• Section 197: Has The Final Word Been Spoken?
  • November 15, 2011
  • Law Firm: Norton Rose Canada LLP - Montreal Office
  • Introduction

    The answer to the title of my paper is no, as the Constitutional Court(CC) has not delivered its judgement in Aviation of South Africa & others v South African Airways (Pty) Ltd and others as to whether second generation outsourcing transactions will attract the provisions of section 197 of the Labour Relations Act subsequent to the Supreme Court of Appeal decision that it does not.

     


    Background

    Section 197 deals with the transfer of employees when a business is transferred as a going concern and provides that “transfer” means the transfer of a business by one employer (the old employer) to another employer (the new employer) as a going concern. In NEHAWU v University of Cape Town1, the CC expressed the view that section 197 does more than just protect workers against job losses. The court stated that the section has a dual purpose in that it facilitates commercial transactions while at the same time protecting workers against job losses. It may be argued that this dual purpose is perhaps the underlying rationale for the divergent views expressed by our courts when interpreting section 197 especially in the context of second generation outsourcing transactions.

    The CC also considered the meaning of the phrase “going concern” as the phrase is not defined in the LRA. The Court held that it must be given its ordinary meaning unless the context indicates otherwise. What is transferred must be a business in operation “so that the business remains the same but in different hands.” Whether that has occurred is a matter of fact which must be determined objectively in the light of the circumstances of each transaction. In deciding whether a business has been transferred as a going concern, regard must be had to the substance and not the form of the transaction. A number of factors will be relevant to the question whether a transfer of a business as a going concern has occurred, such as the transfer or otherwise of assets both tangible and intangible, whether or not workers are taken over by the new employer, whether customers are transferred and whether or not the same business is being carried on by the new employer. What must be stressed is that this list of factors is not exhaustive and that none of them is decisive individually. They must all be considered in the overall assessment and therefore should not be considered in isolation.

    The CC held further that an agreement about the transfer of the employees was irrelevant. In fact, an express agreement that the employees would not transfer, would not prevent a transfer as a going concern. The essential question will always be whether the business remained the same but in different hands.

     

    1 [2003] 24 ILJ 95 (CC).

     


    Subsequent interpretation of section 197 by the courts

    Our courts have historically applied a literal interpretation to section 197 by restricting its application to first generation transfers (the initial transfer of a business by an employer to another, which includes an outsourcing contractor) on the basis that section 197(1)(b) defined the word “transfer” as “the transfer of a business by one employer (“the old employer”) to another employer (“the new employer”) as a going concern”. The word “by” in the literal context was said to denote that the transfer must be effected by the old employer and, if it is not effected by the old employer, it is not a transfer as contemplated in section 197(1)(b) and, therefore, does not have the consequences set out in section 197.

    In COSAWU v Zikhethele Trade (Pty) Ltd2, the Labour Court for the first time interpreted section 197 to include second generation transfers (any subsequent transfer after the initial outsourcing contract has terminated and a further outsourcing contractor is appointed). In this case, the employees that were part of a failed BEE transaction that involved the outsourcing of stevedoring and terminal services, approach the Labour Court for assistance.

    Murphy AJ ruled that a mechanical application of the literal meaning of the word “by” in section 197(1)(a) would lead to the anomaly that workers transferred as part of a first generation contracting-out transaction would be protected whereas those involved in a second generation scheme would not be. He held the view that workers in both instances were equally needful and deserving of protection. He was of the view that a purposive approach to the interpretation of the section was required in order to avoid the possibility of abuse and circumvention of the statutory protection by unscrupulous employers, and achieved this purpose by substituting the word “by” with the word “from”. So interpreted, section 197 applied to second generation outsourcing because the business is transferred from the first contractor to the second contractor.

    What does the so-called purposive approach to interpretation mean? It means no more than that a statutory provision should, if possible, be interpreted in such a fashion that it gives effect to the purpose of the statute. There are however limits to the application of this approach. In Ndima Others v Waverly Blankets Ltd3, Zondo J (as he then was) stated that a court should not disregard the wording of a section when interpreting it as this would cause the distinction between the roles of parliament and the courts to become blurred.

    Many commentators felt that Murphy AJ had stretched the wording of S197 to beyond breaking point, or in the words or Zondo J, he did not give effect to the different roles between parliament and the courts.

    In Aviation Union of South Africa and Others v South African Airways (Pty) Ltd and Others4 the Labour Court agreed with this view. SAA had outsourced services to LGM in terms of an agreement and cancelled the agreement in terms of a clause that gave it the right to do so if the control in LGM changed. SAA then invited tenders for the services. On the strength of the Zikhethele judgment, the employees contended that they would automatically transfer from LGM to the successful tenderer, but both SAA and LGM disagreed. The employees launched an urgent application, inter alia asking that LGM be interdicted from retrenching them or, alternatively, that LGM’s business would transfer to any new contractor.

