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TRANSFER OF UNDERTAKINGS NEW DEVELOPMENTS. Nicola Smit. Section 197 was a novel introduction to SA labour law in 1995 In 2002, the legislator had to amend Chapter VIII, section 197 of the LRA 66 of 1995 to make it clear that that section is capable of including outsourcing within its scope

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TRANSFER OF UNDERTAKINGS NEW DEVELOPMENTS


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    1. TRANSFER OF UNDERTAKINGSNEW DEVELOPMENTS Nicola Smit

    2. Section 197 was a novel introduction to SA labour law in 1995 In 2002, the legislator had to amend Chapter VIII, section 197 of the LRA 66 of 1995 to make it clear that that section is capable of including outsourcing within its scope 197.   Transfer of contract of employment.—(1)  In this section and in section 197A— (a) “business”includes the whole or a part of any business, trade, undertaking or service; and (b) “transfer”means the transfer of a business by one employer (“the old employer”) to another employer (“the new employer”) as a going concern. (2)  If a transfer of a business takes place, unless otherwise agreed in terms of subsection (6)— (a) the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer; … Wallis SC has written that: “The use of ‘by’ indicates that the transferor has a positive role to play in bringing about the transfers. Its replacement by the word ‘from’ eliminates … and reduces the transferor to a passive position to which it may not only not do anything to bring about the transfer but may very possibly … strenuously resist it”.

    3. Oscar Wilde - The truth is rarely pure and never simple • The labour appeal court has stated that: “… those who hold the view that sec 197 does not apply in this situation accept that it applies in the first outsourcing agreement between the outsourcer and the outsourcee if there is a transfer of a going concern but they do not accept that, when there is a further outsourcing to another party and there is a transfer of business as a going concern, sec 197 applies at that stage. In my view this proposition is destructive of the purpose(s) of sec 197, namely, to protect workers against the loss of jobs and the facilitation of a transfer when there is a transfer of business as a going concern”. (own emphasis) • Aviation Union of South Africa obo Barnes and 62 others v SAA & others (par 24).

    4. What legal protection is or should be available (to those working in mainly the services industries) in the event of a changeover of the service provider to the client or the facilitation of services to other?

    5. Requirements for a ‘relevant’ transfer • In ‘normal’ circumstances section 197 will thus apply if - • A business, trade, undertaking or service or part thereof • is transferred (by the old employer to the new employer) • as a going concern. S 197(2) consequences • Nehawu v UCT: • “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 the 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.” par 56 • The European court of justice’s test for whether or not a transfer has occurred that fall within the socpe of Directive 2001/23/EC concerns the key criterion of whether there is a transfer of an economic entity retaining its identity

    6. PE Pack 4100CC v Sanders , Cell C Provider Co & others– LAC (Franchise) Majority – Davis & Hlope • Second respondent was cell phone service providerselling airtime contracts, accessories, pre-paid starter packs, handsets and renewals to members of the public. • a business model in terms of which it develops its business on a franchise basis. Third and fourth respondents were franchise operations of the second respondent until 2nd res cancelled the franchise agreements with the third and fourth res • 2nd res then concluded a franchise agreement with the appellant • 2nd res remained the lessee of the business premises, the furniture and fittings on the business premises remained the property of 2nd res, • the stock on the business premises, which remained the property of the third and fourth respondents, was not transferred by them to the 2nd res but was removed from the business premises upon the cancellation of the franchise agreements. • Majority of court attached great importance to the nature of the ‘transfer’ transaction • Franchise contract

    7. i) Does the transaction concerned create rights and obligations that require one entity to transfer something in favour of/or for the benefit of another or to another? • (ii) If the answer to (i) is in the affirmative, does the obligationimposed within the transaction contemplate a transferor who has the obligation to effect a transfer or allow a transfer to happen and a transferee who received the transfer? • If the answer to this question is in the affirmative, then the transaction constitutes a transfer for the purposes of s 197

