGM at the end of the outsourcing agreement with SAA. 

In December 2010 the proposed amendments to the Labour Relations Act were published and changes to the section 197 were proposed that would see the word “by” to be replaced with the word “from”. This would favour the so-called “second generation” transfer argument of UASA. Unfortunately for UASA these were only proposed amendments and their only resort now was to approach the Constitutional Court.

In 2011 the Constitutional Court dismissed the narrow interpretation of section 197 and agreed with the Labour Appeal Court stating that outsourcing agreements are usually concluded for a fixed period. If the interpretation by the Supreme Court of Appeal stands, employees who enjoyed protection afforded by section 197 at the stage of the first outsourcing agreement would be left with no protection if the same business is again transferred in terms of a second or further outsourcing agreement. This will be the position regardless of whether the further transfer amounts to a transfer of a particular business as a going concern or not.

The Constitutional Court gave this practical explanation of what will happen at the end of the outsourcing agreement between SAA and LGM.

When the business is transferred successively from one entity to another:

1.1.by SAA to LGM, SAA is the old employer and LGM the new employer;

1.      2.by LGM back to SAA for whatever reason, LGM is the old employer and SAA the new employer;

2.      3.subsequently from SAA to a third party, SAA will be the old employer and the third party the new employer; and

3.      4.by LGM directly to the third party, LGM is the old employer and the third party the new employer.

It was further held that the determining factor will be “whether there has been a transfer of a business as a going concern by the old employer to the new employer. A transfer of business may not be covered by section 197 even if it is a “first generation” contracting out. On the other hand, even a “fifth generation” outsourcing could be caught by the section if it is in reality the transfer of a business as a going concern.

The substance of the initial transaction, more specifically whether what is outsourced is a business as a going concern rather than the provision of an outsourced service remains significant during subsequent transfers. If the outsourcing institution from the outset did not offer the service, that service cannot be said to be part of the business of the transferor. What happens here is simple contracting out of the service, nothing more, nothing less.”

In terms of the agreement between SAA and LGM -

  • The assets transferred from SAA to LGM such as computers and airport space will have to be transferred back to SAA;
  • LGM was also obliged to provide SAA with reasonable access to the services, assets and inventory of LGM;
  • Both parties were entitled to the surrender of all information pertaining to the scope of work belonging to the other party.

It would be impossible for LGM to continue to conduct the business upon termination of the agreement. The Constitutional Court therefore declared that the cancellation of the agreement between SAA and LGM obliges LGM to transfer a business as a going concern within the meaning of section 197(1) and 197(2) of the Labour Relations Act 66 of 1995.

Jan du Toit is available to assist employers with disciplinary enquiries and CCMA matters. He can be contacted on jand@labourguide.co.za 

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