Employment law update – Section 197 – appointment of new service provider

April 1st, 2013

By Talita Laubscher and Monique Jefferson

In Franmann Services (Pty) Ltd v Simba (Pty) Ltd and Another [2012] 12 BLLR 1293 (LC) the applicant, Franmann, sought an order declaring that on the termination of an agreement between it and the first respondent, Simba, the employment contracts of Franmann’s employees engaged in performing services to Simba would transfer to the new contractor, the second respondent, Capital Outsourcing.

Franmann and Capital Outsourcing were labour brokers. Franmann had provided labour to Simba since 2000 and this contract terminated on 31 August 2012. Simba subsequently appointed Capital Outsourcing to provide it with temporary employment services.

The Labour Court, per Van Niekerk J, held that whether there has been a transfer of a business as a going concern for purposes of s 197 of the Labour Relations Act 66 of 1995 is a matter of fact to be determined objectively. This requires an inquiry into –

  • the existence of a transfer by one employer to another;
  • whether there was a transfer of a business (ie, an economic entity capable of being transferred); and
  • whether the business is transferred as a going concern (ie, does the entity retain its identity after the transfer?).

If so, s 197 is triggered and the new contractor is automatically substituted by operation of law as the employer of those of the transferor’s employees engaged in the business on the date of the transfer.

The court noted that there was no reason in principle why s 197 should not apply to outsourcing arrangements. Further, whether the arrangement is one of an initial outsourcing from a client to a service provider (a first generation transfer), from one service provider to another (second and further generation transfers), or a resumption by the client of a service previously outsourced (in-sourcing) is not significant; the same test must be applied to each transaction, which must be considered in view of its unique facts and circumstances.

With reference to the decision in Aviation Union of SA and Another v SA Airways (Pty) Ltd and Others [2012] 3 BLLR 211 (CC), the court held: ‘[I]t must be emphasised that what is capable of being transferred is the business that supplies the service and not the service itself. Were it to be otherwise, a termination of a service contract by one party and its subsequent appointment of another service provider would constitute a transfer within the contemplation of the section. … [T]his is not what the section was designed to achieve … .’

Considering whether s 197 applied in the present matter, the court considered the following factors:

  • Franmann had decided to cease operating as a labour broker.
  • Capital Outsourcing would be engaged to render similar services.
  • Capital Outsourcing was not ‘taking over’ Franmann’s business – Franmann’s business was closing shop.
  • The fact that Capital Outsourcing intended to take on some of Franmann’s employees to perform the same tasks did not in itself trigger s 197.
  • Capital Outsourcing would not acquire or take over the use of any of Franmann’s assets or use any of Franmann’s processes. Capital Outsourcing would furthermore not acquire any right to use any of Simba’s assets.

In the absence of any assets (or the use thereof) being transferred, the court held that s 197 was not triggered by the cancellation of the Franmann contract and the appointment of Capital Outsourcing, and that there was no transfer of a business as a going concern. The service obtained through Capital Outsourcing was therefore not the Franmann service in different hands, but a new service.

The application was dismissed with costs.

In light of this decision, practitioners should be aware that not every cancellation of a service contract and appointment of a new service provider will trigger the application of s 197. Each case must be considered carefully and the various tests (ie, whether there is a transfer of a business as a going concern) must be applied properly in order to determine whether there is, in fact, an economic entity retaining its identity in different hands after the transfer.

Retrenchment following a strike

In Food and Allied Workers Union and Others v Premier Foods Ltd t/a Blue Ribbon Salt River [2012] 12 BLLR 1222 (LAC) the Labour Appeal Court (LAC) considered the fairness of selecting employees for retrenchment on the basis that they had committed acts of misconduct during a protected strike.

A particularly violent protected national strike commenced on 5 March 2007 following a failure of wage negotiations with the first applicant, the Food and Allied Workers Union (FAWU). Some of the employees belonging to FAWU chose not to participate in the strike and continued working. There were also some non-unionised employees and temporary staff who continued to render services at the respondent, Premier Foods, during the strike.

Serious acts of violence, harassment and intimidation took place during the strike. The respondent attempted to identify employees who had committed acts of serious misconduct and took statements from non-strikers and family members to determine the identity of the perpetrators. Criminal charges were laid with the police, but the police were unable to provide much assistance and the crimes went unpunished.

When the strike eventually ended, the respondent attempted to take disciplinary action against the perpetrators but there was insufficient evidence as potential witnesses were too afraid to testify and a key witness had disappeared. The respondent decided to abandon the process of holding disciplinary inquiries and instead embarked on a retrenchment exercise. The Commission for Conciliation, Mediation and Arbitration (CCMA) facilitated a consultation process and on 1 October 2007 certain employees were given notice of retrenchment with effect from 31 October 2007. FAWU then launched an application in the Labour Court alleging that the dismissals were substantively and procedurally unfair.

The Labour Court found that the dismissals were not related to financial constraints but were rather on account of misconduct. The court observed that there may be situations where an employer can rely on s 189 of the Labour Relations Act 66 of 1995 where misconduct triggered the operational rationale to retrench, but this was not such a case. Here, s 189 was simply relied on since the respondent was unable to prove the charges against the employees. The dismissal of the 31 employees was accordingly regarded as substantively and procedurally unfair and they were awarded compensation equal to 12 months’ salary.

The appellants appealed, contending that the employees should have been reinstated. The respondent cross-appealed against the finding that the dismissals were unfair on a number of grounds.

The LAC assumed that it may be permissible to retrench employees for misconduct and that the selection of strikers who committed acts of violence and intimidation may constitute fair and objective selection criteria.

In light of these assumptions, the LAC considered whether the respondent had applied fair and objective selection criteria in determining the employees to be retrenched.

The LAC found that, had the respondent presented evidence in the form of written affidavits or testimonies under oath that the appellants had committed the acts of misconduct, which were accepted by the court, the respondent would have discharged this onus. However, the respondent had relied on hearsay evidence to prove that the employees had committed the acts of misconduct. The respondent therefore failed to prove that the selection criterion was fairly and objectively applied and the cross-appeal was dismissed.

In terms of the appeal, the LAC further found that there was no evidence that the employment relationship had been destroyed as there was no evidence linking the acts of misconduct to the appellants. Reinstatement, as the preferred remedy for dismissal, was accordingly ordered, with retrospective effect to the date of dismissal.

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

Monique Jefferson BA (Wits) LLB (Rhodes) is an attorney at Bowman Gilfillan in Johannesburg.

This article was first published in De Rebus in 2013 (April) DR 58.

De Rebus