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Worklaw is a subscription based labour law service developed by leading South African labour lawyers and arbitrators. Worklaw gives you all you need to manage labour law at the workplace. Go to

Worklaw subscribers receive a monthly newsletter containing commentary on the latest labour law cases and trends. This newsletter contains an article on “Calculating your risk: How is compensation calculated?” We discuss some of the leading cases on this topic.  We also look at two new cases: the first, a decision of the SCA, reverses a previous decision on second-generation out-sourcing. The second deals with restructuring for greater profitability.

This public newsletter is a free edited version of the Worklaw subscriber newsletter.


The SCA speaks on second-generation outsourcing

Section 197 of the LRA has caused many problems. It deals with the consequences of a transfer of a business from a seller to a buyer. ‘Business’ is defined to mean the whole or a part of any business, trade, undertaking or service. ‘Transfer’ is defined to mean the transfer of a business by one employer ('the old employer') to another employer ('the new employer') as a going concern. 

The consequences of such a transfer include the following: (i)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; (ii)all the rights and obligations between the old employer and an employeeat the time of the transfer continue in force as if they had been rights and obligations between the new employer and the employee; (iii) the transfer does not interrupt an employee'scontinuity of employment, and an employee'scontract of employment continues with the new employer as if with the old employer.

The LRA anticipates that the new employer is in compliance if that employer employs transferred employeeson terms and conditions that are on the whole not less favourable to the employeesthan those on which they were employed by the old employer.

This is relatively straight-forward. The new employer steps into the shoes (and existing obligations) of the old employer. The policy behind this is to protect employees who find that there has been a change of ownership and they have no legal link to the buyer of the business. The LRA creates that link.

The problem has arisen with respect to when that new buyer sells the business to a third buyer, or more particularly, when the old employer does not renew a contract with the new employer but grants a tender to a third company. These situations have become known as second-generation transfers or outsourcing. Whether they are covered by s 197 has been the subject of many court decisions and learned journal articles. A recent decision which we reported on was Judge Davis’ judgment when he interpreted the phrase ‘transfer of a business by one employer’ to mean ‘transfer of a business from one employer’ (see Aviation Union of SA & others v SAA (Pty) Ltd & others LAC case no: JA 51/07 dated 9 October 2009).

This case went on appeal to the SCA and it has now overruled the LAC judgment – see SAA (Pty) Ltd v Aviation Union of SA & others (SCA Case No: 123/2010  Judgment 11 January 2011). The SCA recognised that the ‘purposive’ interpretation of the word ‘by’ adopted by the Labour Appeal Court was aimed at preventing abuse, but found that this concern was misconceived because there was no suggestion of any abuse in the case. And even if it was accepted that such abuse is possible, the SCA said that this is no reason to distort the plain meaning of the section. The SCA accordingly concluded that the LAC was wrong in adopting an approach to the interpretation of s 197 which is at odds with the ordinary meaning of the words chosen by the legislature. By interpreting the word ‘by’ to mean ‘from’, the court impermissibly distorted the meaning of the word.

Secondly, the SCA held that the LAC, in holding that there was evidence for finding that a transfer of the business as a going concern occurred, was clearly wrong. The SCA said that where parties wish to enter into an outsourcing agreement, and then for the business to revert to the outsourcer, or to be transferred to another provider, there must be a clear re-transfer, demonstrated through written contracts or conduct, of all assets and obligations of the business, including the transfer of workforce rights and obligations, so that no difficulty arises in invoking the protection afforded by s 197 to affected employees who have been involved in carrying out the services provided for in the initial outsourcing agreement.

While this SCA decision is now binding, it should be noted that the 2011 proposed amendments to the LRA (see Worklaw’s January 2010 Newsflash for discussion on this) provide as follows:

"s 197(b)   'transfer' means the transfer of a business from one employer (“the old employer”) to another employer (“the new employer”) as a going concern."

The word ‘by’ is deleted and the word ‘from’ inserted. While this will clearly expand the scope of the section, it does appear that the SCA’s requirements of a more deliberate transfer process for so called second generation outsourcing to be included (as discussed above), may survive the amendment even if that is the version passed by Parliament in due course.

Restructuring to generate greater profits

Despite training for staff on a certain product, sales of the product were not satisfactory and the company decided to reassess its business model. The company identified the structure of the regional manager position as the sole cause of the poor sales performance. A management consultancy was appointed to develop a profile for the position of regional manager. Thereafter all existing regional managers were expected to undergo assessments to determine their eligibility for appointment to the new posts. Only five of the employees were assessed as being acceptable candidates, and two of those were appointed to the new posts. The others were given the choice of alternative positions or retrenchment, and they chose retrenchment. The employees approached the Labour Court, contending that their retrenchment had been both substantively and procedurally unfair.

Van Rooyen & Others v Blue Financial Services (Pty) Ltd (2010) 31 ILJ 2735 (LC) was a case of restructuring a profitable company. The restructuring was designed and implemented to generate profit levels that management considered acceptable. The court recognized that the company found that structural change relating to the regional managers was necessary to improve its operating efficiency and to increase the sales of its products. The court was satisfied that the company had established that the difference in job content between the old and new profiles of the regional managers' positions was sufficiently significant to justify the requirement that the employees be assessed for suitability. The court was accordingly satisfied that the company had established a fair commercial rationale for its decision to restructure its business operations and that the change rendered the employees redundant. It was also satisfied that the company had applied clear and transparent criteria when selecting candidates to be offered appointment to the new posts.

The Labour Court was, however, of the view that there had been no search for consensus. After two meetings the employees were invited to make written representations, which they did in a considered document. The company was dismissive of the document, and failed to engage further with the employees on their proposals before dismissing them.

The court found that the obligation to consult over alternative employment and to take steps to accommodate affected employees was more onerous in this matter where the rationale for the proposed retrenchment was to improve profitability. As the retrenchment was only procedurally unfair and the employees did not seek reinstatement, the court was of the view that compensation equivalent to four months' remuneration was appropriate.

This case is a reminder that the courts will scrutinise very closely restructuring for greater profitability as opposed to restructuring to survive. As it is, the courts refuse to defer to the employer’s reasons for retrenchment. In this kind of restructuring, both reasons and procedures have to be very sound to survive scrutiny.

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Worklaw is a comprehensive labour law advice and information service, developed by some of South Africa`s most experienced labour arbitrators. Worklaw subscribers get free advice from experienced arbitrators via e-mail, can research the law and leading cases, are updated monthly on new cases, trends etc, and can use excellent training material, to name a few of these services. Subscribers are invited to an annual labour law workshop covering the key cases and trends from the past year.

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Bruce Robertson
February 2011
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