New s 197 South African labour law

1 new s 197

1.1 transfer
1.2 going concern
1.3 outsourcing
1.4 general rules
1.5 exceptions
1.6 insolvency

new s 197

the rewritten section 197 attempts address situation in more calculated , extensive way. important difference ordinary transfers dealt separately insolvency transfers.

section 197 applies in cases of transfer of business.

section 197(1) defines business whole or part of business, trade, undertaking or service.

transfer defined transfer of business [...] going concern.

the right of employees have contracts transferred dependent, therefore, on business s transfer meeting exact wording of section 197.

transfer

the meaning of word wider mere sale. in schutte & others v powerplus performance, court held follows:

a business or part of business, may transferred in circumstances other sale. these may arise in case of merger, takeover or part of broader process of restructuring within company or group of companies. transfer can take place virtue of exchange of assets or donation [.... g]iven range of circumstances under transfer can take place, need agreed price or valuation may not arise. consideration may take other form. outsourcing in matter part of broader process of restructuring , must seen against backdrop of [old employer s] acquisition of 50% stake in [new employer].

going concern

once established there transfer, important question whether transfer of whole or part of business, trade, undertaking or service [...] going concern.

a distinction made between 3 ways of transferring business:

in respect of sale of shares, has been held distinction should made between transfer of business going concern , transfer of possession , control of business: result of sale of shares. sale of shares excluded ambit of section 197.

in respect of sale of assets, court in kgethe v lmk manufacturing held agreement sell portion of assets of business not transfer going concern. although judgment overturned on appeal, on basis court not entitled make finding true of agreement. therefore previous decision still tenuous authority proposition sale of assets not constitute transfer going concern.

in schutte v powerplus performance, however, court held that, irrespective of form agreement takes, court substance of agreement determine whether or not transferred going concern.

the following factors may taken account in finding there has been transfer of business contemplated in section 197. list not exhaustive:

a pre-existing relationship between buyer , seller;
a previous in-principle agreement sell part of business;
the wording of contract itself;
the fact buyer employed majority of employees;
use of same premises buyer; and
continuation of same activities without interruption.

in national education health & allied workers union v university of cape town, court held follows:

in deciding whether business has been transferred going concern, regard must had substance , not form of transaction. number of factors relevant [this question], such transfer or otherwise of assets both tangible , intangible, whether or not workers taken on new employer, whether customers transferred , whether or not same business being carried on new employer. must stressed list [...] not exhaustive , none of them decisive individually. must considered in overall assessment , therefore should not considered in isolation.

outsourcing

the question of whether or not outsourcing of services falls within ambit of section 197 has been subject scrutiny.

in samwu v rand airport management company, employer outsourced gardening , security services outside contractors, cheaper. court held gardening , security services fell within ambit of term service in section 197, , these services transferred 1 employer another. next question considered whether these services being transferred going concern. court referred decision in nehawu v university of cape town, , affirmed flexible approach must taken in finding objective answer question. on facts, court held agreement between ramc , other employer in respect of outsourced services amounted transfer of service within ambit of section 197. on evidence, however, court not decide whether agreement between 2 companies had been implemented, , therefore not decide whether contracts had been transferred ramc service provider.

this decision confirms, however, outsourcing exercise may constitute transfer of going concern envisaged in section 197. labour appeal court did not specify, however, factors taken account, not provide final answer question of whether or not outsourcing arrangements fall within section 197.

general rules

once established s197 applies, 1 must consider effect thereof. 4 consequences of such transfer listed in section 197(2). these principles have far-reaching implications new employer, may want restructure business , possibly retrench employees.

if new employer decides retrench employees, severance pay calculated on basis of service old , new employer determine years of service.

similarly, remuneration , benefits may linked years of service, may place financial burden on new employer.

section 197 may affect freedom of new employer apply selection criteria in cases of retrenchment. in keil v foodgro (a division of leisurenet), keil first employed macrib , foodgro, bought macrib going concern. keil employed in same position both employers. foodgro sought justify keil s selection retrenchment on basis had applied lifo, , keil s old contract substituted new 1 when foodgro bought business. court rejected argument on basis section 197 provides continuity of employment, foodgro should have taken keil s service macrib account. foodgro s selection dismissal therefore fundamentally flawed. keil awarded 9 months compensation.

the new employer expected pay sins of old employer. in numsa v success panelbeaters & service centre, employee unfairly dismissed old employer. employee challenged fairness of dismissal, labour court ordering employee reinstated. time, however, old employer had sold business going concern. court held, accordingly, new employer obliged take employee service.

there number of additional principles relating consequences of transfer.

should new employer not adhere obligations provide transferred employees @ least substantially same conditions or circumstances @ work, , should lead termination of contract employee, considered automatically unfair dismissal according sections 186 187 of lra.

exceptions

the general rule employees of old employer become employers of new employee, same terms , conditions of employment, , continuity of employment, subject number of exceptions.

section 197(3) provides new employer may provide terms , conditions of employment on whole not less favorable.

furthermore, consequences of transfer, envisaged in section 197(2), expressly subject agreement in terms of section 197(6). although employees may insist on contracts being transferred, right afforded same contractual rights must agreed upon.

regarding identity if parties, section 197(6)(a) states agreement must same bodies or persons whom employer has consult retrenchments. far employer concerned, either old or new employer may other party agreement.

any agreement interferes employees existing terms , conditions has involve employees in order valid.

in cases of retrenchment prior transfer, retrenchment substantively fair if retrenchment based on operational requirements of old employer , not of new employer.

an employee of old employer refuses adequate alternative employment new employer when faced retrenchment old employer not entitled severance pay.

only rights did accrue contractually employees prior transfer transferred. rights of employees existing @ time of transfer become obligations of new employer.

employees cannot use section 197 form of statutory bargaining insist on better terms , conditions of employment.

not benefits (especially pension benefits) provided employers. existing rights may transferred.

section 197 of lra allows transfer of employees 1 pension fund result of transfer of business if criteria in section 14 of pension funds act met.

insolvency

the term sequestration refers insolvency of individual. terms liquidation , winding-up refer insolvency of company, close corporation or other legal entity.

in past, approach has been contracts of employment between insolvent employer , employees terminate automatically. meant employees lost jobs. in respect of unpaid wages, became creditors of insolvent estate of employer. meant employer manipulate process of insolvency applying provisional liquidation rid of employees, , come kind of arrangement prospective buyer, or creditors, ensure survival or continuation of operations. employer ensure automatic termination of employment contracts without going out of business.

section 197a of lra addresses situation.

this section applies transfer of business. these terms have same meaning under section 197.

section 197a applies if old employer insolvent, or if scheme of arrangement or compromise creditors entered in order avoid winding-up or sequestration.

as general principle, effect of section 197a employees of old employer become employees of new employer; continuity of employment preserved.

these consequences subject agreement (between employees , new or old employer, or both) contrary.

other similarities between ordinary transfers , transfers in case of insolvency are:

the new employer complies obligations if takes on employees long terms , conditions of employment are, on whole, not less favourable.
subject agreement, new employer bound pre-existing arbitration awards , collective agreements.
provision made transfer of employees 1 pension fund consequence of transfer of business.
resignation of employee, faced substantially less favourable conditions , circumstances, regarded automatically unfair.

in transfers in normal course of business, however,

the rights , obligations of old employer , employees @ time of transfer remain; and
the new employer not inherit sins of old employer.

subsections 197(7) (9), regarding valuation , provision of accrued benefits, not apply transfers in cases of insolvency.