    8. Par 15 • The essential elements which characterize a franchise relationship are: a) granting the right to operate the franchisor’s method of business, which mainly includes licensing the use of intellectual property rights and know-how (the business package); b) selling certain types of products (distribution contract); c) the franchisee’s independence: in the franchisee’s name and on the franchisee’s behalf; d) (direct or indirect) financial remuneration for the franchisor • Par 18 • What effectively had taken place was that the license to operate a business on behalf of second respondent had been terminated by the latter, insofar as third and fourth respondents were concerned. This was not the equivalent situation to that of an outsourcing agreement. The franchisor continued to hold the core assets. They remained those of the franchisor, being second respondent, both before and after the agreement had been concluded. • There was thus no transfer of infrastructural assets which would sustain an argument that there was a transfer of a going concern. Once the core assets remained intact, that is in the ownership of the second respondent as the franchisor, it becomes difficult to see how a transfer of a business pursuant to s197(1) has taken place

    9. Dissenting: Landman (par 38-42) • The question whether the old franchisee takes anything away so as to be able to continue its business requires further comment. This aspect is important. Jafta JA in Aviation Union of South Africa v SA Airways (Pty) Ltd says: (2011) 32 ILJ 2861 (CC)) • ‘Speaking generally, a termination of a service contract and a subsequent award of it to a third party does not, in itself, constitute a transfer as envisaged in the section. In those circumstances, the service provider who contract has been terminated loses the contract but retains its business. The service provider would be free to offer the same service to other clients with its workforce still intact.’ • What does the old franchise carry away? Can he continue another business after termination of the franchise? The old franchisee cannot continue doing what it was doing prior to the termination of the franchisee. To continue he would have to obtain a franchise with another brand or operate independently ie differently to the way it operated before as a franchisee. This distinguishes it from the situation with which Jafta J was dealing. • [42]  This leads me to conclude that a stable economic entity changes hands when a franchise is terminated. It reverts to the franchisor.

    10. Harsco Metals SA (Pty) Ltd & another v Arcelormittal SA Ltd & others (2012) 33 ILJ 901 (LC) • The applicant, Harsco, had provided slag management and processing services to AMSA, at several sites in South Africa for 40 years. • In early 2011 AMSA called for tenders for the services. Harsco was unsuccessful in its bid to renew all its service agreements with AMSA. • The second and third respondents, Phoenix and Tube City, were awarded the tenders at most operations, and Harsco was retained to continue operations at the other plants for a limited period to ensure a seamless transfer of those operations to Phoenix and Tube City at a later date. • The new service agreements were to come into operation on 1 January 2012. Both Phoenix and Tube City were willing to employ the majority of the Harsco employees at their operations • AMSA contended that, as the initial transaction 40 years earlier did not involve the transfer of a business as a going concern from AMSA to Harsco and was simply a contracting out of services to Harsco, the cancellation of the service contracts did not attract the application of s 197 • Van Niekerk J observed that the judgment of the Constitutional Court in Aviation Union of SA (2011) 32 ILJ 2861 (CC) clarified the meaning of s 197(1) and the circumstances in which it will apply, and was central to the determination of the application or otherwise of s 197 in the present matter • It affirmed that whether an outsourcing attracts the application of s 197 is to be determined in the same way as any other transfer

    11. The purpose of s 197, which is to ensure both continuity of employment within an economic entity irrespective of any change in ownership, and to facilitate the smooth transfer of businesses as going concerns • The court was satisfied that, as at least some of Harsco's assets and the majority of its employees would be transferred to Phoenix and Tube City, there was a 'transfer' for the purposes of s 197 • there was an economic entity capable of being transferred, in the form of Harsco's business operations conducted pursuant to the service agreements it had concluded with AMSA, and this comprised a 'business' for the purposes of s 197 • 197 does not define what is meant by a transfer of a business 'as a going concern', the courts have provided a number of factors that are relevant in determining the issue. The decisive criterion is whether, after the transfer, the undertaking retains its identity • the nature of the business is a primary consideration as, in most instances, this will provide a useful indication of the weight to be attached particularly to the transfer of assets and whether any workers are taken over by the new employer, and if so, the number and significance of each • the majority of Harsco's employees would be taken over by Phoenix and Tube City; that certain assets of Harsco would be sold to AMSA and ultimately be made available to Phoenix and Tube City; that AMSA was and would remain the only recipient of services after the transfer; that Phoenix and Tube City would perform substantially similar services to those performed by Harsco at the same locations using the same operational methods, and was satisfied that there existed an economic entity which, despite changes, remained identifiable, though not necessarily identical, after the transfer.

