The purpose of section 197 of South Africa’s Labour Relations Act, 1995 (“LRA”) is to protect and maintain employment in circumstances where a transfer of business takes place. In terms of section 197 and section 197B(1)(b), a “transfer” means the transfer of a business by one employer (the old employer) to another employer (the new employer) as a going concern. InNEHAWU v University of Cape Town & Others,the Constitutional Court stated that section 197 of the LRA has a dual purpose – “it facilitates the commercial transactions while at the same time protecting the workers against unfair job losses”. The primary aim of section 197 is to ensure that job losses do not occur simply as a result of one business being transferred to a new owner. The default position is: if you want to take ownership of a business, you also get the employees who come along with that business as an automatic consequence of the transfer of ownership.

However, in the recent case ofNUMSA obo Members and Others v AIH Logistics (Pty) Ltd and Another, Witcher J considered the intricacies of applying section 197 in an unusual situation.

In this case, AIH Logistics (Pty) Ltd sought to transfer certain of its employees to Blacksuits (Pty) Ltd, relying on section 197 to ensure that the transfers took place. It was envisaged that, after this transfer, the employees would perform the same functions for AIH, but as employees of Blacksuits.

The applicant employees opposed their transfer to Blacksuits and approached the Labour Court for relief. They argued that the purported transfer was a sham “to get rid of them” and that there had been no real transfer of a business as a “going concern”. They argued that the business that had allegedly transferred continued to operate in exactly the same way as it had prior to the transfer, but, crucially, this business had not “changed hands” as was required by section 197. Additionally, no price had been paid for the transfer; Blacksuits was making rent-free use of AIH’s premises; there was no sale or lease of tools or transfer of assets; and AIH had retained meaningful control over the employees. As a result, the employees sought a remedy setting aside the purported transfer and restoring the status quo that applied before the transfer.

Witcher J held that, in order for section 197 to apply, there need not be a transfer of all assets and personnel from the old to the new employer; however, in a true arm’s length transfer of business, what should be transferred are those assets and personnel that are essential to the business.

She held further that, considered properly, the purpose of the transaction between AIH and Blacksuits in this case was actually to shift employees from one entity to another and not to transfer a business. Therefore, Blacksuits was not in possession of a going concern after the transfer, but rather in possession of the right to perform certain limited HR time-management and disciplinary functions for AIH. This is hardly an indication of a true transfer of a business.

Witcher J ultimately found that the transfer of the employees was not one that fell within the prescripts of section 197, and ordered that the position between AIH and the employees prior to the transfer be restored.

This case serves as a reminder that whether section 197 applies to a particular transaction or transfer is entirely fact-specific and each case has to be judged on its merits. Further, the court makes it clear that section 197 is certainly not a vehicle that employers can use to try to rid themselves of certain employees by purporting to transfer a business to a new employer.

Witcher J specifically noted in her judgment that section 197’s primary function is the protection of employees’ rights, specifically their right to continuity of employment. As such, the business should be capable of standing on its own two feet following the transfer, otherwise employee jobs could be in jeopardy if the business to which they transferred ended up having no substance to it.

Employers should be cautious when seeking to utilise section 197 to shift employees to a purported new employer. Failing to scrutinise potential section 197 transfers could see the purported transfer and its automatic consequences (including the transfer of employment of affected employees) reversed, as was the case here.

Henry Rossouw

Executive Employment

[email protected]

Claire Nolan

Associate Employment

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