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Why are transfers as a going concern so difficult to manage?

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Where an undertaking (or part thereof or a service) of any kind is transferred by one employer to another as a going concern section 197 of the Labour Relations Act (LRA) comes into effect. This forces the new entity to take over all the employees of the old undertaking. 

Unfortunately, the LRA does not define what a transfer ‘as a going concern’ is. This causes great confusion and sparks many disputes between employers, employees and trade unions. This confusion causes a serious problem for contractors considering making a bid for an outsourcing deal. They need to know for certain, before signing the deal, whether they will be forced to take over all the old employer’s employees. 

While the sale of a business as an operating entity has normally been considered to qualify under the heading of a section 197 transfer it was, for some time, unclear whether the outsourcing of an enterprise to a contractor without selling the entity constitutes the transfer of a going concern. 

This uncertainty emanates from the contradictions in court decisions on this issue. In the case of NEHAWU vs University of Cape Town & Others (2000, 1 BLLR 803) the Labour Court found that the outsourcing of the university’s cleaning, maintenance and gardening functions did not constitute the takeover of a going concern. And in SAMWU and others vs Rand Airport Management Company (Pty) Ltd & others (2002, 12 BLLR 1220) the Labour Court found that the transfer of part of an employer’s structure that did not comprise a recognisable entity did not constitute the transfer of a going concern. 

However, the Labour Appeal Court in SAMWU and others vs Rand Airport Management Company (Pty) Ltd & others (2005 3 BLLR 241) overturned the earlier Rand Airport case decision; and the Constitutional Court, in NEHAWU vs University of Cape Town & Others (2003, 24 ILJ 95) overturned the earlier University of Cape Town decision. 

In the case of COSAWU vs Zikhethele Trade (Pty) Ltd (2005, 14 LC 11.3.2 ) as reported in Contemporary Labour Law 14 No. 12) the Labour Court took the prior outsourcing decisions one step further in finding that the takeover of a contract by one contractor from another constituted the takeover of a going concern.

That decision means that: 

  • if contractor A loses the contract, which is then outsourced to B (the new contractor) then B is required to take over all the employees of A who were employed on the contract! 
  • If, in the process of the takeover, the employees of contractor A are dismissed to make way for B’s employees, this would be an automatically unfair dismissal in terms of section 187(1)(g) of the LRA! On the other hand, if B retrenches its own employees to make way for the employees being transferred by A this could also be an automatically unfair dismissal because these dismissals took place for reasons related to the takeover of a going concern. 
  • For a contracting business to win a contract may no longer be a victory because this double-edged sword could destroy the contracting business. 

The Zikhethele decision and those handed down by the Labour Appeal Court and Constitutional Court, were hailed as resounding victories for trade unions trying to preserve the jobs of their members involved in outsourcing arrangements. At the same time these three decisions constitute a massive blow for contractors and for businesses wishing to outsource certain functions. 

However, in Aviation Union of South Africa & others vs SAA (Pty) Ltd & others (2008, 1 BLLR 20) SAA had earlier outsourced its support services department to a contractor named LGM and transferred the 62 affected employees to LGM.  Then SAA cancelled its contract with LGM and put out a tender for a new contractor to take over. The employees’ trade union applied to the  Labour Court under section 197 of the LRA to force SAA to either take over LGM’s employees or to require any new contractor to take them over. The Court refused to do so, saying that section 197 did not apply to “second generation” takeovers because section 197(1)(b) uses the word “by” and not “from”. However, the Constitutional Court overturned this decision. 

Due to the uncertainty and complexities involved contractors and other employers should not enter into outsourcing agreements before consulting a reputable labour law expert to establish whether winning a new contract will mean a victory or a disaster.

BY   Ivan Israelstam, Chief Executive of Labour Law Management Consulting. He may be contacted on (011) 888-7944 or 0828522973 or on e-mail address: [email protected]. Go to: www.labourlawadvice.co.za 

To buy our E-Book, Walking the New Labour Law Tightrope please contact Ivan via [email protected] or 0828522973.

 

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