The Future of Section 197 in South Africa: Bradley Workman-Davies

THE FUTURE OF SECTION 197 IN SOUTH AFRICA

BRADLEY WORKMAN-DAVIES

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SECTION 197 TODAY

Section 197 applies where there is -

A transfer of a business - s197(2);

business’ includes the whole or a part of any business, trade, undertaking or service – s197(1)(a);

‘transfer’ means the transfer of a business by one employer (‘the old employer’) to another employer (‘the new employer’) as a going concern – s197(1)(b).

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SECTION 197 TODAY

What constitutes a “going concern” –

type of undertaking or business;

whether or not tangible assets have been transferred;

whether or not intangible assets have been transferred;

whether or not employees are taken over by the new employer;

whether or not customers are transferred;

the degree of similarity between the activities carried on before and after the transfer; and

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SECTION 197 TODAY

What constitutes a “going concern” –

the period, if any, for which the business activities are suspended;

the degree of similarity between the activities carried on before and after the transfer; and

the period, if any, for which the business activities are suspended;

that which is transferred must be a business in operation "so that the business remains the same but in different hands“;

an identifiable economic entity by means of which economic activity is carried out with an objective of its own.

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OUTSOURCING AND SECOND GENERATION OUTSOURCING

SAMWU & Others v Rand Airport Management Company (Proprietary) Limited 2005 (LAC)

Outsourcing agreement –

an agreement 'in terms of which the a second party undertakes to or is obliged to perform services previously performed by employees of the first party'.

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Cosawu v Zikethele Trade (Proprietary) Limited and Another (2005) 26 ILJ 1056 (LC) -

change in the identity of service providers = second generation outsourcing;

Second generation outsourcing could give rise to a transfer of a business as a going concern as contemplated in terms of section 197 of the LRA;

This would mean that the new service provider would step into the shoes of the old service provider in as far as the employees associated with the business are concerned.

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Aviation Union of South Africa & others v SA Airways (Proprietary) Limited and others 2012 (2) BCLR 117 (CC) –

if the outsourcing institution from the outset never offered the service, the service cannot be said to be part of that institution's business. The cancellation of the contract in these circumstances would also not give rise to a transfer of a business in terms of section 197;

the Constitutional Court has now finally pronounced that section 197 of the LRA applies not only to first generation outsourcing arrangements but also to second generation outsourcing arrangements.

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CONSEQUENCES OF SECTION 197 APPLYING

The new employer is automatically substituted in the place of the old employer in respect of all contracts of employment of the employees associated with that business, in existence immediately before the date of transfer.

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 the 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 an act of unfair discrimination, is considered to have been done by or in relation to the new employer.

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CONSEQUENCES OF SECTION 197 APPLYING

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.

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 an 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.

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WHY SECTION 197?

Continuity of employment.

Protection of employees.

Business efficiencies (in the case of second generation outsourcing?).

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HOW FAR CAN SECTION 197 BE TAKEN

Section 197 has been confirmed to apply to –

Classic business transfers;

Outsourcing;

second-generation outsourcing.

What about service transfers?

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SERVICE TRANSFERS

No Asset Transfers involved

Distribution agreements;

Logistics / supply agreements;

Manufacturing agreements;

Client service agreements;

Franchise agreements;

Support / Service level agreements.

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SECTION 197 TOMORROW

Franmann Services (Pty) Ltd v Simba (Pty) Ltd and another[2012] 12 BLLR 1293 (LC) -

labour broker’s cancellation of contract and client’s decision to appoint new broker not signaling transfer of business as going concern;

new broker merely concluding fresh service contract with client;

section 197 of LRA not applying to pending transaction with new broker.

Mentions that EU court apply a transfer in circumstances where the new contractor utilises substantial parts of the assets) previously used by the outgoing contractor but owned by the client.

Labour broker provides only labour – does not provide a service

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PE Pack 4100CC v Sanders and others[2013] 4 BLLR 348 (LAC) -

transfer of franchise rights from one franchisee to another not constituting transfer of business as a going concern;

not attracting section 197 of LRA;

such transfers not to be confused with outsourcing arrangements.

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TMS Group Industrial Services (Pty) Ltd t/a Vericon v Unitrans Supply Chain Solutions (Pty) Ltd and Others (JA58/2014) [2014] LAC 39 (6 August 2014) -

warehousing agreement;

change of party providing warehousing services to Nampak;

using Nampak assets (warehouse / computer systems / products / machinery and equipment);

court found that section 197 applied on the basis that same business being carried on by new party providing warehouse services.

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LOOKING TO EU AND UK JURISPRUDENCE

SA cases show that section 197 may apply where there is a change in service provider, provided that –

must be service, not goods (labour broker employees – Franman);

must utilize assets of client, even if no asset transfer (EU case law mentioned in Franman);

each case analysed on its own merits.

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LOOKING TO EU AND UK JURISPRUDENCE

TMS Group Industrial Services (Pty) Ltd t/a Vericon v Unitrans Supply Chain Solutions (Pty) Ltd and Others (JA58/2014) [2014] LAC 39 (6 August 2014).

Refers to TUPE SERVICE PROVISION CHANGE.

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TUPE SERVICE AND PROVISION CHANGE

United Kingdom (Transfer of Undertakings (Protection of Employment).

Since 1980.

Amended by Regulations 2006 SI2006/246.

Amended by Regulations 2014 (The Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014).

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TUPE SERVICE PROVISION CHANGE

A business transfer: this is analogous to the application of section 197 to the transfer of a business, trade, undertaking or part thereof as a going concern in the case of the sale of a business or sale of assets comprising a business.

A service provisions change in third party contracts.

This is analogous to the application of section 197 to outsourcing and second generation outsourcing transactions. However, the service provision transfer includes circumstances where there is a change of a contractor providing services to a client, even if the services were not originally outsourced.

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Applies to particular set of third party contracts only, to ensure that not every single cancellation and transfer of a third party contract would give rise to the service provision transfer consequences.

Only apply if the service provision contract which has been cancelled and awarded to a new party –

was for the provision of services, and not goods; and

involved a defined and organised grouping of employees which was assigned to or concerned with carrying out the services for the client.

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Applying the TUPE Regulations, when a client utilises for example a courier company for the collection and delivery of its parcels, and the courier company utilises random, rather than dedicated, employees to collect and deliver parcels as and when the client requires, there is no defined or organised grouping of employees in respect of the client, and no transfer of employees would take place if the client cancels the contract and utilises the services of an alternate courier.

Service provided - No assets used - No organised grouping.

No TUPE application.

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LINK BETWEEN TUPE AND SECTION 197

TMS Group Industrial Services (Pty) Ltd t/a Vericon v Unitrans Supply Chain Solutions (Pty) Ltd and Others (JA58/2014) [2014] LAC 39 (6 August 2014).

Refers to TUPE SERVICE PROVISION CHANGE.

Cannot apply the restrictions since section 197 does not contain this wording.

Attempts to apply the principles.

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SECTION 197 IN FUTURE

SA courts may be approached to apply TUPE style service provision transfers.

Should apply TUPE restrictions.

Van Niekerk (Franman) goods v services.

Test whether there is an organised grouping.

If not, net is cast wide for similar activities of incoming and outgoing service providers to attract section 197 application.

THANK YOUDate 18 September 2014

Legal notice: Nothing in this presentation should be construed as formal legal advice from any lawyer or this firm. Readers are advised to consult professional legal advisors for guidance on legislation which may affect their businesses.

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The Future of Section 197 in South Africa: Bradley Workman-Davies