Introduction

With the introduction of the Labour Relations Act of 1995 (“LRA”), the law regarding the transfer of employees when businesses are transferred as a going concern has been constantly changing.

Initially, one school of thought contended that there was only a transfer of the employees from the old employer to the new employer if both employers agreed. The second school of thought held the view that the transfer of a business as a going concern automatically triggered the transfer of the employees.

The Labour Court and the Labour Appeal Court in NEHAWU v University of Cape Town and Others (1) [2000] 7 BLLR 803 (LC) and [2002] 4 BLLR 311 (LAC) preferred the first approach. The Constitutional Court ([2003] 24 1CJ 95 CC) held the view that employees would automatically transfer.

The Labour Relations Amendment Act of 2001 unambiguously established that there is an automatic transfer of the contracts of employment where there is a transfer of a business as a going concern.

With regard to the “transfer of a business”, the amended LRA defines :

1. 1. a “business” as including “the whole or a part of any business, trade, undertaking or service”;


2. 2. a “transfer” as meaning “the transfer of a business by one employer to another employer as a going concern”.

With outsourcing, employees may automatically transfer

The Labour Court in the UCT case held that an outsourcing does not necessarily constitute a transfer of a business as a going concern. This issue was not determined by either the Labour Appeal Court or the Constitutional Court.

In the 2002 amendments, “service” was included in the definition of a “business”. This lead the Labour Appeal Court in SAMWU and Others v Rand Airport Management Company (Pty) Ltd and Others [2005] 9 BLLR 924 (LC) to conclude that Section 197 does apply to the outsourcing of services i.e. all the employees engaged in a service, for example cleaning services, would transfer to a contractor if that service is outsourced as a going concern.

After this judgment, conventional wisdom was that Section 197 only applied to first generation outsourcing, in other words, when the owner outsourced the service to the contractor, but did not apply to second generation outsourcing, when the contractor was unsuccessful in securing another contract at the end of the period of the contract, and was replaced by a second contractor.

Do the employees automatically transfer in second generation transfer?

This issue was first determined in the case of COSAWU v Zikhethele Trade (Pty) Limited [2005] 9 BLLR 924 (LC). The facts were that the Fresh Produce Terminals (FPT) at the Cape Town, Port Elizabeth and Durban harbours outsourced the terminal and stevedoring services to Khulisa, as part of a BEE transaction. In due course, an acrimonious dispute arose between two factions of Khulisa. FPT became concerned about these developments and put its terminal and stevedoring contracts out to tender. Each of the factions submitted a tender. FPT awarded the outsourcing contract to one of the factions, being Zikhethele. Zikhethele refused to accept the automatic transfer of employees from Khulisa. COSAWU launched an application to declare that the employees had been automatically transferred to Zikhethele, in terms of Section 197 of the Act.
Murphy AJ ruled that a mechanical application of the literal meaning of the word “by” in Section 197(1)(a) would lead to an anomaly in that workers transferred as first generation transfers would be protected whereas those in a second generation scheme would not be.

Murphy AJ was of the view that a purposive approach to the interpretation of the section was required in order to avoid the possibility of abuse and circumvention of the statutory protection by unscrupulous employers, and achieved this purpose by substituting the word “by” with the word “from”. Murphy AJ accordingly found that the business of terminal and stevedoring services was transferred automatically from Khulisa to Zikhethele as a going concern, and, more importantly, the employees were automatically transferred.

Whether employees automatically transfer in a second generation transfer, came before the Labour Court again in Aviation Union of South Africa and Others v South African Airways (Pty) Limited and Others [2008] 1 BLLR 20 (LC).

Basson J held that a court, when interpreting a statue, is enjoined to have regard to the ordinary and literal meaning of the word used in order to determine the intention of the legislature, unless the words were ambiguous or when doing so would lead to an absurdity. She held that the wording of Section 197(1)(b) was clear, and there was no need to read into the section words that were not there.

