12 October 2009

Landmark judgement fundamentally changes the law relating to the employment consequences of outsourced services

A landmark judgement given in the Labour Appeal Court this morning (Friday 9 October 2009) fundamentally changes the law relating to the employment consequences of outsourced services when a business is transferred to a new entity.

In its decision on AUSA obo Barnes & others / South African Airways (Pty) Limited, the Labour Appeal Court ruled in favour of second generation outsourcing. It found that Section 197 of the Labour Relations Act (LRA) contemplates not only first generation outsourcing – where the business is transferred by the old employer to the new employer – but also so-called second generation outsourcing.

Second generation outsourcing transfers are typically when a contract for rendering services between a client and a contracted service provider is transferred to the new employer as part of the transfer of a business as a going concern.

In April 2000, SAA and LGM signed an outsourcing contract agreement for the outsourcing of infrastructure and support services maintenance of SAA. In terms of Section 197 of the LRA, all SAA staff previously employed to provide these services had their employment contracts transferred to LGM.

In 2007, SAA terminated its contract with LGM and LGM then retrenched all the employees that had rendered the services in terms of the outsourcing contract. SAA believed that it had no obligation under Section 197 of the LRA towards the staff engaged in the services provided under the agreement, as no provision had been made to that effect in the original outsourcing agreement.

In the matter brought before the Court, Melanie Hart, a partner in the Employment Law practice at leading business law firm, Cliffe Dekker Hofmeyr acting for SAA, argued that in a second generation outsourcing there is no relationship or contract between the first contractor who has lost the job – the old employer – and a second contractor who now has the job, as the initial outsourcing contract has been validly terminated.

It is trite law that if a contract is validly terminated, it ceases to exist. There is therefore no business left that the first contractor can transfer to the second contractor.

"According to the language used by the legislature in Section 197 of the LRA, that section cannot apply to a second generation outsourcing in such a manner that the employees of the first contractor become the employees of the second contractor," said Hart.

In terms of section 197(2) of the Labour Relations Act (LRA), if a business, trade, undertaking or service is transferred in whole or in part, as a going concern, then the purchaser – the new employer – is automatically substituted in place of the old employer in respect of all contracts of employment existing immediately before the date of transfer of the business.

Similarly, when a company transfers non-core functions as a going concern to another service provider, then these so called first generation outsourcing transactions would fall within the ambit of Section 197 of the LRA. In terms of existing law, the employees are transferred from their existing employer to the new service provider.

The concept of a second generation outsourcing had not been dealt with extensively by the Courts before this Labour Appeal Court decision.

Hart said the ruling holds a number of consequences for employers who outsource services.

"The employees who were engaged in rendering the services in terms of the outsourcing agreement are transferred back to the employer when the outsourcing agreement terminates for whatever reason.

"The employer would then again become the employer of those employees until their contracts transfer to the new service provider that is ultimately appointed to render the services in terms of a fresh tender or outsourcing process, Hart said.

She added that the company to which the services had been outsourced may lose some valuable employees when the agreement terminates. On the other hand, the service provider or contractor appointed after the agreement with the first contractor has expired will inherit those employed by the first contractor.

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