14 December 2008

When is the right time to raise a jurisdictional point?

The Court has in the recent past on three occasions had to consider what becomes of the employees affected by so-called "second generation" contracting out.

Each of the cases arose from a second generation outsourcing transaction, in which the old employer remains the client, but the business is removed from the first service provider and contracted to another service provider. The question to be determined in each of the cases was whether the second transfer constituted a transfer as contemplated by section 197.

In terms of section 197, provided the requirements of the operation of the section are met, the contract of employment transfers automatically from the old employer to the new employer.

Against the backdrop of section 197 the Court in the case of COSAWU v Zikhethele Trade (Pty) Ltd and Another, found that section 197 applied to second generation outsourcing. The Court reasoned that the transfer of a business for the purpose of section 197 occurred through a two-phased transaction. Upon the expiry of an outsource contract (or on its termination in this case), the services in question are handed back to the outsourcer and then the services are handed on to the new contractor. The Court reasoned that a mechanical application of the literal meaning of the word "by" in section 197(1) (b) would lead to the anomaly that employees transferred as part of first generation contracting out would be protected whereas those in a second generation scheme would not be.

Commentators concluded that upon a proper interpretation of section 197 there is no transfer of the business by an employer when one service provider is substituted for another. If there is a need to cater for second generation outsourcing, the LRA needs to be amended accordingly.

After the Zikhethele case the Court had an opportunity to again consider the scope and purpose of section 197 and its role in second generation contracting out in the matter of Aviation Union of South Africa and Others v SAA (Pty) Ltd.

The facts also involved the transfer of an outsourced contract from the initial contractor to another contractor. The dispute arose from a second generation outsourcing transaction, in which the old employer remains the client, but the business is removed from the first service provider and contracted to another.

The Court accepted that the central purpose of section 197 was intended to protect employees affected by the transfer of a going concern. Nevertheless, the Court also held that in outsourcing transactions, the business of the old employer can transfer to a new employer only in the first transfer. Section 197 was therefore held to apply only to "first generation" outsourcing transactions and to interpret the provision otherwise would require the substitution of the word "by" with the word "from" in section 197(1)(b). The Court concluded that the substitution of the wording in section 197 can be affected only by the Legislature.

In the case of Crossroads Distribution (Pty) Ltd v Clover SA (Pty) Ltd and Others, a second judgment in as many months held that section 197 of the LRA did not apply to second generation outsourcing contracts.

The Court analysed the concept of second generation contracting out and held that the entity which provided the service in this case was not transferred at any stage. There was no transfer of any kind, only the conclusion of separate transactions starting with the termination of one contract and the entering into a new contract.

In our view, the Aviation Union and Crossroads cases have correctly held that the argument that section 197 is applicable in second generation outsourcing is not sustainable because there has been no "transfer of business" as contemplated by section 197 of the LRA.

In summary, it appears that the Court had regard to the strenuous criticism levelled at the Zikhethele decision in which the Court, in effect, substituted the wording of section 197 in order to reach a decision which was designed to protect the employees.

Rightly, it has been held that the Court has no jurisdiction to change the meaning of the LRA and it is not permissible for the Court to deviate from the wording of a statute.

Tim Mills

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