Employment law update – What constitutes a transfer of a business?

November 1st, 2017

Moksha Naidoo BA (Wits) LLB (UKZN) is an advocate at the Johannesburg Bar.

Imvula Quality Protection and Others v UNISA (unreported case no J435/17, 31-8-2017) (Van Niekerk J)

Pursuant to the ‘Fees Must Fall’ campaign the University of South Africa (Unisa) entered into an agreement with certain stakeholders wherein it agreed to terminate its contract with its security service provider and directly employ the majority of security guards needed. The implementation of the agreement would see 910 out of the 1 413 outsourced security staff being directly employed by Unisa.

Unisa informed both the applicant, Imvula Quality Protection and the intervening applicant, Red Alert TSS, that it would be cancelling its service level agreement with both entities. It was common cause that Unisa, having notified the applicants of its intention, approached the employees of the applicants and invited them to apply for posts of security guards.

The applicants approached the Labour Court (LC) seeking a declarator that the insourcing agreement triggered the provisions of s 197 and as a result thereof, its employees employed to service the respective contracts with Unisa would automatically be transferred to Unisa.

Unisa argued that in the absence of a ‘transfer of a business’, s 197 did not find application in these circumstances.

The court affirmed that the test into whether a transaction falls within the ambit of s 197, involves an inquiry into; whether firstly there was a transfer, if so found, whether the transfer was of a business; if found that there was a business that was transferred, the third leg of the inquiry is whether the business was transferred as a going concern. The test is an objective one, which is limited to the facts of the case, and was not guided or influenced by the labels the parties assigned the transaction, such as outsourcing/ insourcing agreements or second or third generation transfers.

While the applicants acknowledged that Unisa would not acquire any of its assets, business infrastructure, technology or operating model, post cancellation of their respective contracts, it argued that providing security guards is a service and thus a business for purposes of s 197 – the insourcing agreement would see a continuation of the same service and hence a business has been transferred.

With reference to the Constitutional Court (CC) decision in Aviation Union of SA and Another v SA Airways (Pty) Ltd and Others [2012] 3 BLLR 211 (CC), Van Niekerk J held:

‘The Constitutional Court has identified two situations within the realm of outsourcing and insourcing with a clear distinction between the two. In the first, where s 197 does not apply, the outgoing service provider forfeits the right to provide services, whether by way of the cancellation of a contract or otherwise, but does not transfer its business. In this instance, the right to provide the outsourced service may transfer, but no business is transferred as a going concern.

The second situation arises when on the termination of a service contract, when the service is either insourced or a different service provider is appointed, the business that supplies the service, including its business infrastructure, is transferred from the outgoing service provider either back to its erstwhile client or to the new service provider, as a going concern. In these circumstances, a transfer occurs as contemplated by s 197.

The distinction is one that has its roots in the definition of a “business” in s 197(1). While that definition includes a service, it should be emphasised that it is the business that supplies the service that is capable of being transferred, not the business itself.’

On the facts, Unisa’s decision to terminate its contract with the applicants and, thereafter, offer the applicants’ employees employment, did not yield a transfer of any assets or business infrastructure from the applicants to Unisa. Therefore, even if the court were to accept that the requirements of a transfer had been met, it was not persuaded that such a transfer was of a business.

The applicants’ respective businesses comprised of various components such as assets, business infrastructure, operational resources, industry know-how, management and staff. The termination of the service level agreements would result in only some staff members working directly for Unisa while both applicants retain the components, which make up their respective businesses, leaving them free to offer their services to other clients. In finding the termination of the service level agreement fell within the second scenario described by the CC, the court held:

‘The true position therefore is that the contracts for the provision of services concluded between Unisa and iMvula and Red Alert respectively have come to an end, and that no part of the infrastructure for the conducting of the business of providing a security service is to be transferred to Unisa. In those circumstances, Unisa’s decision to insource in terms of the shared services model and the offers of employment consequently made to some of iMvula and Red Alert’s staff does not trigger s 197. The application falls to be dismissed.’

The application was dismissed with costs.

This article was first published in De Rebus in 2017 (Nov) DR 38.