Aviation Union of SA & others v SAA (Pty) Ltd & others LAC case no: JA 51/07 dated 9 October 2009
Section 197 of the LRA is intended to protect employees whose security of employment and rights are in jeopardy as result of business transfers. A mechanical application of the literal meaning of the word ‘by’ in s197 (1)(b) would lead to the anomaly that workers transferred as part of ‘first generation’ contracting-out would be protected whereas those of the ‘second generation’ scheme would not be, when both are equally needful and deserving of the protection.
SAA concluded a collective agreement with three trade unions in terms of which its infrastructure and support services departments were transferred to LGM. Shortly thereafter, a further agreement for the outsourcing of the infrastructure and support services was concluded between LGM and SAA.
The agreement provided that the contracts of employees would be transferred to LGM in terms of s 197 of the LRA. Assets and inventory of SAA relating to the transferred services were sold to LGM and, on termination of the outsourcing agreement, SAA was entitled to repurchase the assets and inventory of LGM. Of critical importance to the dispute was a provision in the agreement that SAA retained a right to transfer certain services and all functions to itself or to a third party and to obtain transfer or assignment of LGM to SAA of all third party contracts.
During 2007 there was change of ownership of LGM. On this basis, SAA considered that it was entitled to cancel the agreement which included change of control as a ground for cancellation.
In August 2007 SAA called for tenders for various services performed by LGM in terms of this outsourcing agreement. There was some suggestion by SAA that it intended to extend the outsourcing agreement until January 2008, but LGM declined to accept this offer. SAA called on LGM to develop and implement the hand-over plan in terms of the outsourcing agreement. It also adopted the stance that it had no obligation towards the staff of LGM who had been engaged in the services provided pursuant to the agreement.
SAA then advertised tenders for the various services which had been performed by LGM. Of particular importance was the following provision of the tender agreement: “SAA currently uses the services of an establishment service provider whose contract with SAA is coming to an end soon.&rdquo
On 7 September 2007, the union and each of the individual applicants received a letter from LGM advising of possible retrenchments in the light of SAA’s cancellation of the agreement. The 62 individual applicants were all either transferred in terms of the agreement or subsequently employed by LGM, and were all engaged in the services provided by LGM in terms of the agreement.
At a meeting between representatives of union and LGM on 10 September 2007, the management of LGM informed these representatives that the last working day for LGM would be 30 September 2007; LGM would not render further services to SAA after that date. LGM had obtained advice from senior counsel which indicated that the current position could constitute a transfer in terms of section 197 of LRA and accordingly, LGM had applied to the CCMA for the appointment of a facilitator in terms of section 189A of the LRA.
On 14 September 2007, partly in an effort to obtain certainty about the employment status of the employees as from 1 October 2007, and partly to obtain a commitment from SAA to assume responsibility for the transfer of the contracts of these employees, the union wrote to the CEO of SAA requesting it to confirm that the employees would be transferred back to SAA as at 1 October 2007 (because only an interim service provider had been appointed) and that they should report for duty on that date. SAA indicated that it was not prepared to make any such undertaking, nor did it regard itself obliged to do so under the law.
The question which arose in this case was whether there can be a s 197 transfer between the unsuccessful outgoing contractor and the successful incoming contractor? Does this ‘second outsourcing’ constitute a transfer as contemplated by section 197 of the LRA?
Extract from the judgment:  This is an appeal against a decision of Basson J in which she dismissed an urgent application brought by appellant and its members against first respondent together with second and third respondents.
 The application sought to compel respondents to comply with provisions of section 197 of the Labour Relations Act 66 of 1995 (‘the LRA’) as a result of first respondent’s early termination of an outsourcing agreement with second and third respondents (LGM) under which the latter had rendered a variety of services to first respondent.
The relief sought was of the following nature:
- A declaration by the court a quo that the termination of the outsourcing agreement or SAA’s resumption of part or all of the undertaking or services previously conducted by LGM had gave rise to a section 197 transfer of those operations to SAA.
- Alternatively, AUSA sought a declaration that if SAA awarded specific tenders to third parties, such an award would constitute a transfer of part or all of the undertaking or services previously conducted by LGM for SAA to the new contractor.
- A declaration by the court that if the employment contracts of the individual appellants were not transferred in terms of the provisions of section 197, then if they were dismissed by LGM in consequence of the transfer of part or all of the undertaking or services previously provided by LGM to SAA, resulting from SAA’s termination of the outsourcing agreement with LGM, such dismissals would be automatically unfair and in breach of section 187(1)(g) of the LRA, AUSA likewise sought to interdict such dismissals on the basis of such a declaration.
