8 February 2008 by

Welcome respite for outsourcers?

The Labour Court delivered a blow to second generation outsourcing in COSAWU v Zikhethele Trade (Pty) Ltd & Another (2005) 26 ILJ 1056 (LC). Many have heralded the subsequent Labour Court decision in Aviation Union of South Africa & Others v SA Airways and Others, Labour Court case no. J22206/07 dated 1 October 2007, as welcome respite for those involved in second generation outsourcing. But is it?

Section 197 of the Labour Relations Act applies where the whole or part of a business including a service, is transferred as a going concern by the old employer to the new employer. The contracts of employment of staff employed by the old employer immediately before the transfer are automatically transferred to the new employer. In Zikhethele the court found that section 197 applies to second generation outsourcing. Second generation outsourcing occurs where there is a change in the provider of an outsourced service. An entity outsources services to a contractor. On expiry of the contract, the entity puts the provision of the service out to tender. The contract is then awarded to another contractor.

Second generation outsourcing and section 197 were considered once again in SA Airways. The court found that section 197 only applies if the transaction satisfies all the requirements of section 197. Firstly, the transaction must constitute a transfer. Secondly, a business must be transferred which includes a part of a business, trade, undertaking or service. Thirdly, the business must be transferred as a going concern. The judge examined the wording of section 197 and found that the literal meaning of the section contemplates first generation outsourcing only. The wording requires the business to be transferred by the old employer to the new employer. Second generation outsourcing occurs where the business is transferred from one employer to another and not by the old employer to the new employer.

In reaching its decision, the court considered the purpose of section 197, namely to protect the job security of employees when a business is transferred as a going concern. It recognised that the literal wording of the section would not achieve this purpose when second generation outsourcing takes place. But the court found that it should not easily depart from the literal meaning of the words used and should only do so out of necessity. As the wording of section 197 is not ambiguous, the court applied the ordinary and literal wording. The judge stated that if the legislature had intended section 197 to apply to all transactions, it should have amended the provision. There was no reason to read into the section words which do not appear in the section.

Whilst finding that section 197 did not apply in this case, the judge referred to the Zikhethele case and recognised that there are transactions in which, on the facts of the matter, section 197 may apply. In Zikhethele the second business was so closely aligned to the first that it was regarded as identical and so section 197 was applicable.

This decision leaves the door open for it to be argued that section 197 applies to second generation outsourcing. Whether such an argument will succeed will depend on the facts of each case. The Zikhethele decision has been taken on appeal so we have not yet heard the last word on this matter.

Gillian Lumb and Liezl-Mari Mouton

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