    12. Franmann Services (Pty) Ltd v Simba (Pty) Ltd & another (2013) 34 ILJ 897 (LC) • Van Niekerk J held that whether there has been a transfer of a business as a going concern for the purposes of s 197 is a matter of fact, to be determined objectively • When determining whether a business (including a service) has been transferred as a going concern, all of the components of the transferring entity must change hands so that the entity is essentially the same after the transfer. • Applicant TES had supplied labour to the first respondent company since 2000. The applicant wished to discontinue the business of labour broking and did not tender for a new contract, which was awarded to the second respondent with effect from 1 September 2012. The applicant applied to the Labour Court for an urgent order declaring that the employees currently engaged in providing services to the company be transferred in terms of s 197 of the LRA 1995 to the company or the new service provider appointed by the company • Generally, the termination of a contract between a client and a service provider is not in itself a transfer of a business as a going concern • Applicant had decided to discontinue business. Its business would therefore terminate and would not be capable of being continued • Furthermore, no assets, goodwill and the like were to be transferred to the second respondent and it had no intention to utilize any of the processes instituted by the applicant. In addition, there was no evidence that the company or the second respondent would offer employment to any of the applicant's employees • No transfer of a business as a going concern

    13. Ngema & others v Screenex Wire Weaving Manufacturers (Pty) Ltd & another (2013) 34 ILJ 1470 (LAC) • Where employees were dismissed before transferring of the business as going concern and subsequently reinstated such employees seeking to enforce such order must do so against new employer • Section 197(2)(a) of LRA 1995 = New employer assumes liability for all actions done by old employer in relation to employees • Employees seeking to enforce order for reinstatement must do so against new employer • New employer cannot be substituted for old employer after judgment handed down • Employees or old employer should have made that application at time matter was before court • New employer should have been joined before judgment handed down.

    14. Welch v Kulu Motors Kenilworth (Pty) Ltd & others (2013) 34 ILJ 1804 (LC) • The founder (JW) of Kulu Motors Rugby (KMR) employed the applicant, his son, at KMR until 2001. Father and son did not work well together, and JW decided to establish another business, Kulu Motors Kenilworth (KMK), so that the two would not have to work together on a day-to-day basis. • The applicant was appointed managing director of KMK and held 40% of the shares in KMK. • JW was also a director, and the remaining 60% of the shares were held by a family trust. • Under the son’s management, KMK suffered substantial losses for several years. Late 2010 both the auditors and the bank had expressed concern to JW about the precarious financial position of the business and the risk of potential liability to the directors. • JW decided to close KMK and terminated his son’s employment with effect from 28 February 2011. • KMK's premises were leased to a third party and all its stock was taken over by KMR. KMR also took over most of the KMK's employees and all post-sale obligations to KMK's customers • Welch approached the Court for compensation, contending that the business of KMK had transferred as a going concern to KMR and that his dismissal was automatically unfair because it was for a reason related to the transfer.

    15. Van Niekerk J was satisfied that: • “the closure of KMK and the assumption by KMR of most of KMK's employees, the purchase and transfer of certain of KMK's assets, the assumption by KMR of certain of KMK's obligations to third parties and the continuation of the same business from KMR, assessed holistically, constituted the transfer of a business as a going concern and thus triggered the application of s 197” • Whether the reason for the applicant's dismissal was the transfer or a reason related to it was an issue of causation • Rely on Van der Velde v Business & Design Software (Pty) Ltd & another (2006) 27 ILJ 1738 (LC) • In casu = close proximity of date requires KMK to show true operational requirements • KMK was in effect trading in insolvent circumstances • Concerned about the liability of the directors of the company • decided to close KMK and gave instructions for a s 189(3) letter • In short: there was nothing improper or unreasonable in the step eventually taken by John Welch in January 2011, which resulted in the closure of KMK.