- AUSA sought an interdict restraining SAA from providing any of the services previously provided to it by LGM, by itself or permitting a third party to provide them unless the individual appellants were transferred to the new provider of those services, be it SAA itself, or a third party.
The factual matrix
 In March 2000, SAA concluded a collective agreement with first appellant and two other unions in terms of which its infrastructure and support services departments were transferred to LGM. Shortly thereafter, a further agreement for the outsourcing of the infrastructure and support services was concluded between LGM and SAA. The agreement provided inter alia that LGM would perform these services until 2010 with the first respondent obtaining an option to renew for a further five years, and that the contract of effected employees would be transferred to LGM pursuant to section 197 of the LRA.
 Briefly the following terms of this agreement were material:
- The agreement took effect 1 April 2000 and would expire at midnight on 31 March 2010.
- SAA retained an option of renewing their agreement for a further five years from the date of the initial expiry of the agreement.
- Assets and inventory of SAA as pertaining to the transferred services were sold to LGM and, on termination of the outsourcing agreement, SAA would be entitled to repurchase the assets and inventory of LGM dedicated to providing the services under the agreement.
- LGM and SAA agreed that transferred employees were deemed to have been employed by LGM in terms of section 197(1)(a) and 197(2) (a) of LRA.
- LGM was afforded the access which was reasonably required to render the services to use the office space, workshops, the airport apron, computers and the network of SAA at all designated airports.
- Of critical importance to the present dispute was a provision in the agreement (clause 27) that SAA retained a right to transfer certain services and all functions to itself or to a third party and to obtain transfer or assignment of LGM to SAA of all third party contracts. The complete clause reads thus:
27.1. On the termination date- In August 2007 SAA generated advertisements calling for tenders for various services performed by LGM in terms of this outsourcing agreement. There was some suggestion by SAA that it intended to extend the outsourcing agreement until January 2008, but LGM declined to accept this offer. In a letter of 17 August 2007, SAA called on LGM to develop and implement the hand over plan in terms of the outsourcing agreement. It also adopted the stance that it had no obligation towards the staff of LGM who had been engaged in the services provided pursuant to the agreement.
27.1.1. should SAA desire LGM SA’s assistance in transferring certain services and/or functions back to SAA. SAA’s affiliates or to a third party, SAA and LGM SA may agree in writing upon a period of transfer assistance ending at termination date. LGM SA shall furthermore, during such transfer assistance period, provide SAA with reasonable access to the services, Fixed Assets and inventory of LGM SA provided that such agreement is reached in writing and provided that any such access does not and will not interfere with LGM SA ability to provide the services or transfer assistance and that the third parties and SAA affiliates permitted such access comply with LGM SA security and confidentiality requirements, including execution of an appropriate confidentiality agreement;27.2. Upon termination of this agreement both parties shall be obliged to surrender any information pertaining to the scope of work belonging to the other party.”
27.1.2. SAA shall be entitled to purchase, at fair market value, all fixed assts and inventory belonging to LGM SA and dedicated only to providing the services in terms of this agreement;
27.1.3. SAA shall be entitle to obtain transfer or assignment from LGM SA of all third party contracts
 The 62 individual applicants were all either transferred in terms of the agreement in 2002 or subsequently employed by LGM, and were all engaged in the services provided by LGM in terms of the agreement.
 During 2007 there was change of ownership of LGM. On this basis, SAA considered that it was entitled to cancel the agreement in terms of clause 26.1.2 thereof, which included change of control as a ground for cancellation .On 29 June 2007 it duly elected to so cancel the agreement, thereby invoking the provisions of clause 27.
 SAA then advertised tenders for the various services which had been performed by LGM. Of particular importance was the following provision of the tender agreement:
“1. BACKGROUND TO PROJECT The closing date for the tenders was 30 September 2007 but, at the hearing before the court a quo, SAA stated that it only anticipated completion of the tender process by the middle of November 2007.
SAA currently uses the services of an establishment service provider whose contract with SAA is coming to an end soon. This service requirement entails the maintenance of all SAA occupied buildings for the specified period. The company is in pursuit of service excellence and cost competitiveness from a service provider with a proven track record. It is against this brief background that interested and capable bidders are invited.”
