PE Pack 4100CC v Sanders and Others (LAC) (unreported case no PA 08/10, 22-1-2013) (Davis JA)
By Moksha Naidoo
Does s 197 of the Labour Relations Act 66 of 1995 (LRA), dealing with a transfer of a business, apply when a franchisor terminates its franchise agreement with one entity and replaces it by entering into another franchise agreement with a different entity?
The Labour Court in the present matter held that under such circumstances a transfer of a business, as contemplated in s 197, takes place. As a result, according to the court, employees working for an entity in terms of the old franchise agreement would automatically be transferred to the entity that is a party to the new franchise agreement with the franchisor.
Section 197(1)(a) of the Act defines ‘business’ as ‘includes the whole or a part of any business, trade, undertaking or service’, while ‘transfer’ is defined as ‘the transfer of a business by one employer (“the old employer”) to another employer (“the new employer”) as a going concern’.
Section 197(2) of the Act provides, inter alia, that if a transfer of a business takes place –
‘(a) the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer;
(b) 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 rights and obligations between the new employer and the employee;
(c) 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 act of unfair discrimination, is considered to have been done by or in relation to the new employer; and
(d) 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.’
Background
On 30 April 2010 the second respondent, Cell C Provider Company (Pty) (Cell C), cancelled its franchise agreement with the third and fourth respondents and entered into a new franchise agreement with the appellant, effective 1 May 2010.
Under both franchise agreements Cell C remained the lessee of the premises and sub-leased same to the entity with whom it had a franchise agreement. It further retained ownership of the fittings and furniture on the premises. All stock belonged to the third and fourth respondents and, as such, was not transferred back to Cell C on cancellation of the franchise agreement.
Having lost the franchise agreement, the third and fourth respondents advised the first respondent, its employee Sanders, of his likely retrenchment.
On the advice of his legal representative, the first respondent took the view that s 197 was triggered once Cell C cancelled its agreement with the third and fourth respondents and entered into a similar agreement, involving the same nature of business conducted on the same premises, with the appellant. Thus, according to the first respondent, his employment should have been automatically transferred to the appellant.
Cell C’s view was that it did not buy back the franchise from the third and fourth respondents but merely cancelled it in terms of the contract. Further, as Cell C owned the entire infrastructure – including the premises, furniture, fittings and operating systems – under the agreement with the third and fourth respondents, it could not be argued that there was any transfer of a business from these entities to Cell C.
Arising from these divergent views, the first respondent approached the Labour Court for a declaratory order.
Labour Court
The Labour Court, per De Swardt AJ, in Sanders v Cell C Provider Co (Pty) Ltd and Others (2010) 31 ILJ 2722 (LC) applied the ‘snapshot’ test in deciding whether or not a transfer of a business had occurred. In this regard, the court held:
‘In the instant case, if one were to take a snapshot of the businesses conducted by the third and fourth respondents before 30 April 2010, one would find an outlet selling cell phone contracts, and pay-as-you-go airtime, where customers could bring in their cell phones for repairs or could inquire about a variety of problems [relating to] their use of Cell C’s products. A snapshot taken of the businesses on 1 May 2010 or on any day thereafter, would reveal a similar picture. The businesses remained located in exactly the same place, the telephone numbers remained the same, the nature of the business remained the same. The only visible difference would ostensibly have been that there were some new faces behind the counter. Indeed, as [Sanders’ attorney] pointed out in argument, customers who had brought their cell phones in for repair prior to 1 May 2010 would collect these after 1 May 2010 once these had been repaired. Potential customers who came into either of the shops prior to 1 May 2010 to inquire about cell phone contracts, could come back on or after 1 May 2010 to conclude the contract.’
On this basis, the court found that in a franchise agreement, the franchisor effectively ‘outsources’ its business to the franchisee, who runs it on behalf of the former, and therefore a transfer of business as contemplated by s 197 occurs. While Cell C was free to choose whom to outsource its business to, once it decided to change this entity, s 197 remained operative and, with that, the first respondent’s employment was automatically transferred to the appellant.
Labour Appeal Court
Aggrieved by the outcome in the Labour Court, the appellant approached the Labour Appeal Court (LAC).
Before addressing the merits, the LAC briefly described the roles and duties of parties to a franchise agreement: The franchisor grants the franchisee the right to use either its network, trade name, intellectual property or business model to sell certain products for its own (ie, the franchisee’s) behalf. In return for the use of either or all of the above, the franchisee remunerates the franchisor.
Turning to the merits, the LAC held the following:
‘In short, appellant had not acquired the business as a going concern from either third or fourth respondent. It cannot be said therefore that components of the business operated by third or fourth respondent had then been passed onto the appellant. What effectively had taken place was that the licence to operate a business on behalf of second respondent had been terminated by the latter, insofar as third and fourth respondents were concerned. This was not the equivalent situation to that of an outsourcing agreement. The franchisor continued to hold the core assets. They remained those of the franchisor, being second respondent, both before and after the agreement had been concluded. There was thus no transfer of infrastructural assets which would sustain an argument that there was a transfer of a going concern. Once the core assets remained intact, that is, in the ownership of the second respondent as the franchisor, it becomes difficult to see how a transfer of a business pursuant to s 197(1) has taken place.’
The majority upheld the appeal with costs and the order of the court a quo was set aside.
In a dissenting judgment, Landman AJA stated the following:
‘Was there a transfer from the old employer to the new employer? It could be said that there has been no such transfer because the franchisor does not intend operating the shop. The franchisor intends extending a franchise to a new franchisee. In this case, taking into account the nature and modus operandi of a franchise, it may be said that the franchisor intended to seamlessly transfer the operation of the shop to the new franchisee. The old franchisee knows that this will happen and so does the new franchisee. In these circumstances, there has been transfer of an undertaking, albeit an indirect one, from the old franchisee (old employer) to the new franchisee (new employer). The franchisor fulfils the role of a self-interested conduit [between] the old and new franchisees.’
Note: Unreported cases at date of publication may have subsequently been reported.
Moksha Naidoo BA (Wits) LLB (UKZN) is an advocate at the Johannesburg Bar.
This article was first published in De Rebus in 2013 (April) DR 59.
