Member Article

Section 197 of the South African Labour Relations Act: The ebb and flow of what constitutes a going concern More recently, in 2016, in Rural Maintenance (Pty) Limited and Another v Maluti-A-Phofung Local Municipality, the Constitutional Court dealt with outsourcing and the impact of a transfer of assets by the outgoing entity in evaluating whether a transfer of a business as a going concern existed. The court found that “for a transfer of a business as a going concern to occur, not all the assets of the business have to be transferred and that it depends on the nature of the business and essentiality or otherwise of particular assets for a particular business.”

Section 197 of the South African Labour Relations Act, 1995 (the “LRA”) sets out the treatment of employees when one business (or part thereof) is transferred to another as a going concern. While the LRA does not define “going concern”, the courts have, over the years, given an indication of how it should be interpreted.

In 2002, in the matter of National Education Health and Allied Workers Union v University of Cape Town and Others, the South African Constitutional Court emphasised that as “going concern” is not defined in the LRA, it must be given its ordinary meaning unless the context indicates otherwise. The court emphasised that various factors were relevant to determining whether a transfer of a going concern exists and there is no closed list of factors and all relevant factors must be considered. Of particular relevance are whether there is a transfer of assets, whether employees are taken over by the new service provider, whether customers are transferred and whether the same business is being carried on by the new service provider.

Importantly, the court emphasised that section 197 is not the only section of the LRA that affords employees protection when a business ceases to operate. When section 197 does not apply and the business comes to an end due to operational reasons, section 189 of the LRA, which deals with dismissals in this context, applies.

Later in 2016, the South African Labour Court, in Rosond (Pty) Ltd v Western Platinum Ltd and 327 Others, considered whether a partial transfer of assets triggers section 197 and the role the client’s right of use of assets plays in determining if there is a transfer of a business as a going concern.

Rosond was notified that its tender application to continue to provide grout pack support to Lonmin in 2017 was unsuccessful and that Electro Hydro World CC (“EHW”) and Murray & Roberts Cementation (Pty) Ltd (“M&R”) were awarded the tender. M&R offered to purchase Rosond’s plant, but Rosond declined, stating that its equipment was specialised. Notwithstanding this, Rosond contended that the equipment EHW and M&R would be using was the same kind that it used, which indicated that section 197 would be triggered.

The Labour Court disagreed, stating:

“The fact that Rosond refused to part with the primary tangible assets delivering the service and that it is a condition of the new contracts that the contractors do so in the event of future termination of their agreements with Lonmin, rather supports the view that in casu the business operation that delivered the service is not being transferred, even though the services Lonmin requires are the same.”

In respect of using Lonmin’s piping to deliver the grout underground, the court held that although the right to use assets could be construed as an asset itself, the new contractor’s use of Lonmin’s piping did not render the outsourcing arrangement a transfer of business.

The court found that the case amounted to weighing up three main factors:

1. the absence of the transfer of crucial and essential assets (the grout plant and relay stations);

2. the transfer of the right of use of the mining structure, particularly the pipe range; and

3. M&R’s employment of 30% of Rosond’s employees.

The absence of the transfer of crucial essential assets outweighed the transfer of the right of use of the mining structures and M&R’s employment of some of Rosond’s unskilled employees, given that the bulk of the employees employed on the project by M&R had not originally been employed by Rosond. Accordingly, the court held that there was no transfer of a business as a going concern.

While the LRA does not define going concern, the courts have been active in interpreting this term by critically analysing the facts of each transaction. When dealing with replacing one contractor with another, care must be taken to consider and compare all facts and circumstances of the service delivered to determine whether section 197 applies.

St Elmo Wilken

employment executive consultant

[email protected]

cell: +27 82 900 7678

Shivani Moodley

employment candidate attorney

[email protected]

+27 82 560 4064