The core requirements for section 197 to apply.
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.
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.
Below we
continue our series of notes and articles on important practical issues for
those involved in mergers, acquisitions, outsourcing, business sales, going
concern transfers and business development work.
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 (earlier to Iscor) 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.
P and T made offers of employment to, and were prepared to 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.
AMSA was the
only recipient of services, and hence no customers were to transfer in the deal.
As for the
assets, the following were to transpire : Intangible assets : Harsco would
retain its goodwill, intellectual property and patents, and its operational
methodologies. Tangible Assets in the form of processing and screening and
recovery plant: This was the source of much debate in the case, but P and T
were to take no transfer of plant. Harsco did not make important parts of the
recovery and processing plants available for purchase, and indicated that much
of the plant will be decommissioned and hence the new providers would have to commission
new plant and had to invest capital of R 500 million, amongst others, for this
purpose.
Moveable
tangible assets: there was a dispute on the facts, but AMSA claimed that Harsco
retained important movable assets critical to the operation of the services.
However, about 32.5% of the counted movable assets deployed by Harsco at AMSA,
and 54% of the total NBV of Harsco's assets were to transfer to AMSA. AMSA was
to purchase 92 assets, of which it would retain 30 and dispose of 16 to P and
46 to T. In total, 22% of Harsco's assets were to end up taken over by the P or
T.
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 will appear below.
Do these figures
ad up to form the picture of a transfer under section 197?
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.
A Transfer?
We deal here
with the first requirement : was there a transfer?
In so doing, we
acknowledge that these are three entangled requirements under section 197,
which cannot be clinically sealed off from one another. [See other comments in this series on Harsco
and SAA CC : insert two links here - Harsco summary Article No ...... and
Business : Article No ....]
Something must
transfer, for a matter to fall under section 197, and that must not be
insignificant or trivial. The test is both quantitative and qualitative, and
will be determined objectively, largely based on the facts and terms of the
particular business deal. It cannot be separated from the nature of the
business, as each type of business will present the acquirer with different
assets and property possibly to be transferred (or not).
Some commercial
transactions remain no more than the termination of a contract, and in such
event nothing may transfer, as the outgoing provider simply packs its bags (of
assets and equipment !) and leave to do business with another. Examples which
may not fall under a transfer here, are the termination of a simple service
contract for florist services in 20 client reception sites, or the termination
of a rental agreement for three employee transport buses.
What must be
searched for, is if components of the business would pass to the third party,
particularly in the form of plant, assets in any form, licences, or workers
(often possessing specific skills or competencies needed by the client). In an
unskilled or low-level skills service, there may be no such employee
requirement at all, on the part of the client or the incoming provider.
By contrast, in
a high level skills service, e.g. banking security IT services, the very names
of the expert employees who are critical for the deal to go through, may be
specified, and without them, no deal may be struck. In this area, anything is
possible in business, and the labour court addressing this question, will
derive its clues from the terms of the parties' contracts and deal context. In
Harsco, answering this question proved to a hefty quantitative exercise. All
assets involved were identified to present the court with an overall picture of
what was to remain behind and what was to transfer. As stated, P and T were not
to take transfer of the plant, but of movables, and the Harsco judge held that
these transferring assets were indeed not insignificant. AMSA failed in qualitative arguments on the
significance of the transferred assets in the overall business picture.
The transfer
need not occur directly or contractually between the incoming and outgoing
entities. In Harsco, the court found help in COSAWU v Zikhethele Trade (Pty)
Ltd (2005) 26 ILJ 1056 (LC) which in turn relied on a UK Tribunal ruling, that
it is irrelevant that no contractual link existed between Harsco and P or T.
After all, they were competitors and the tender deal was driven by AMSA, the
client. The objective terms showed that both assets and employees were required
to transfer and would end up with P or T. In this, AMSA, the client with an
interest in the on-going service, played the facilitative role, as is often the
case.
It would appear
that offers of employment were made by P or T, and accepted by the 300 lucky
Harsco's employees, but no agreement on a section 197 transfer for these 300
employees were struck (par. 37). The fact of the need for these employees were
however a key business component, supporting the view that a transfer is
occurring. After all, in many businesses zero need for any ''old'' employees
may be expressed (e.g. a security contract) on the part of the incoming
provider, nor will any assets likely transfer in such a contract.
The court held
that the fact the some of Harsco's assets and the majority of its employees
will move the P or T or AMSA, was adequate to constitute a transfer under
section 197. The first hurdle was cleared by Harsco.
Other
requirements of section 197 are discussed in this series on
Harsco and SAA CC.