    16. ‘The applicant must prove the existence of a dismissal and establish that the underlying transaction is one that falls within the ambit of s 197. • The applicant must adduce some credible evidence that shows that the dismissal is causally connected to the transfer. • This is an objective enquiry, to be conducted by reference to all of the relevant facts and circumstances. • The proximity of the dismissal to the date of the transfer is a relevant but not determinative factor in this preliminary enquiry. • If the applicant succeeds in discharging these evidentiary burdens, the employer must establish the true reason for dismissal, being a reason that is not automatically unfair. • When the employer relies on a fair reason related to its operational requirements (or indeed any other potentially fair reason) as the true reason for dismissal, the court must apply the two-stage test of factual and legal causation to determine whether the true reason for dismissal was the transfer itself, or a reason related to the employer's operational requirements. • The test for factual causation = "but for" test — would the dismissal have taken place but for the transfer? • If the test for factual causation is satisfied, the test for legal causation must be applied. • Legal causation = the court must determine whether the transfer is the main, dominant, approximate or most likely cause of the dismissal. • This is an objective enquiry. The employer's motive for the dismissal, and how long before or after the transfer the employee was dismissed, are relevant but not determinative factors.

    17. If the reason for dismissal are not the transfer itself (because, e.g., it was a dismissal effected in anticipation of a transfer and in response to the requirements of a potential purchaser of the business) the true reason may nonetheless be a reason related to the transfer. • To answer this question (whether the reason related to the transfer) the court must determine whether the dismissal was used by the employer as a means to avoid its obligations under s 197. • This is an objective test, which requires the court to evaluate any evidence adduced by the employer that the true reason for dismissal is one related to its operational requirements, and where the employer's motive for the dismissal is only one of the factors that must be considered • If in this sense the employer used the dismissal to avoid its s 197 obligations, then the dismissal was related to the transfer. • If not, the reason for dismissal relates to the employer's operational requirements, and • the court must apply s 188 read with s 189 to determine the fairness of the dismissal.'

    18. Grinpal Energy Management Services (Pty) Ltd v City Power Johannesburg (Pty) Ltd & others (2013) 34 ILJ 905 (LC) • In 2003 the applicant company entered into two service agreements with the first respondent, City Power, in terms of which it supplied, installed, operated and maintained the pre-paid electricity network to households in Alexandra Township. In March 2012 City Power notified the company that it was cancelling the service agreements • City Power notified that company that, as from 1 August 2012, it would introduce interim measures to be applied until a new contractor was appointed • City Power submitted that scrutiny of the initial transaction between the parties indicated that it had not offered the service from the outset and that it had never been part of the business of City Power • Rabkin-Naicker J found that there was no general rule that, if there was no s 197 transfer from the outsourcing party to the first contractor, there could never be a subsequent transfer from the first contractor to a second or subsequent contractor, regardless of the facts and the nature of the transaction • because of the nature of the service performed, there had to be a degree of cooperation between the old service provider and the new service provider and that City Power itself would be involved in a 'holding operation' until the arrangements with the new service provider were finalized • Organ of state not exempted

    19. Transport & Allied Workers Union of SA V Transnet (Pty) Ltd & others (2014) 35 ILJ 526 (LC) • Provision of public transport service by municipality is an obligation that must be delegated to public transport operator— • Municipality prohibited from providing service itself • Public transport operator an 'agent' undertaking provision of service on behalf of municipality • Cele J held it was not 'business' as contemplated in s 197 • Public transport operator terminating contract, retrenching its employees and ceasing operations • No business capable of transfer and no employees whose contracts could be automatically transferred when operator ceased operations • No transfer of business as contemplated in s 197 of LRA 1995.

    20. TMS GROUP INDUSTRIAL SERVICES(PTY) LTD T/A VERICON • Van Niekerk J held that the termination of a warehousing agreement between first and third respondent and the conclusion of an agreement for the provision of similar services between third respondent and appellant constituted a transfer of an undertaking as contemplated in s 197 of the Labour Relations Act 66 of 1995 (LRA). • Pursuant to this finding, the court a quo held that the employment contracts certain employees, who were employed by second respondent, transferred automatically to appellant with effect from the date of transfer, being 1 February 2014 • First respondent was providing supply chain solutions for clients, in effect, the management of the “end to end” movements of goods • Third respondent conducts a business as a manufacturer of a wide range of glass products. These glass products are stored on site in warehouses to await dispatch to the customers of third respondent. • In 2007, third respondent changed its method of business by outsourcing the warehousing service. To this effect, first and third respondents concluded a warehousing agreement which commenced on 1 February 2011 and was terminated by the effuxion of time on 31 January 2014. • The staff, who were employed to discharge first respondent’s obligations under the warehousing agreement, from May 2011 were employed by second respondent, a wholly owned subsidiary of first respondent, forming part of a specialised goods business unit within the first respondent; that is a business unit which specialised in providing management warehousing services to clients.