 Although not stated in the papers before the court a quo, counsel for SAA informed the court at the hearing that a temporary service provider have been appointed to provide the relevant services pending the outcome of the tender process. On 7 September 2007, first respondent and each of the individual appellants received a letter from LGM advising of possible retrenchments in the light of SAA’s cancellation on the agreement of 30 June 2007, to take effect as of 30 September 2007.
 At a meeting between representatives of first appellant and LGM on 10 September 2007, the management of LGM informed these representatives that the last working day for LGM would be 30 September 2007; LGM would not render further services to SAA after that date. LGM had obtained advice from senior counsel which indicated that the current position could constitute a transfer in terms of section 197 of LRA and accordingly, LGM had applied to the CCMA for the appointment of a facilitator in terms of section 189A of the LRA.
 On 14 September 2007, partly in an effort to obtain certainty about the employment status of these individual appellants as from 1 October 2007, and partly to obtain a commitment from SAA to assume responsibility for the transfer of the contracts of these individual appellants, first appellant wrote to the Chief Executive Officer of SAA requesting it to confirm that the employees would be transferred back to SAA as at 1 October 2007 and that they should report for duty on that date. Initially SAA denied receipt of this letter but it finally responded on 19 September 2007, in terms whereby it indicated that it was not prepared to make any such undertaking, nor did it regard itself obliged to do so under the law.
 Basson J correctly framed the key question for resolution of the present dispute as follows:
“The question which arises is whether there can be a section 197 transfer between the unsuccessful outgoing contractor and the successful incoming contractor? Put differently, the question which arises is whether this ‘second outsourcing’ constitutes a transfer as contemplated by section 197 of the LRA.” Basson J then determined the case by way of an interpretation of section 197: Notwithstanding a dispute as to whether SAA’s appointment of a temporary service provider which provided the relevant services pending the outcome of the tender process had changed the legal position, Basson J accepted the point made by SAA’s counsel that it had already appointed an interim service provider, pending the outcome of the tender process. Thus the court stated:
“I am of the view that section 197 only contemplates a first generation outsourcing. In other words, where the businesses transferred by the old employer to the new employer and not the so called second generation transfers.”
On the basis of this interpretation, the court a quo held that section 197 was not applicable to the present case. The learned judge then found:
“It is common cause that no agreement exists between SAA and LGM back to SAA. This much is clear from the facts: SAA has terminated the outsourcing contract and has made it perfectly clear that it does not want the employees of LGM. The contract also does not make provision for the scenario that once the contract is terminated, employees of LGM (the service provider) will be transferred back to SAA (the old clear that it does not want to employ the employees. There is also no indication on the papers that the services have reverted back to SAA. In light of the aforegoing I am of the view that LGM remains the employer vis-à-vis SAA”.
‘this court can therefore, not conclude on the facts that a transfer back to SAA has or would take place on this basis’. Accordingly, ‘it would in my view, be untenable to order that the workers transfer to the interim service provider only to transfer thereafter to the successful bidder’.The appeal
 Two separate questions emerged for determination at the appeal. In the first place, an application was brought by first respondent in terms of section 174 (1) of the LRA for the hearing of further evidence. Secondly, appellants contended that the court a quo erred in its narrow interpretation of section 197 of the LRA. It is to the application under section 174 of the LRA that I first turn.
 Section 174 (a) of the LRA provides thus:
“The Labour Appeal Court has the power- In terms of this section, SAA applied to lead the additional evidence set out in the supporting affidavit deposed to by Louisa Zondo, general legal counsel for SAA, whose evidence concerned the payment of severance pay to LGM employees on 30 November 2007 and appellant’s acceptance of the termination of their contracts of employment by virtue of a retrenchment process which had been engaged in between themselves and LGM.
