|Case No.||Lower Court Judgments||Hearing Date|
|CCT 133/14||Labour Court, 31 Aug. 2012
Labour Appeal Court, 29 May 2014
|18 Nov. 2014|
By Duncan Wild on 3 November 2014
This case involves the consideration of when the cancellation of a contract under which certain services are outsourced may be considered a transfer of business from the outsourcee to the outsourcer, requiring the outsourcer to take over the employment contracts of the employees of the outsourcer under section 197 of the Labour Relations Act 66 of 1995 (“LRA“.)
The first respondent Grinpal Energy Management Services (Pty) Ltd (“Grinpal“) manufactures, supplies and installs, operates and maintains smart metering systems and electrical infrastructure which it provides primarily to municipalities and power utility companies. In 2003 it was awarded a tender to supply a prepaid metering system to City Power (Pty) Ltd (“City Power“). As a result Grinpal and City Power entered two service level agreements to govern the manner in which first respondent supplied, installed, operated and maintained the medium and low voltage systems, related infrastructure and smart metering systems in Alexander Township.
In March 2012, City Power notified Grinpal that it was terminating the agreements. As a result of the termination City Power and Grinpal agreed to a hand over process under which Grinpal would hand over its customer databases, telecommunication platforms, details of Grinpal staff administering the contract for Grinpal, information technology platforms used to administer the services, and training on those platforms, amongst other things.
Grinpal argued that in terms of this process its “business” of providing the services under the contract had been transferred to City Power, and therefore, under section 197 of the LRA, City Power was obliged to take over the employment contracts of those of Grinpal’s employees providing the service.
Section 197 of the LRA states:
(1) In this section and in section 197A –
(a) “business” includes the whole or a part of any business, trade, undertaking or service; and
(b) transfer” means the transfer of a business by one employer (“the old employer”) to another employer (“the new employer”) as a going concern.
(2) If a transfer of a business takes place, unless otherwise agreed in terms of subsection (6) –
(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.
City Power argued that it was simply taking over the operations temporarily and that what was contemplated was that Grinpal would cease operations and exit with its equipment and employees, and a new contractor would be appointed who would then provide its own equipment and employees in order to provide similar services. Therefore it was not the case that Grinpal was transferring a “business” as contemplated by the section to City Power.
The Labour Court found that what had in fact occurred was a transfer of business from Grinpal to City Power and therefore it was City Power’s obligation to take over the employment of Grinpal’s employees under section 197 of the LRA.
On appeal to the Labour Appeal Court, City Power argued that the Labour Court had understood the arrangement as only a temporary one, as City Power was not capable of running the services provided by Grinpal, and as such the services provided by Grinpal, its business, could not be transferred to City Power as contemplated in the section.
In determining whether what had occurred should be considered a “transfer of business” under section 197, the Labour Appeal Court referred to the Constitutional Court decision of Aviation Union of South Africa and another v South African Airways (Pty) Ltd and others 2012 (1) SA 321 (CC). In that case, Justice Yacoob, writing for the majority, set out the basis for determining whether a “transfer of business” had occurred in the context of the cancellation of an outsourcing agreement as follows:
Does the transaction concerned create rights and obligations that require one entity to transfer something in favour or for the benefit of another or to another? If so, does the obligation imposed within a transaction, fairly read, contemplate a transferor who has the obligation to effect a transfer or allow a transfer to happen, and a transferee who receives the transfer? If the answer to both these questions is in the affirmative, then the transaction contemplates transfer by the transferor to the transferee. Provided that this transfer is that of a business as a going concern, for purposes of s 197, the transferee is the new employer and the transferor the old. The transaction attracts the section and the workers will enjoy its protection.
The Labour Appeal Court, stated that “the question is whether the activities conducted by a party, such as first respondent, constitute a defined set of activities which represents an identifiable business undertaking so that when a termination of an agreement between first respondent and appellant takes place, it can be said that this set of activities, which constitutes a discrete business undertaking has now been taken over by another party”.
Applying the test to the termination of the Grinpal contract, the Labour Appeal Court found that a transfer of business had occurred. Essentially Grinpal’s entire operation was transferred to City Power, the business was identifiable and discrete, and therefore City Power was obliged to take over Grinpal’s role as employer of the relevant employees.
The Labour Appeal Court did note that the result of this finding, and the law as set out by the Constitutional Court, could have significant negative financial implications particularly for organ’s of state, such as municipalities, that upon the expiration of a fixed term outsourcing contract, the municipality (or other other organ of state) could be obliged to finance the ongoing employment contracts. This could have severe financial consequences.
Despite these concerns, the Labour Appeal Court found that the legal position was clear and therefore dismissed City Power’s appeal.
The Constitutional Court will consider City Power’s appeal against the Labour Appeal Court order.
Disclosure: Webber Wentzel, where the author of this post and editor of ConCourtBlog is employed, is representing the Grinpal in this matter.