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Jun 15, 2012

Facts of business transfer determine labour law applicability

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Africa|LGM South Africa|South African Airways|Africa|Contracting|Similar Services|Claire Gaul
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The facts around the transfer of a business, specifically whether the business and services continue after the transfer, will determine whether Section 197 of the Labour Relations Act (LRA), No 66 of 1995, is applicable, in which case the employees must continue to be employed by the new employer to provide the services.

Webber Wentzel partner Claire Gaul explains that the Constitutional Court, with clarification provided by the Labour Court, in December 2011, stated that the facts around a transfer determine the applicability of Section 197 of the LRA. That is irrespective of whether the entity is profit-making or not, whether there is a sale of a business, a donation of a business or a sale of part of a business, and if there is an identifiable entity that provides similar services after the transfer.

Section 197 states that there are automatic statutory employment consequences if a transaction conforms to a transfer of a business, trade, undertaking, service, or part thereof.

All the rights and obligations between the old employer and an employee at the time of the transfer continue to remain in force as if they had been the rights and obligations entered into between the new employer and the employee. Further, 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.

“The Constitutional Court said two key ques- tions must be answered to determine if Section 197 will apply. Does the transaction create rights and obligations that require one entity to transfer something in favour of or for the benefit of another, or to another? If the answer is ‘yes’, does the obligation imposed within the transaction contemplate a transferor who has the obligation to effect the transfer or to allow the transfer to happen, and is there a transferee who receives the transfer?

“If the answer to both questions is ‘yes’, the transaction contemplates a transfer by the transferor to the transferee, and hence Section 197 may apply.”

However, the Constitutional Court noted that it is important to determine whether the transfer is of going concern, meaning that operations continue after the transfer. Further, the court said that what must be transferred is a business in operation, so that the business remains the same, or similar, but in different hands.

“One must determine the facts around a transfer objectively with regard to the substance of the transaction, regardless of the form that the transaction takes. If a business or coherent entity, which is identifiable and conducts identifiable activities, . . . continues in the hands of another, it is enough to trigger the application of Section 197 regarding employment protection,” says Gaul.

“Is there a transaction which involves the movement of an identifiable service from one entity to another entity and which will be continued in the hands of the latter? This is the critical question to ask.

“The theme throughout the Section 197 cases before the courts is the necessity of reviewing decisions from an employment perspective, not the principles of property, company or insolvency. The crucial question is whether, taking a realistic view of the activities in which employees are employed, there exists an economic entity which, despite changes, remains identifiable, but not necessarily identical, after the alleged transfer,” she explains.

Further, Gaul highlights the case of national airline South African Airways (SAA) and facility management company LGM South Africa heard by the Constitutional Court, in which there was reference to the original outsourcing contract whereby SAA outsourced maintenance operations to LGM South Africa. SAA, at the end of its contract with LGM South Africa, wanted to appoint another service provider to provide similar services.

The Constitutional Court noted that, in that specific case, the original agreement was of importance but not of overriding importance.

“This means that the question of first-generation outsourcing and whether second-generation outsourcing, where the business receiving the services changes service providers, triggers Section 197 is moot. As long as a transfer or transaction fulfils the requirements to trigger Section 197 of the LRA, then the section is applicable to that transfer.

“Again, one has to look at the facts to deter- mine if the service is of going concern (continuing), rather than a simple contracting out of a service to a service provider, which does not trigger the application of Section 197,” explains Gaul.

“The scope of Section 197 of the LRA is wide open and each case must be considered on its facts to determine if Section 197 will apply,” she concludes.

Edited by: Martin Zhuwakinyu
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