    Basson J accepted that a liberal interpretation of s197, leaning in favour of protecting the rights of employees affected by the often harsh effects of a transfer, should be given. However, a court, when interpreting a statute, is enjoined to have regard to the ordinary and literal meaning of the words used in order to determine the intention of the Legislature, unless the words were ambiguous or when doing so would lead to an absurdity. She held that the wording of section 197(1)(b) was clear, and there was no need to read into the section, words that were not there. She further agreed with Murphy AJ that workers affected by a second generation transfer may well equally be in need of protection, but felt that it should be left to the legislature to extend the ambit of the section, if it deemed it advisable to do so. Since LGM had not transferred its business, the transaction did not attract the provisions of section 197.

    Aviation Union went on appeal to the LAC5 contending that the Labour Court had interpreted section 197 too narrowly. The LAC held that section 197 should apply to second generation outsourcing despite the fact that the old contractor does not transfer anything to the new contractor. One of the reasons why the LAC made this finding was that the literal interpretation of section 197 would, in the court’s view, be destructive of the purpose of the section due to the fact that an employer, who wanted to get rid of its employees, could simply outsource the business to another entity for a while and then transfer it back to itself without the employees. In order to avoid this mischief the LAC held that section 197 should not only apply when a transfer by an old employer to a new employer took place (as envisaged by the literal interpretation of s197) but also when a business was transferred from the old employer to a new employer.

    In FAWU v The Cold Chain6 , the Labour Court held that the approach to be taken in order to determine whether a transfer of a business as a going concern had taken place, was to take a snapshot of the entity before the transfer, assess its components, and to compare that with a snapshot of the business after the transfer in order to establish whether it is substantially the same business but in different hands.

    In Adam Sanders v Cell C Provider Company (Pty) Ltd and Others7 the Labour Court extended the application of section 197 even further. Cell C terminated its franchise agreements with two franchisees (‘the old franchisees’) and then entered into an agreement with a new franchisee. The court followed the snapshot approach adopted in Cold Chain and found that subsequent to the termination of the franchise agreements with the old franchisees and the entering into a franchise agreement with the new franchisee, the business had remained the same and was therefore was subject to the provisions of section 197. The contract of employment of Mr Sanders had automatically transferred to the new franchisee despite the fact that Cell C had never employed Mr Sanders.

    South African Airways went on appeal to the SCA8, which delivered its judgment on 11 January 2011. The SCA agreed with the Labour Court and overturned the decision of the Labour Appeal Court. It did soon two grounds, namely the interpretation of section 197 and the lack of evidence. I deal them in turn:

     

    2[2005] 9 BLLR 924 (LC).  
    3[1999] 6 BLLR 577 (LC).
    4[2008] 1 BLLR 20 (LC).
    5[2010] 1 BLLR 14 (LAC).
    6[2010] 1 BLLR 49 (LC).
    7[2010] 9 BLLR 973 (LC).
    8[2011] ZASCA 1 (2011).


    Interpretation

    The SCA’s reasoning was that there are boundaries to the purposive approach of interpretation.  They made the point that there is a difference between interpreting a statute to give effect to its purposes and ignoring or altering the plain wording of statutory provisions.  When the language chosen by the Legislature is clear, words have to be given their ordinary grammatical meaning in the context in which they appear in the statute. The Court stressed that it is not the function of a court to do violence to the language of a Statute and to impose its views of what the policy or object of a measure should be irrespective of the wording of the Statute. 

    The SCA held that, broken down to its essential components, s197(1)(b) has the following unambiguous meaning:

    • The word “by” identifies the old employer as the means or instrumentality for affecting the transfer of the business;
    • the definition of “transfer” identifies the entity to which the business is transferred, namely the new employer; and
    • the section then identifies the consequences of the transfer. 

    To interpret the word “by” to mean “from” not only strains the meaning of the word but also fundamentally changes the meaning of the section as a whole since it no longer requires any action on the part of the old employer.  This is not consonant with the intention of the Legislature as evinced by the ordinary meaning of the word “by”. The SCA held that the LAC had erred in adopting an approach to the interpretation of section 197 which was at odds with the ordinary meaning of the words chosen by the Legislature; and by interpreting the word “by” to mean “from” the Court impermissibly distorted the meaning of the word.

     


    Lack of evidence

    The SCA then dealt with the second ground of appeal namely that the evidence did not establish that there had been a transfer of a business as a going concern.  The SCA found that the approach of the LAC, in finding that an evidential basis did exist for finding that a transfer of a business as a going concern had occurred, was clearly wrong. 

    It held that where parties wished to enter into an outsourcing agreement, and then for the business to revert to the outsourcer or to be transferred to another provider, there had to be a clear re-transfer, demonstrated through written contracts or conduct, of all assets and obligations of the business, including the transfer of workforce rights and obligations.

     


    Conclusion

    Aviation Union has taken the SCA’s decision on appeal to the CC but to date no judgment has been handed down. The SCA’s decision that an agreement or conduct to transfer and re- transfer is a pre-requisite for section 197 to apply disregards the CC’s decision in NEHAWU. The essential question will always be whether the business remained the same but in different hands.

    The proposed amendment to section 197 seeks to replace the word “by” with the word “from” and if this if this amendment is promulgated, then the provisions of section 197 will apply to second generation transfers.

    The final word on the application section 197 to second generation transfers remains to be spoken.