- on the hearing of an appeal to receive further evidence, either orally or by deposition before a person appointed by the Labour Appeal Court, or to remit the case to the Labour Court for further hearing, with such instructions as regards the taking of further evidence or otherwise as the Labour Appeal Court considers necessary…”
 Ms Nkosi-Thomas, who appeared on behalf of first respondent, submitted that, as a result of their actions, appellants had elected to accept the termination of their contracts of employment with LGM by way of a retrenchment process and it was therefore non-suited in the appeal. In her view, appellants could not, on the one hand, accept severance packages from LGM, thereby conceding to the fact that the latter continued to be their employer during the period subsequent to 1 October 2007, and simultaneously contend in this appeal that the contracts of employment failed to be transferred either to an interim service provider, to first respondent or to a permanent service provider duly appointed by first respondent. Accordingly, appellants had waived any rights that they may have wished to vindicate in this appeal. The evidence which first respondent wished to place before this court concerned events which occurred subsequent to the matter being heard before the court a quo. In terms of section 197(2) of the LRA, a new employer is ‘automatically substituted in the place of the old employer’ ; in other words, upon a transfer of a business as a growing concern as contemplated in section 197(1)(a) employees are transferred by law to the new employer; Nehawu v The University of Cape Town and others 2003 (2) BCLR 154 CC at para 71. Thus, had Basson J found that the appellants were entitled to an order declaring that the determination of the outsourcing agreement between SAA and LGM , with effect from 30 September 2007 ,constituted a transfer of the undertaking of the services provided to SAA by LGM in terms of section 197 of the LRA, appellants would have been automatically transferred to a new employer in substitution of their old employer, LGM. Expressed differently, if this court decides that the court a quo erred and that the order should have been granted, it would mean that the appellants would no longer be in the employ of LGM after 30 September 2007, rendering any agreement between them and, what would then be ‘their non- existent’ employer LGM ,irrelevant to the present dispute. For these reasons therefore, any evidence which first respondent wished to place before this court in terms of its application under section 174 of the LRA is not relevant to the present appeal and the application stands to be dismissed.
The application of section 197 of the LRA: The merits of the appeal
 Section 197 (1) and (2) provide as follows:
“s197 Transfer of contract of employment in this section and in section 197A-The facts in this case raised the following key question relating to the meaning and scope of section 197 which required determination insofar as the merits of the appeal was concerned: does section 197 of the LRA cover so called second generation transfers? If the section can be interpreted to extend to such transfers, then the reversion to SAA of the outsourced services which had been undertaken by LGM pursuant to the agreement of March 2000 fell within the scope of this section.
- ‘business’ includes the whole or part of any business, trade, undertaking or service; and
- ‘transfer’ means the transfer of a business by one employer (‘the old employer’) to another employer (‘the new employer’) as a going concern.
- If a transfer of a business takes place, unless otherwise agreed in terms of subsection (6)-
- 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;
- all the rights and obligations between the old employer and an employee at the time of the transfer continue in force as if they had been rights and obligations between the new employer and the employee;
- anything done before the transfer by or in relation to the old employer, including dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination , is considered to have been done by or in relation to the new employer; and
- the transfer does not interrupt an employee’s continuity of employment, and an employee’s contract of employment continues with the new employer as if with the old employer. “
 As noted above, the court a quo decided this question in the negative. In particular, Basson J relied on the following wording of section 197(1)(b) of the Act which defines the word ‘transfer’ to mean ‘the transfer of business from one employer to another employer as a going concern’. Basson J concluded:
“I am not persuaded that, in light of the expressed and unambiguous wording of section 197 (1)(b), that it would be appropriate to interpret section 197 (1) to also apply to a transfer “from” one employer to another as opposed to a transfer by the “old” employer to the “new” employer.” The court a quo held that, in the case of LGM and SAA, the following considerations were to be applied in determining whether there was a transfer of an undertaking from LGM to SAA which would occur once the initial outsourcing agreement had been terminated:
Therefore, in her view, the wording of this section did not support the arguments contended for by the appellants, who thus did not stand to be protected by s197.
- There was no agreement between LGM and SAA requiring SAA to retransfer employees from LGM to SAA. SAA had made it plain it did not want LGM employees.
- Outsourcing agreement made no provision for a reversion of LGM employees to SAA.
- There was no indication that the services had reverted back to SAA.
“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 to resist it.”Shorter Oxford English Dictionary Volume 1.
Thus, Wallis contends that, given that the purpose of section 197 was to balance and protect the interests of both the employee and the employer, it was reasonable for the legislature to have limited the scope of this section to those transfers where two parties decide to bring about a change in ownership of a business (as defined) by whatever means but, not to extend the section to remote situations as would occur in the case of a second generation transfer. The word “by” holds a number of different meanings including ‘indicating the medium, means, instrumental or agency, of circumstance, condition, manner, cause, reason’ .
 An examination of the multiple meanings of the word “by” indicates that the confident assertion that the literal interpretation of this section precludes any possible extension to second generation transfers is not justified linguistically. The wording of the section does not necessarily and inevitably support the exclusive connotation that the transferor has to play an immediate, positive role in bringing about the transfer.
