Rural Maintenance (Pty) Limited and Another v Maluti-A-Phofong Local Municipality (CCT214/15) [2016] ZACC 37 (1 November 2016)

Principle:

The definition of "business" in section 197(1) of the LRA includes a service. This means that it is the business that supplies the service, and not the service itself, that must be transferred.

Facts:

In this case a municipality, responsible for the provision of services to its residents, allowed its electricity services to fall into disrepair. In 2011 the municipal manager entered into an Electricity Management Contract (EMC) with a private company (Rural) to operate and manage the municipal electricity distribution network for a period of 25 years, after which the obligation to supply electricity to residents would revert to the Municipality. In terms of the EMC 16 employees were transferred under section 197 of the LRA by the Municipality to Rural.

Rural started its performance under the provisions of the EMC on 1 September 2011. It expanded the workforce to 127 employees and incurred significant expenditure on the purchase of network materials, specialised vehicles, the compiling and recording of details of the Municipality's electrical distribution infrastructure, the mapping of townships within the Municipality's geographical area, and software systems in relation to the provision of the electrical services. It also purchased immovable property for offices and staff accommodation. This all cost in the region of R96 million.

In August 2013 the Municipality informed Rural that it considered the EMC to be null and void because the then municipal manager did not have the requisite authority to conclude the EMC with Rural. The latter disputed this and contended that this conduct amounted to a repudiation of the Municipality's obligations under the EMC, entitling it to cancel the agreement. This contractual dispute is still pending in the Free State High Court.

Despite the pending action in the High Court, Rural provided the Municipality with information about the identities of the 127 employees, their employment contracts and organisational structure in the beginning of October 2014. It also handed over what it termed the "possession of the Network and the Capital Assets". It proposed an agreement of the transfer of the 127 employees under section 197 of the LRA to the Municipality, which the Municipality refused to accept.

Rural then sought relief in the Labour Court for an order declaring that there had been a transfer of business as a going concern by it to the Municipality and that the employment contracts of the 127 employees should accordingly be transferred to the Municipality. The Labour Court granted the relief, but the Labour Appeal Court overturned that decision on the basis that Rural had failed to discharge the onus of showing, on the probabilities, that a transfer of a business as a going concern had taken place and that the very business conducted by Rural had been transferred back to the Municipality. The test was whether the Municipality would have been able to continue business seamlessly after the 'transfer', it being common cause that certain components of Rural's business that supplied electricity services were not handed back to the Municipality.

When the matter was referred to the Constitutional Court the Municipality argued that the business was not transferred to it as a 'going concern'. At best it received an obligation to provide electricity to the residents but it never received Rural's computers, systems, stationery, vehicles, equipment etc. It also did not receive their debtor's book or an inventory of Rural's business. So it was argued that Rural was not transferred as a going concern.

Rural on the other hand argued that the business comprised the infrastructure for the provision of electricity services and the employees dedicated to that business. Handing over of peripheral assets such as software, vehicles and stationery were not essential for the transaction to constitute one in terms of section 197 of the LRA. The EMC agreement did not contemplate that such assets would ever transfer to the Municipality as part of the business.

The Constitutional Court had to decide whether a transfer of a fully functional business in its expanded form was necessary for it to fall within s 197. The Court was clear that one business could not try to transfer the obligation to take over all employees to the new owner under the guise of s 197, but nevertheless retain for itself the means it used to conduct the business. The court said while the protection of employees is the primary concern of s 197, employees are also protected by the retrenchment provisions in section 189. The choice in this case was which employer should be responsible for the workers affected by the change in circumstance.

The Constitutional Court accepted that for a transfer of a business as a going concern to occur, not all the assets of the business have to be transferred and that it depends on the nature of the business. But in this case the assets that Rural did not transfer back to the Municipality were essential to the profitability and operation of the business. Without these crucial assets, the Municipality could not have carried on the business without major difficulties. Applying what it called the "factual application of a flexible test", the Court concluded that there had been no transfer of the business to the Municipality as a going concern.

Extract from the judgment:

[27]   This Court has, in NEHAWU, Aviation Union and City Power, consistently formulated the approach to be followed in determining whether there has been a transfer of business as a going concern under section 197.

[28]   NEHAWU was decided before the amendment that included a "service" in the definition of "business" was applicable, but regarded the amendment as a clarification of the conclusion it reached. Ngcobo J formulated the approach as follows:

"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."

[29]   Both the majority and minority judgments in AviationUnion relied on and endorsed this approach to the interpretation and application of section 197 of the LRA. The disagreement between the two judgments related to whether a transfer must already have taken place before relief could be granted and whether there was sufficient evidence to justify the relief being granted on the record before the Court.

[30]   Importantly, and helpfully, Jafta J in the minority judgment also dealt with the inclusion of service in the definition of a business in section 197(1):

"Although the definition of business in section 197(1) includes a service, it must be emphasised that what is capable of being transferred is the business that supplies the service and not the service itself."

[31]   City Power too accepted and built on the foundations of NEHAWU and Aviation Union. It is important to note that City Power did not find that the mere termination of a service contract triggered the application of section 197 of the LRA. It followed the approach in NEHAWU and Aviation Union and determined the question on the facts:

"On the present facts, there is no dispute that City Power took over the full business 'as is', with all of the complex network infrastructure, assets, know how, and technology required to install and operate the prepaid electricity system with the clear intention of maintaining uninterrupted electricity services to Alexandra Township. The project continued after termination of the service level agreements and completion of the handover process. The business is identifiable and it is discrete. Ultimately a business of providing a system of prepaid electricity to residents of Alexandra continued, save that it was now conducted by a different entity."

