Employment law update – Section 197 transfers

December 1st, 2014


By Talita Laubscher and Monique Jefferson

In City Power (Pty) Ltd v Grinpal Energy Management Services (Pty) Ltd and Others (LAC) (unreported case no JA55/2012, 29-5-2014) (Davis JA), the Labour Appeal Court (LAC) considered an appeal against the Labour Court’s finding that s 197 of the Labour Relations Act 66 of 1995 applied to the cancellation of two service level agreements between the appellant and the first respondent.

The business of Grinpal Energy Management Services (Pty) Ltd (Grinpal) is to manufacture, supply, install, operate and maintain metering systems and electrical infrastructure. In 2003 it was awarded a tender and entered into two service level agreements in terms of which it would supply a prepaid metering system to City Power (Pty) Ltd. In 2012 City Power cancelled the service agreements but Grinpal was required to carry on with the performance of its obligations until a proper handover could be done. A meeting was held regarding the termination of the relationship and details of the handover were discussed. In this regard, Grinpal would provide City Power with customer databases, customer details, connectivity to customers, the vending platform and server, the telecommunication platform and contacts with service providers, as well as the details of all staff. It was intended that all of the assets, both tangible and intangible, which were required to operate the project would transfer to City Power. Given the fact that the infrastructure required for conducting the business transferred from Grinpal to City Power, the Labour Court, per Rabkin-Naicker J, concluded that s 197 applied.

On appeal, City Power argued that there could not have been a transfer of a business as a going concern as the business would not be carried out by City Power in the same manner that it was carried out by Grinpal. The LAC confirmed that in determining whether s 197 applies the question is whether the activities conducted by a party constitute a defined set of activities, which represents an identifiable business undertaking so that when the termination of an agreement occurs this set of activities is taken over by another party.

The LAC per Davis JA found that the business was identifiable and discrete and Grinpal’s equipment and expertise was required by City Power to take over the project. Grinpal was also required to provide training to City Power’s employees so that it could continue to run the project. Thus, the business of providing a system of prepaid electricity was continuing but would henceforth be in different hands. Davis JA concluded that s 197 did apply.

In TMS Group Industrial Services (Pty) Ltd t/a Vericon v Unitrans Supply Chain Solutions (Pty) Ltd and Others (LAC) (unreported case no JA58/2014, 6-8-2014), the LAC per Waglay JP, Tlaletsi DJP and Davis JA considered an appeal against a judgment of the Labour Court per Van Niekerk J. Van Niekerk J had found that the termination of a warehousing agreement between Unitrans Supply Chain Solutions (Pty) Ltd (Unitrans) and Nampak Glass (Pty) Ltd (Nampak) and the subsequent appointment by Nampak of TMS Group Industrial Services (Pty) Ltd (TMS) to provide similar services constituted a transfer in terms of s 197.

In 2007, Nampak outsourced its warehousing functions to Unitrans, a company that conducts the business of providing supply chain solutions. A warehousing agreement was concluded that expired in January 2014. The production facility where the services were performed was owned by Nampak and all the assets required to perform the services were owned by Nampak but were used by Unitrans. Van Niekerk J found that the services rendered by TMS were substantially the same as those that had been performed by Unitrans. In fact, the same services were now being performed by TMS at the same site and within the same premises. Van Niekerk J found that it was reasonable to conclude that the same equipment and information technology systems that were used by Unitrans remained the property of Nampak and would continue to be used by TMS. Van Niekerk J concluded that the warehousing service was an economic entity comprising the contractual right to perform the services, the assets owned by Nampak but used by the service provider, the activity of warehousing and the employees. Van Niekerk J found that the contractual right to provide warehousing services now vested in TMS and TMS was using the same assets to provide the same services. Thus, s 197 applied.

On appeal, the LAC had to consider three arguments why s 197 potentially did not apply:

  • there was no written agreement between TMS and Nampak to perform the services;
  • the employees who performed the services in terms of the agreement between Unitrans and Nampak were not employed by Unitrans but were instead employees of a wholly owned subsidiary of Unitrans; and
  • no assets of Unitrans were taken over by TMS. TMS simply continued to use assets that had always remained the property of Nampak.

As regards the lack of a written agreement, the LAC considered that factually, TMS was actually performing the services for Nampak and thus the lack of a final written agreement to this effect did not prevent the application of s 197. As regards the fact that the employees who had been performing the services under the agreement between Unitrans and Nampak were not employees of Unitrans but were employed by a different entity, the LAC held that Unitrans was the de facto employer of the employees. If TMS’s argument was upheld (ie, that s 197 could not apply because it was not the business of the entity that employed the employees that had transferred to TMS), this would create a mechanism to circumvent the consequences of s 197. As regards the argument that no assets were transferred from Unitrans to TMS, the LAC held that this was merely one factor to be taken into account when determining the application of s 197 and one needed to look at the substance of the transaction. It was held that TMS assumed the right to use Nampak’s assets and infrastructure to continue to perform the same services that were performed by Unitrans and this was sufficient to trigger the application of s 197. The appeal was dismissed with costs.

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 2014 (Dec) DR 39.