Employees not left in the cold in the termination of outsourced arrangements

18 Feb 2015 5 min read Technology, Media and Telecommunications Alert Article

There is no question that outsourcing is an effective service model which allows for core business focus and often results in reduced costs and improved efficiencies. Despite these advantages, the risks and practicalities associated with these arrangements cannot be overlooked and these should be comprehensively addressed in the agreement governing the outsource relationship so as to ensure that the parties rights are protected and there is an understanding of the implications of the arrangement, not only during its subsistence but also on termination.

A prevalent issue is that of the potentially significant impact of s197 of the Labour Relations Act, No 66 of 1995 on outsource transactions, both at the commencement of the arrangement and on termination. This issue has been under the spotlight and a wealth of precedents exist. The recent matter of TMS Group Industrial Services (Pty) Ltd T/A Vericon vs Unitrans Supply Chain Solutions (Pty) Ltd and Others (JA58/2014) [2014] ZALAC 39 (6 August 2014) which came before the Labour Appeal Court highlights the importance of being aware of the implications of s197 and including detailed provisions in outsource agreements to account therefor.

In this matter, Nampak Glass (Pty) Ltd (Nampak) outsourced its warehousing and distribution services to Unitrans Supply Chain Solutions (Pty) Ltd (USCS). The employees performing the services were employed by Unitrans Household Goods Logistics (Pty) Ltd (UHGL), a wholly owned subsidiary of USCS. The services were governed by a warehouse management agreement concluded between the parties on 1 February 2011. On expiry of the agreement on 31 January 2014, Nampak entered into a new agreement with TMS Group Industrial Services (Pty) Ltd t/a Vericon (Vericon) for the provision of warehousing and distribution services.

A dispute arose as to whether the employees of UHGL who were providing the services to Nampak under the previous agreement with USCS had been transferred to Vericon in terms of s197 as a result of the conclusion of the new agreement between Vericon and Nampak.

In resolving the dispute, the Labour Court (being the court of first instance) determined that there were essentially two issues that needed to be resolved. Firstly, whether the fact that the employees were employed by a different entity (ie UHGL) to the entity that contracted with Nampak (ie USCS), had any bearing on the application of s197 and secondly, whether the appointment of Vericon as the new service provider constituted a transfer of business as a going concern.

In addressing the first issue, the Labour Court referred to prior judgments handed down by the Constitutional Court as well as foreign jurisprudence in reiterating that s197 would apply to any transaction in terms of which the whole or part of a business is transferred as a going concern, irrespective of (i) the manner in which the transfer is occasioned and (ii) the 'generation' of the transfer. It held further that the employees that should transfer are the employees working in the business that is being transferred. These employees should transfer irrespective of who, in formal terms, is their employer. In addressing the second issue, the Labour Court pointed out that Nampak had provided USCS with the facilities, infrastructure and equipment that were necessary to perform the services (ie a comprehensive right to use of the assets), which constituted an economic entity for the purpose of s197 which afforded USCS, inter alia, the contractual right and practical ability to perform the services. When this contractual right was transferred to Vericon, it constituted a transfer of an economic entity which placed an obligation on Vericon to take transfer of the employees performing the services as well.

Accordingly, the Labour Court found that the termination of the agreement between USCS and Nampak and the conclusion of a new agreement for the provision of similar services between Nampak and Vericon constituted a transfer of a business as a going concern as contemplated by s197 and further, the employees who were employed by UHGL, had transferred to Vericon by operation of the law.

On appeal to the Labour Appeal Court (LAC), Vericon averred, inter alia, that it was merely providing a service to Nampak and that there was no transfer of the business as a going concern. Vericon submitted further that it had engaged its own resources in performing the services and did not take over any of the employees previously providing the services to Nampak, nor did it take over any assets, goodwill or intellectual property.

The LAC supported the decision of the Labour Court and held that in deciding whether a business has been transferred as a going concern, regard must be had to the substance and not the form of the transaction. In reaching its decision, the LAC took into account various factors including the following:

  • the warehousing operation services were a discrete business;
  • Vericon had assumed the right to use the same Nampak assets, computer systems, infrastructure, forklifts and other assets to continue to provide the same services to Nampak as those services that were previously provided by USCS;
  • the services could only have been provided at Nampak's production facility; and
  • the affected employees only performed services for Nampak.

The appeal was accordingly dismissed with the effect that Vericon was held to be the employer of the transferred employees by operation of law.

Although parties cannot contract out of statutory obligations, they can contractually provide for the steps to be taken and arrangements which will apply in the event of a transfer of employees by operation of law under s197. These steps may include agreeing on who will be responsible for costs, the conduct of the parties in respect of affected employees prior to termination/expiration and entering into arrangements with affected employees in anticipation of a s197 transfer.

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