[32]   Rural submitted that this consistent approach nevertheless needs clarification in the light of the Labour Appeal Court's alleged acceptance into our law of the 2006 TUPE Regulations relating to service provision changes. But this is also incorrect.

[33]   It is true that in TMS Group the Labour Appeal Court did, in the course of its judgment, refer to the TUPE Regulations. It is incorrect, however, that the Court accepted them as now constituting a separate test for service provision changes. Instead, what Davis JA did do was to continue and refer to the European Court of Justice decision in Sodexho:

"In my view, the approach adopted by the European Court of Justice in Sodhexo,supra, accords with the approach which has been adopted to section 197 by the Constitutional Court, both in [Aviation Union], supra and in its earlier decision of [NEHAWU]:

'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.'

See also [Aviation Union]supra at para 50?51."

[34]   Sodexho was a case decided under the Acquired Rights Directive, and not the TUPE Regulations. Its approach to the issue of the transfer of the business concerned was formulated as follows:

"The national court, in assessing the facts characterising the transaction in question, must take into account the type of undertaking or business concerned. It follows that the degree of importance to be attached to each criterion for determining whether or not there has been a transfer within the meaning of Directive 77/187 will necessarily vary according to the activity carried on, or indeed the production or operating methods employed in the relevant undertaking, business or part of a business (Süzen, paragraph 18, and Hidalgo, cited above, paragraph 31)."

This approach accords with the approach in our law, set out in NEHAWU and Aviation Union, as the Labour Appeal Court correctly pointed out.

[35]   I have had the privilege of reading the judgments of Jafta J (second judgment) and Zondo J (third judgment). I can discern no new, old or important issue of principle in the application of section 197 that we differ on. What remains is an appeal on the facts, not usually a sufficient ground for this Court to interfere with the findings of a specialist tribunal like the Labour Appeal Court. Its findings are in any event not unreasonable.........................

[37]   Rural submitted that it expanded the business and made it more profitable. The Municipality, by contrast, complains that certain necessary assets were not transferred. I agree that for a transfer of a business as a going concern to occur, not all the assets of the business have to be transferred and that it depends on the nature of the business and essentiality or otherwise of particular assets for a particular business. That factual application of a flexible test has long been at the heart of our going-concern business transfer jurisprudence. The onus rested on Rural to set out what work the more than hundred additional employees it employed were involved in and what means were provided to them to do that work. It is common cause that certain equipment was not transferred to the Municipality, but it appears improbable that at least some of the newly employed employees did not need and use that equipment in order to do their work. Without the transfer of the means to do the work they did as part of Rural's business, there could be no transfer of the business to the Municipality as a going concern. The assets that Rural did not transfer back to the Municipality were essential to the profitability and operation of the business. Without these crucial assets, the Municipality could not have carried on the business without any major difficulties. But all this involves a disputed factual assessment - which is precisely not this Court's task. This example shows how this Court would have to make factual findings on what assets were essential for the operation of the business. But as noted earlier, it is quite inapt for this Court to adjudicate the appeal on a set of facts the Labour Appeal Court fully considered and itself determined..........................

[39]   This provides a useful illustration of what role the causa, or legal cause, of any transfer of a business may play in the application of section 197 of the LRA. It is settled that the enquiry to determine whether the business is transferred as a going concern is a factual one. But the parameters of the factual inquiry are determined by the legal cause from which the transfer stems from. The legal cause may be the invalidity of the underlying contract. In this case, if the EMC is held to be invalid, the legal causeof restitution demands that what Rural needs to hand back to the Municipality is the original business as operated by the Municipality at the time when it was transferred to Rural. If, however, it is held that the EMC was valid, the legal cause within which the factual inquiry (whether transfer of the business took place) must take place is the valid contract. What Rural needs to hand back is the business it operated until acceptance of the repudiation of the EMC and the cancellation of the EMC. To the extent that the second judgment finds that the legal cause is totally irrelevant, I must disagree.

Summary and conclusion

On the evidence on record it was common cause that certain components of Rural's operation of the business that supplied electricity services to the Municipality were not handed back to the Municipality. Despite having the opportunity to refute this evidence, Rural contended that they were peripheral to the operation of its business and need not have been handed back to the Municipality. Besides, Rural did not explain precisely what this business entailed. The Labour Appeal Court, proceeding on the accepted test of an assessment of all the relevant factors to determine whether there was a transfer of business as a going concern under section 197 of the LRA, held to the contrary. It did not apply any new test, nor has the Labour Appeal Court imported a different test in relation to the transfers of so-called"service provision changes". That term was imported into the TUPE Regulations in Britain in 2006 and does not appear in section 197 of the LRA. The definition of "business" in section 197(1) of the LRA includes a service. This Court has clarified that this means that it is the business that supplies the service, and not the service itself, that must be transferred. Both in wording and context the provisions of section 197 differ materially from those in the TUPE Regulations. No need has been demonstrated that our existing law on the interpretation and application of section 197 of the LRA is in need of reformulation or development.

[40]   It follows that leave to appeal must be refused with costs, including the costs of two counsel.