Employment law update – Dismissal related to a s 197 transfer?

October 1st, 2012

By Talita Laubscher

The applicant in Long v Prism Holdings Ltd and Another [2012] 7 BLLR 672 (LAC) was employed as the first respondent’s human resources director from 1 November 1998. On 3 July 2006 the second respondent, Net 1 Applied Technologies SA Ltd (Net 1), acquired the entire issued share capital of the first respondent, Prism Holdings Ltd (Prism). Thereafter, Prism and Net 1 remained separate legal entities. One Chalmers was the group human resources manager of Net 1, a position he held from 1 April 1998.

Prism was involved in the business of electronic payments and had a number of major retailers as customers. Net 1’s major business was Cash Paymaster Services, which was contracted by the government to pay social grants.

Net 1’s acquisition of Prism would enhance its business as, after the acquisition, its smart cards could be used at major retailers. Net 1’s cardholders would therefore be able to make purchases at all major retailers using Prism’s technology. Net 1 was about five times the size of Prism and had about 2 000 employees, whereas Prism had about 280 employees.

After the acquisition of Prism, a process of integration and restructuring followed. The reason for this was that certain business units, such as human resources, were duplicated in Net 1 and Prism and these had to be integrated. In particular, the respective positions held by one Long and Chalmers had to be merged.

On 20 September 2006 Chalmers circulated a memorandum containing a proposed new group structure to all employees. Each staff member was invited to comment and make proposals on the structure by 29 September 2006. Chalmers was reflected as the group human resources manager in the proposed structure. Long’s name did not appear in the proposed structure.

On 22 September 2006, at the suggestion of Prism’s chief executive officer, Long submitted his curriculum vitae to the head of finance, in which he set out his experience and functions as human resources manager at Prism.

On 5 October 2006 the executive committee confirmed the structure, which was communicated to staff after certain amendments had been effected. Again, Long’s name was not reflected in the structure. On 9 October 2006 Chalmers circulated a memorandum to the staff at Prism advising that, as part of the integration and restructuring process, Prism’s head office would be closed and the Prism staff who could be accommodated in the new Net 1 structure would be moved to Net 1’s offices. Those who could not be accommodated faced the possibility of retrenchment or of being placed elsewhere in the Net 1 group.

On 10 October 2006 Chalmers, Long and the head of finance, had a meeting at which Long presented his curriculum vitae and commented on Chalmer’s memorandum. They did not discuss Chalmer’s selection as human resources manager, as Long felt that this would not be appropriate in Chalmer’s presence. The head of finance testified that, by this date, Chalmers had already been appointed as the new human resources manager and that it was inevitable that Long would not be appointed to this position, but would be retrenched. Subsequent to further exchanges, on 9 November 2006 Chalmers wrote to Long and explained why he (Chalmers) had been appointed as human resources manager. Long replied by stating that he accepted that only one head of human resources was required, but he objected to the manner in which Chalmers had been selected for the position.

On 15 November 2006 Long received a notice of his retrenchment, effective from 15 December 2006. On 12 December 2006 Long referred an unfair dismissal claim to the Commission for Conciliation, Mediation and Arbitration. Conciliation was unsuccessful and the matter was referred to the Labour Court. Long contended that his dismissal was automatically unfair because he was dismissed as a result of a transfer of a business as a going concern; alternatively that his dismissal was unfair for failure to comply with the provisions of s 189 of the Labour Relations Act 66 of 1997. He asked for reinstatement, alternatively compensation.

The Labour Court dismissed Long’s claim with costs and he appealed to the Labour Appeal Court (LAC).

The LAC, per Sandi AJA (Waglay DJP and Davis JA concurring) noted that it was common cause that Net 1 had acquired all the shares in Prism and that the two had remained separate legal entities. Net 1 did however exercise control over Prism and designed its policies. The question was whether this amounted to a transfer of a business as a going concern for purposes of s 197 of the LRA. The LAC held that it did not. It referred to Ndima and Others v Waverley Blankets Ltd [1999] 6 BLLR 577 (LC), in which it was held that ‘the transfer of possession and control of a business’ are two separate concepts. The court also referred to the following by Todd et al:

‘[T]he old and the new employers must be two separate entities. It is for this reason that the section will not apply where control of the business is transferred by way of a share transfer. In such cases control is shifted, but the legal entity of the employer remains the same’ (C Todd, D du Toit & C Bosch Business Transfer and Employment Rights in South Africa (Durban: LexisNexis Butterworths 2004)).

The LAC accepted that Long was dismissed for operational requirements and not because of a transfer of a business as a going concern. The automatically unfair dismissal claim accordingly had to fail.

The LAC also rejected Long’s claim that his retrenchment was substantively unfair. It observed that: ‘As the circumstances of the present case demonstrate, in the majority of cases acquisition of one entity by another invariably results in the integration and restructuring of the workforces. In that process, some employees become redundant, unless alternative employment can be found for them. If this cannot be achieved, their dismissal for operational reasons is unavoidable.’

On the evidence, the court was satisfied that the integration of the business units was necessary and the duplication of the functions at Prism had to be eliminated if Prism was to be financially viable. Only one human resources manager was required, which Long conceded. The court was further satisfied that Chalmers was the right person for the job and that there were no alternative positions available for Long, save for the position of human resources manager falling under Chalmers, which he refused to accept.

The LAC, however, held that Long’s dismissal was procedurally unfair. It held that it was significant that Long did not comment, object or make a counter-proposal when he was invited to do so at the time the new structure was proposed. All he did was to submit his curriculum vitae to the head of finance. At that time, he did not make any comment about Chalmers being proposed as the new head of human resources. Even after publication of the structure in November 2006, Long did not make any move to object or challenge Chalmer’s appointment. He only did so after he was told that there were no positions available for him in Net 1’s international operations.

Nevertheless, Prism was required to consult with Long before Chalmers was appointed, in particular on the selection criteria that would be applied to select the new human resources manager. For this failure, Prism was ordered to pay Long an amount equal to three months’ remuneration and to pay 50% of his costs on appeal as well as in the Labour Court.

Talita Laubscher BIur LLB (UFS) LLM (Emory University USA) is an attorney at Bowman Gilfillan in Johannesburg.

These articles were first published in De Rebus in 2012 (Oct) DR 52.