Contracts of Employment

By Ivan Israelstam


In a previous article I explained that, where an undertaking of any kind is transferred to another undertaking as a going concern, section 197 of the Labour Relations Act (LRA) comes into effect.  This forces the new entity to take over all the employees of the old undertaking and to recognise all the terms and conditions of these employees including their years of service.

However, not all transfers qualify under this legislation because not all transfers are "going concerns". It is vital for employers to know which transfers do and do not fall under this legislation. Unfortunately the LRA does not define what "a going concern" is. This causes confusion and sparks many disputes between employers and employees and trade unions.

Takeovers often cause loss of jobs and employees are often desperate to stay on with the new enterprise. On the other hand, the new entity usually already has its own staff and wants to avoid taking on additional employees. To add to the confusion for employers the LRA was amended in 2002 to include a "service" as part of a going concern for purposes of section 197 of the LRA.

That there is little clarity as to what constitutes a section 197 takeover is a serious problem for contractors considering making a bid for an outsourcing deal.  They need to know, before signing the deal, whether they will be forced to take over all the old employer's employees and whether they will have to recognise and preserve all the benefits, remuneration, working conditions, years of service and other rights of the employees.

While the sale of a business as an operating entity has normally qualified, it is uncertain whether the outsourcing of an enterprise to a contractor without selling it constitutes the transfer of a going concern. This uncertainty emanates from the contradictions in court decisions on this issue. In the case of Nehawu v University of Cape Town the labour court found the outsourcing of cleaning, maintenance and gardening functions did not constitute the takeover of a going concern.

And in Samwu and others v Rand Airport Management Company the court found that the transfer of part of an employer's structure that was not a recognisable entity did not constitute the transfer of a going concern. However, the labour appeal court in Samwu and others v Rand Airport Company overturned the earlier case decision; and the constitutional court, in Nehawu v University of Cape Town, overturned that earlier decision.

In Cosawu v Zikhethele Trade, the labour court has now taken the prior outsourcing decisions one step further in finding that the takeover of a contract by one contractor from another constituted the takeover of a going concern.

This means that:

  • If contractor A loses the contract which is then outsourced to B, B is required to take over all the employees of A who were employed on the contract.
  • The new contractor can't use its existing employees to carry out the work.
  • If, in the process of the takeover, the employees of contractor A are dismissed to make way for B's employees, this would be an automatically unfair dismissal in terms of section 187(1)(g) of the LRA.

    If B retrenches its own employees to make way for the employees being transferred by A this could also be an automatically unfair dismissal because these dismissals took place for reasons related to the takeover of a going concern.
  • For a contracting business to win a contract may no longer be a victory because this double-edged sword could destroy the contracting business.

    This decision, added to those handed down by the labour appeal court and constitutional court, has been hailed as a victory for trade unions trying to preserve the jobs of members involved in business takeovers and outsourcing arrangements. The three decisions, however, constitute a blow for contractors and for businesses wishing to outsource certain functions.
  • Ivan Israelstam is chief executive of Labour Law Management Consulting. Contact him on 011-888-7944 or via e-mail:

  • Our thanks to Ivan and the Star newspaper for permission to publish this article. 

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