    21. LAC – Davis JA • Appellant claims that when it began to perform services on behalf of third respondent it did not take over “in any manner, whatsoever, any person previously employed by the Applicants or the First Respondent nor any assets whether fixed, movable, corporeal or incorporeal, goodwill or intellectual property from neither the Applicants or the First Respondent”. • Par 8 ‘Hence it contends there is an inadequate evidential basis for the finding that s 197 of the LRA is applicable to it.’ • A quo found that “The services rendered by appellant and the assets used in the performance of these services were substantially the same as those which had been utilised by the first respondent in the performance of its obligations until the termination of its contract with third respondent on 31 January 2014” • could only have been performed at the production facility of third respondent, at the same site and within the same premises • ‘The warehousing service provided by the first applicant to Nampak constituted an economic entity, or, put another way, an organized grouping of resources. This comprises, at least, the contractual right to perform the services, the assets owned by Nampak but used by the affected employees, the specific activities, performed by the affected employees and the employees themselves. This economic entity constitutes a service for the purposes of s 197 (1). • Aviation: ‘For a transfer to be established there must be components of the original business which are transferred onto a third party. These may be in a form of assets or the taking over of workers who are assigned to provide the service.’

    22. Appellant’s case (paras 12 et seq) • it concluded an agreement with third respondent concerning a provision of warehousing and auditing services and that it commenced providing these services with effect from 12 February 2014, no written agreement had been entered into between the parties. All material terms relating to pricing and costing had not yet been agreed and indeed the negotiations concerning these terms had been suspended as a result of the litigation which had given rise to this appeal. • while first respondent had been a party to a contract to provide services to third respondent, second respondent alone was the employer of fourth and further respondents; hence s 197 could not apply even if a business was transferred from first respondent to appellant • Relied on the case of Betts v Brintel Helicopters Limited [1997] ICR 792 (CA) • submitted that the mere fact that the service provided by the old and new contractors could be considered to be similar, on its own and without more did not justify the conclusion that there had been a transfer of an economic entity pursuant to s197 of the LRA • National Education Health and Allied Workers Union v University of Cape Town and Others (CC) • In distinguishing between a business and the provisions of a service, the Constitutional Court in Aviation Union SA had said: ‘It must be emphasised that what is capable of being transferred is the business that supplies service and not the service itself. Were it to be otherwise, a termination of a service contract by one party and its subsequent appointment of another service provider would constitute a transfer within the contemplation of the section that is not what the section was designed to achieve as apparent from its scheme, historical context and its purpose

    23. Par 27: ‘The indicated approach is thus not to apply s 197 section in a literal or formalistic fashion but rather to enquire into the substance of the transaction in question.’ • In this case, the service which was provided was that of warehousing. It was initially provided to third respondent by first respondent. • Warehouse operation services constituted a discrete business • At the date of the inception of its agreement with third respondent, appellant assumed the right to use third respondent’s assets and infrastructure in order to continue to provide the same service to third respondent as it had previously been provided by first respondent • Thus, the services are “performed at the very same site and fixed premises as the services that were performed by Unitrans in terms of the Warehousing agreement.” Appellant was required to make use of the same equipment and IT systems that were previously employed by first respondent including forklifts, computers, printers, a computer system as well as other assets such as furniture. • VAT legislation also uses notion of “going concern” NZ case – “the meaning of going concern: “The activity must be one which is handed over to the transferee in such a state that it may be carried on by the transferee if he so wishes” • The undisputed evidence clearly indicates that the real employer in this case, prior to the termination of the agreement with third respondent, was first respondent

    24. Thank you