Outsourcing and the application of section 197 of the Labour Relations Act

16th November 2009

Dear Reader

This week we will be dealing with outsourcing and the application of section 197 of the Labour Relations Act thereto.

It is accepted by our courts that a company may outsource work to a third party that might otherwise be performed by its employees.

What is outsourcing?  Outsourcing will take place where an employer discontinues a service or activity, that is in most cases not part of the main business of the employer, and contract an outside contractor to take over that service or activity.  For example the outsourcing of garden or cleaning services.    When a service or an activity is outsourced the question arises whether that service or activity is transferred as a business, part of a business or a service as a going concern.  If the answer is yes, it will place the outsourcing within the scope of section 197 of the Labour Relations Act, as discussed in our previous newsletter of 9 November 2009.   

In answering the question, whether outsourcing can be subjected to section 197, writer turned to the judgements of both the Labour Appeal Court in South African Municipal Workers Union and Others v Rand Airport Management Company (Pty) Ltd and Others* and the Constitutional Court in NEHAWU v University of Cape Town**. 

In the Rand Airport case the court dealt with the issue of whether section 197 would be applicable to outsourcing and came to conclusion that it could apply to outsourcing if it passes the test of a “transfer” as well as the test of what constitutes a “business or a service”

In this case the Labour Appeal court also referred to the Constitutional court case of NEHAWU v University of Cape Town which set the record straight with regards to whether an agreement in terms of the transfer of the employees from the old employer to the new employer, are a requirement before there can be a transfer of a business as a going concern in terms of section 197.  The Constitutional Court indicated that such an agreement is not a prerequisite for a transfer as a going concern. 

In Rand Airport Judge Zondo said that to determine whether there has been a transfer the first step would be to have regard to the meaning of the word business in section 197, which was amended to include service.  The court turned to the definition of service as per the Shorter Oxford English Dictionary:

The provision of a facility to meet the needs or for the use of a person or a person’s interest or advantage; assistance or benefit provided to someone by a person or thing; an act of helping or benefiting another; an instance of beneficial, useful or friendly actions; the action of serving, helping or benefiting another; behaviour conducive to the welfare or advantage of another; friendly or professional assistance’.

The question arising from this is whether the activity or service that is outsourced could be regarded as a service, business or part of a business.    The test is whether the subject matter of the transaction forms an “economic entity” which remains in existence and continues to be operated by the new employer.  In this regards both the Labour Appeal Court and the Constitutional Court in the judgements above were guided by the case of Spijkers v Gebroeders Benedik Abbatoir v Alfred  Benedik en Zonen*** in which the test laid down was as follows:

“The decisive criterion... is whether the business in question retains its identity.  Consequently a transfer of an undertaking, business or part of a business does not occur merely because its assets are disposed of.  Instead it is necessary to consider... whether the business was disposed of as a going concern, as would be indicated, inter alia, by the fact that its operation was actually continued or resumed by the new employer, with the same or similar activities”

The next question the Labour Appeal Court turned to in Rand Airport is what does it mean to transfer a business or a service “as a going concern”?  In the determination of whether a business has been transferred as a going concern, the critical phrase is ‘a going concern’. The court quoted paragraphs 56-58 of the Constitutional Court judgement in NEHAWU as follows:

“[56]    The phrase “going concern” is not defined in the LRA. It must therefore be given its ordinary meaning unless the context indicates otherwise. What must be transferred must be a business in operation “so that the business remains the same but in different hands”. Whether that has occurred is a matter of fact which must be determined objectively in the light of the circumstances of each transaction. In deciding whether a business has been transferred as a going concern, regard must be had to the substance and not the form of the transaction. A number of factors will be relevant to the question whether a transfer of business as a going concern has occurred, such as the transfer or otherwise of assets, both tangible or intangible, whether or not workers are taken over by the new employer, whether customers are transferred and whether or not the same business has been carried on by the new employer. What must be stressed is that this list of factors is not exhaustive and that none of them is decisive individually.  They must all be considered in the overall assessment and therefore should not be considered in isolation.

[57]      There is nothing either in the context or language of section 197 to suggest that the phrase “going concern” must be given the meaning assigned to it by the majority. On the contrary, the purpose of the section and the context in which that phrase occurs suggests otherwise. 

[58]      The fact that the seller and the purchaser of the business had not agreed on the transfer of the workforce as part of the transaction does not disqualify the transaction from being a transfer of a business as a going concern within the meaning of section 197. Each transaction must be considered on its own merits regard being had to the circumstances of the transaction in question. Only then can a determination be made as to whether the transaction constitutes the transfer of a business as a going concern. In this regard I agree with Zondo JP.”

It can thus be said that the basic test is whether the business, service or activity stayed the same, but in different hands?  If the answer is yes, then there would be a transfer of a business as a going concern.

Once it is established that the outsourced activities have been transferred as a going concern the employees will enjoy the protection of section 197.  Which means that the employment contracts will transfer automatically to the contractor as per the judgement delivered by the Constitutional Court in NEHAWU above.  Please see our case law library for a full discussion on this case.

Next week we will be discussing the requirements for polygraph testing, the admissibility thereof and whether it can be used to dismiss an employee.

Me. L Bouwer

General Manager: Legal Assistance

* South African Municipal Workers Union and Others v Rand Airport Management Company (Pty) Ltd and Others(JA9/03) [2004] ZALAC 17 (3 December 2004)
** NEHAWU v University of Cape Town (2003) 24 ILJ 95 (CC)
*** 1986 2 CMLR 296

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