 By contrast to the approach adopted by Wallis, Murphy AJ (as he then was) in Cosawu v Zikhethele Trade (Pty) Ltd and another (2005) 26 ILJ 1056 LC at 1066 para 29, said:
“I am persuaded that a less literal and more purposive approach is justified in the context of s 197. As stated earlier, the section is intended to protect the employees whose security of employment and rights are in jeopardy as result of business transfers. A mechanical application of the literal meaning of the word ‘by’ in s197 (1)(b) would lead to the anomaly that workers transferred as part of first generation contracting-out who is protected whereas those of the second generation scheme would not be, when both are equally needful and deserving of the protection. The possibility of abuse and circumvention of the statutory protections by unscrupulous employees is easy to imagine. As in this case, the danger exists that the employees may not only lose their continuity of their employment but also their severance benefits, for the reason that the old employer having lost its business to the new employer lacks the means to pay its debts.” The approach adopted by Murphy AJ holds the compelling attraction that it serves to prevent the kind of abuse that would subvert the very purpose of the section. The potential abuse of this section by an application of the narrow interpretation adopted by Basson J in the court a quo can be illustrated thus: A Company wishes to rid itself of a group of employees who form a discrete business unit within A. It enters into an agreement with B Company whereby the particular business unit which forms a part of A’s overall business is transferred as a going concern to B. In short, B will now ensure performance of the operations of that unit. This transaction between A and B can be classified as an outsourcing agreement. The agreement includes the right of A to cancel the outsourcing agreement within a year which would thereby obligate B to transfer the business back to A. If the literal interpretation adopted by Basson J were to be applied, the entire protection of section 197 afforded to employees in the unit could be circumvented in that, once the business is retransferred to A, the latter would have no obligations to any of the employees pursuant to section 197 of LRA. This result would surely be subversive of the very purpose of section 197 and can only be sustained if the wording of the section could plausibly bear no other interpretation. As noted earlier in this judgment the wording of the section cannot be construed only to bear the meaning contended for by SAA.
 In the present case, the agreement between SAA and LGM provided that SAA could cancel the agreement. Once that right had been invoked, the business would be transferred from LGM to a third party or back to SAA. In short, the old employer, being LGM, would be required to transfer that business to a new employer either SAA or to a third party. There is nothing in the wording of section 197 which inherently prevents its application to such a case.
 Wallis at 10 says ‘[w]hat the section says is that that the old employer is a positive actor in the process. This is not what occurs when an institution has concluded a contract for the provision of cleaning services and at the expiry puts it out to tender and the existing contractor loses the tender. In those circumstances the role and function of the old employer is to strive to keep the contract not to transfer all or any part of the business to someone else.’ Sophistry aside, there is no compelling reason to conclude, on the wording of section 197(1)(b) , that the new employer( i.e. the initial transferee) has not transferred the business to a third party or to the initial transferor. In other words the initial transferee became the employer after the initial transfer. Pursuant to the contract which caused the initial transfer, the existing employer is now obliged to transfer the business to a party which will now become the new employer. Hence the second generation transfer falls within the scope of the definition.
 Assume however, that the word “by” must be interpreted to connote a positive action on the part of the old employer (in this context LGM) as contended for by respondent. On the particular facts of this case, the requisite positive action was taken when the initial agreement was concluded between SAA and LGM which afforded SAA rights to compel LGM to act by means of a transfer of the business back to SAA or to a third party.
 In my view, the approach to section 197 adopted by the Court a quo is neither inexorably congruent with the literal wording of the section nor with the facts of the present dispute Hence , the conclusion it reached cannot be supported. Further, the application of the provisions of section 197 is clearly incongruent with the purpose of this section as already outlined. The interpretation of section 197(1)(b) as proposed does no violence to the wording of the section and is manifestly congruent with the purpose of section 197 read as a whole.
 Accordingly, I find that the court a quo erred in the approach that it adopted to section 197. On a purposive construction, section 197 covers the situation, whereby, after SAA cancelled the initial outsourcing agreement, it invoked clause 27 of the agreement to compel LGM to implement the ‘handover plan’. The application should not have been dismissed in its entirety. Some declaratory order should have been granted..
 Appellants sought a detailed order that would specify the necessary steps to be taken in terms of section 197 to enforce employee rights. However, to do so would require knowledge of events that took place after October 2007, none of which was contained in the evidence placed before this court. In the circumstances this court would be ill advised to frame a detailed order which would have legal consequences unbeknown to this court, given the factual matrix placed before it. For this reason, the order granted is designed to settle the legal dispute between the parties and provide them with a framework within which to arrange their legal relationships.