This article examines the effect of section 197 of the Labour Relations Act No. 66 of 1995 as amended (the Act) on employees and employers’ rights and obligations during the transfer of a business as a “going concern”.
This article will also discuss the treatment of various types of employees during a section 197 transfer of business, namely standard employees, employees employed in terms of an outsourcing agreement and fixed term employees.
The Effect of section 197
If a business, or part thereof, is transferred to another entity or person, as a going concern, the employees of the business being transferred must be taken over by the purchaser (“the new employer”).
The scope of section 197 has been the subject of extensive case law due to the harsh penalties attached to the dismissal of an employee just before, during or after a section 197 transfer of business. Dismissing an employee for reasons relating to a transfer of business is classed as an automatically unfair dismissal which carries increased penalties.
We now turn to discuss the different types of employees and how they may be affected by a section 197 transfer.
It is often easier to determine if employees should be transferred to the new employer where these employees are ‘standard employees’ meaning that they are employed on standard terms for an indefinite time. In this case, the new employer will step into the shoes of the old employer and the employees must be employed on the same or no less favourable terms than previously. Their employment is also deemed to continue in respect of length of service, pensions and provident funds. The new employer may transfer the employee based on the last two benefits provided that the registrar is satisfied that any scheme to amalgamate or transfer funds is reasonable and equitable and the employer accords full recognition to the rights and reasonable benefit expectations of the persons concerned in terms of the fund rules and to additional benefits which have become established practice (sec 14(1)(c) of the Pension Funds Act 24 of 1956).
The position of employees who have been outsourced by a business undergoing a section 197 transfer is not conclusively decided in case law. Judgments differ depending on the relevant facts of each case and the relationship of the outsourced employees to the business being transferred.
The case of SVA Security (Pty) Limited v Makro (Pty) Limited (a division of Massmart) and Others (J720/17)  ZALCJHB 137 concerned the termination of a security service contract by a national retailer and the appointment of a new security service provider. It was held that although it was common cause that the new contractor would be rendering fundamentally the same service as its predecessor, it would be using its own equipment and there would be no transfer of assets between the two providers, meaning that the transaction was not a transfer in terms of section 197.
In TMS Group Industrial Services (Pty) Ltd t/a Vericon v Unitrans Supply Chain Solutions (Pty) Ltd & Others ((2015) 36 ILJ 197 (LAC) a third party (‘Unitrans’) was contracted to operate the warehousing and distribution functions of Nampak. When that contract expired, a new contractor (TMS) was engaged to provide the same functions to Nampak. It was held that both contractors were engaged in providing a warehouse service to Nampak and that the warehousing service, performed specifically at Nampak’s premises with its equipment, constituted a discrete business. The LAC concluded that the business of warehousing Nampak’s products was transferred as a going concern to TMS by Unitrans.
In Sisonke Partnership t/a DSV Healthcare v Medtronic South Africa (Pty) Ltd and Another (J1864/17)  ZALCJHB 329, however, the Applicant (with certain of the First Respondent’s employees) performed certain warehouse functions of the First Respondent based on a contract which the First Respondent later lawfully terminated in order to perform such functions by itself. It was held that although a discrete service was performed by a third party which ceased to be provided by that third party, with the service being taken over by another entity as with the aforementioned cases, there was no transfer in terms of section 197 as the entity taking over the rendering of the service was the client itself, being the First Respondent.
Generally, if a business transfer falls under the ambit of section 197, the outsourced contracts will be transferred to the purchaser as a normal consequence of transfer of a business as a going concern. The contracts held by the business will be transferred to the purchaser and will continue to be in effect for the contractual term.
Where a business cancels or fails to renew an outsourced agreement for a specific service, the new outsourced business may have to take over the employees of the previous business providing the service. Businesses intending to apply for an outsourced contract should consult a professional regarding whether the transfer of the outsourced agreement would constitute a section 197 transfer of business as a going concern.
Employees on Fixed Term Contracts
In Jenkin vs Khumbula Media (2010, 12 BLLR 1295) the applicant was told that his contract had lapsed after the business had changed hands twice. The Court rejected the employer’s version that the employee had been a fixed-term contractor and found that the employee had, in effect, been retrenched. It also found that on both occasions of takeover, these had been carried out as transfers as a going concern. The employer had conducted only one meeting with the employee and this one meeting was not held in good faith because the employer had not even made its intentions clear. The retrenchment was thus procedurally unfair and the employer was ordered to pay the employee eight months’ salary in compensation plus severance pay calculated on the basis of 29 years of service.
A section 197 transfer may arise from the transfer of intellectual property, contracts, goodwill, clients and any other assets, whether tangible or intangible. The list is not exhaustive. Should a transfer be found to have taken place, the buyer must then ensure the continued employment of the seller’s employees, failing which, the buyer may face claims for unfair labour practices. To avoid this, prospective business purchasers are encouraged to seek legal advice before entering such a transaction.
Written by Musa Mathebula and Charlotte Clarke