The Aviation
Union of SA & another v South African Airways (Pty) Ltd. & others
(2011) 32 ILJ (CC) 2861, a Constitutional Court ruling on section 197 of the 1995
Labour Relations Act of South Africa on business transfers, was applied and
followed shortly thereafter in the important further judgement a month later,
in Harsco Metals SA (Pty) Ltd & another v Arcelormittal SA Ltd & others
(2012) 33 ILJ 901 (Labour Court) at the end of December 2011 by Van Niekerk, J.
issues for those
involved in mergers, acquisitions, outsourcing, business
sales, going
concern transfers and business development work.
The core requirements for section 197 to apply - ''A Business'' ... how low
can you go ?
The facts in
Harsco are discussed in Article 1. In
short, during 2011, Arcelormittal SA (AMSA) called for tenders and Harsco, its
slag management services provider for 40 years lost out to two separate
competitors, Phoenix (P) and Tube City (T), respectively, who were awarded the
tenders at four plants to conduct substantially similar services, and who were
prepared to take over and employ 300 of the 445 impacted employees. About 145
employees were to be ''left behind'' with Harsco, and could lose their jobs.
Harsco was to retain its head office staff, as well as two site managers under
restraints of trade. On 23 December 2011, Harsco sought an urgent declaratory
order that this transfer of the work to P and T as from 1 January 2012 was
governed by section 197 of the LRA and that all 445 employees were to transfer
to them as incoming contract winners. Further relevant facts appear below.
The three
classic requirements for section 197 to apply.
To ground the
Harsco analysis, Judge Van Niekerk in the Labour Court interpreted and applied
the Constitutional Court's ruling in Aviation Union of SA & another v South
African Airways Ltd and another (2012) 3 BLLR 211 CC (the SAA CC judgment)
handed down just a month prior to Harsco, on 24 November. Citing the wording of
section 197(1), he stated :
To sum up: SAA
resolves the debate on whether second (and further) generation outsourcing may
in principle trigger the provisions of section 197. The court's unanimous
answer is that they may. The judgment also affirms that whether an outsourcing
[arrangement] attracts the application of section 197 is to be determined in the
same way as any other transfer. Section 197 is triggered when on the facts
[Note: our numbering added for emphasis] - (1) there is a transfer by one
employer to another, (2) in circumstances where the transferred entity is the
whole or part of a business, and (3) the business (or part of it) is
transferred as a going concern.
These questions
will be determined objectively, largely based on the terms
of the particular
business deal.
Is the
transferred entity a business?
This can of
course include the whole or a part of a service, business, trade or
undertaking, in terms of section 197(1) of the LRA.
This is a
fascinating question, given the myriad ways in which capital can be deployed,
and enterprise undertaken. The business or part of it that is the subject of a
transfer involving labour rights, will be scrutinised by the courts. The
concept of an "economic entity" has been developed under applicable
regulations in the same area in Europe. This was defined as “an organised
grouping of persons and assets facilitating the exercise of an economic
activity which pursues a specific objective” in a European Court of Justice
decision cited in Harsco.
The question is
of particular importance in South Africa, where section 197 will have little
social impact, if it does not acknowledge the vulnerability of large tracts of
relatively lowly skilled workers in gardening, maintenance, cleaning and
security services, to name a few, if ''low asset and high worker number only''
businesses are not recognised as a business under section 197. The question : a
business ? has to apply from a massive mining operation employing thousands, to
a single employee enterprise. An impacted business under section 197 will
employ at least one impacted employee in law, who is not a director or member
only.
Economic entity
or service activity?
Here, a fine
distinction develops, especially in labour intensive businesses such as
gardening, cleaning, security between an "economic entity" and a mere
"activity". An activity will often be the mere provision of services under
a specific contract, e.g. where company X, a specialised medical pathology
firm, contracts a florist to provide it weekly with flowers in 20 reception
offices where patients arrive for tests. The "economic entity" test,
Judge Van Niekerk held in Harsco, is more easily applied where a substantial
business with assets and employees is being transferred. At the opposite end,
one may encounter examples in business of the provision of only services and
nothing else, e.g. security and gardening services.
Ironically, it
is in these instances, where the idea of a business is least obvious as no or
few assets are involved, where section 197 may best come to the assistance of
workers. It is thus critical to understand when it will constitute a business
under section 197. Where only services or mainly services are involved,
Europeans Courts have recognised that regard to the transfer of tangible assets
can provide unrealistic results in business practice : its capital assets may
be of negligible significance in the overall conduct of its activities, but its
revenue flows from deployment of skills, and a business it may very well be. In
the UK, this issue led to a change to the TUPE regulations in 2006, to include
''a service provision change'' within the broader definition of a relevant
transfer.
In Harsco, Judge
Van Niekerk however held that he is bound in law on the question of what is a
business, by SAMWU & others v Rand Airport Management Co (Pty) Ltd &
others (2005) 26 ILJ 67 (LAC). There, the outsourcing of labour intensive
gardening and security functions at an airport were indeed held by the Labour
Appeal Court to be businesses capable of being transferred, despite the fact
that virtually no assets, goodwill, operational resources or workforce were to
be transferred or required by the new incoming provider. That case drew no
particular distinction between a business that is largely employee reliant, and
one that is more asset reliant (e.g. a mine).
Neither factor enjoyed greater
weight than the other in determining what ''a business'' is. He took this point
further at par. 27 in Harsco : if a group of unskilled employees, the work they
perform and no assets can, in Rand Airport, comprise a business in South
Africa, "it is difficult to conceive, in the context of an outsourcing
transaction, of an economic entity which would not be capable of transfer in
terms of the section". Harsco's slag management operations, comprising
assets and the majority of employees at four plants for AMSA, were indeed held
to be a business, i.e. an economic activity capable of being transferred to the
incoming providers under section 197. (For the assets involved, see Article 1)
This point in
Harsco underscores the myriad ways in which business transfers can occur in
reality and the potentially wide reach of section 197. Each instance will raise
particular questions to be objectively assessed on the facts, as to whether it
meets the criteria for a business as defined. As stated before, the cited
requirements for section 197 to apply, should be assessed as a whole. When it
comes to employment and protection of labour security, business and accounting
concepts may be of assistance, but this decision indicates that tests will be
more organically applied, and that labour law will develop its own criteria and
concepts, to protect the interests of workers, and service the purposes for
which section 197 was enacted in the first place.
Comment appears
elsewhere on the measures deployed by employers in their commercial contracts
to avoid the wide reach of section 197 in business deal making. [see Article 1]