Basson J referred to the meaning of the word “transfer” in the definition “the transfer of a business by one employer to another employer as a going concern”, and concluded that a transfer did not include a transfer from one employer to another employer.

Basson J agreed with Murphy AJ that workers affected by a second generation transfer may equally be in need of protection, but felt that it should be left to the legislature to extend the ambit of this section, if it deemed it advisable to do so.

Basson J then proceeded to interpret Section 197 as follows :

“I am of the view that Section 197 only contemplates a first general outsourcing. In other words, where the business is transferred by the old employer to the new employer and not the so called second generations transfers.”

This decision was taken on appeal to the Labour Appeal Court and judgment was handed down on 9 October 2009. The facts were as follows :

1. 1. SAA outsourced its infrastructure and support services departments to a contractor, LGM. SAA and LGM agreed that the affected employees would be transferred to LGM in terms of Section 197 of the Act.


2. 2. Assets and inventory of SAA for the transferred services were sold to LGM and, it was agreed that on termination of the outsourcing agreement, SAA would be entitled to repurchase these assets and inventory from LGM


3. 3. In due course, SAA terminated the outsourcing agreement with LGM and held that it had no obligation to re-employ the employees of LGM, who had been engaged to provide infrastructure and support services.


4. 4. COSAWU demanded that SAA accept that the employees of LGM would be transferred back to SAA, in terms of Section 197. SAA was not prepared to give the undertaking.

The main issue before the Labour Appeal Court was whether the Labour Court had erred in its narrow interpretation of Section 197 of the Act.

Davis JA refers to an article by M J D Wallis S.C. (as he then was) 2006 (27) ILJ 1 in which he writes :

“The use of “by” indicates that the transferor has a positive role to play in bringing about the transfers. Its replacement by the word “from” eliminates … and reduces the transferor to a passive position to which it may not only not do anything to bring about the transfer but may very possibly … strenuously resist it.”

Wallis goes further to say that the purpose of Section 197 was to balance and protect the interests of both the employee and the employer, and for this reason, it was reasonable for the legislature to have limited the scope of this section to those transfers where two parties decide to bring about a change in ownership of a business. It does not extend the section to the case of second generation transfers.

Davis JA concludes that having regard to the wording of Section 197(1)(b), there is no compelling reason why the new employer (i.e. the initial transferee) has not transferred the business to a third party or to the initial transferor.

Davis JA accordingly concludes that Section 197 does apply and that the services that were provided by LGM to SAA are transferred to SAA at the end of the contract between SAA and LGM. At the same time, Davis JA also found that if SAA contracted out the services to another party, then Section 197 of the LRA also applies to this transaction.

In a lengthy concurring judgment, Zondo JP maintains that a purposive approach in interpreting Section 197 is consistent with our Constitution. The purpose of Section 197 is twofold, namely, to protect the workers and to facilitate transfers of businesses. Zondo JP then concludes :

“It is difficult for me to see what purpose sec 197 can be said to aim to achieve if the protection which it gives to workers against job losses is as limited as it has to be conceded would be the case if the word “by” in the section was read to mean what it normally means. In such a case the protection of workers would be limited to the first outsourcing and nothing more. It may give protection in the case of those outsourcing situation where employers are not trying to get rid of the workers but those are not the situations for which workers need the sec 197 type of protection the most. The situations in which the workers need protection the most is where they dealing (sic) with the employers who are trying to get rid of them. That is where sec 197 counts. However, that is where it would not apply if the school of thought that propounds a literal meaning were to prevail.”

Conclusion

The Constitutional Court, in the UCT cases, and the Labour Appeal Court, in the AUSA case, have interpreted section 197 in such a way as to ensure that the protection of the workers is paramount. Until the Constitutional Court pronounces on the issue of second generation transfers, it is premature to say that the final word has been spoken. Until then, the AUSA case is the law, and workers are afforded the protection of section 197 in a second generation transfer. This means that employees are automatically transferred in circumstances where there is a second generation transfer of a business as a going concern.