Background

The dispute began when a contract for grout plant operations was awarded to a new contractor. The outgoing contractor argued that section 197 applied, resulting in the automatic transfer of 63 employees. The incoming contractor disagreed, stating it would construct its own plants that “were geographically, technologically and operationally distinct from that of the old plant operated by” the outgoing contractor, use new methods, engage its own employees and equipment, and build new plants. Thus, no transfer as a business as a going concern occurred.

The tender documents contained a clause which referenced section 197:

“In the event that the incumbent service provider no longer requires the services of its employees in the provision of the services … the successful tenderer shall be obliged to abide by its obligations in terms of section 197 of the LRA … “

The incoming contractor argued that this was a non-binding template provision, while the outgoing contractor contended that it signalled an expectation that section 197 would apply, in the event of a change in service provider.

Labour Court judgment

The Labour Court considered the facts (as the application of section 197 is a preeminent factual inquiry) and found that the business retained its identity. It noted that the mine provided essential utilities and materials to both contractors. The court concluded that despite changes in technology and staffing, the core economic activity remained unchanged, meaning the business was transferred as a going concern and section 197 applied.

The incoming contractor appealed, challenging the test applied by the Labour Court, the weight given to the continuity of services, and the interpretation of the tender clause.

LAC judgment

The LAC affirmed that a holistic factual assessment determines if a business retains its identity after the transfer. It reiterated that the non-transfer of employees or assets is not, by itself, decisive. The application of section 197 depends on the substance of the transaction, not contractual labels.

Key findings

The key findings included that the core infrastructure and economic activity (grout pumping services using client-supplied infrastructure and materials) remained constant before and after the transfer.

Changes in technology, staffing models, or the construction of new plants did not alter the business’s essential nature. In addition, the transfer of every asset is not required. Only those assets essential to the continuation of the business are relevant.

Importantly, Western Platinum provided the utilities, materials and storage facilities through which the respondent could carry out its services, including providing electric power, compressed air, potable water, grout ranges and their associated materials, grout bags, grout mixture, the communication system between the work face, and grout plant and storage space for the respondent to store the materials supplied by Western Platinum and used in the performance of the respondent’s services.

The incoming contractor would similarly be provided with the above when it was accorded the right to conduct the business subject to the transfer and in terms of the successful award of the tender.

What was thus transferred was the right to conduct the same business, and it is in this context that the court’s following statement must then be understood:

“In substance, the appellant continues to perform the same core function as that performed by the respondent, the provision of grout pumping services, using the same inputs supplied … The fact that the service is now delivered more efficiently, and at a larger scale across two plants rather than one, does not alter the essential nature of the service being performed [and the context and manner in which it is being performed (i.e. in terms of a contract awarded to render the service (a right) together with inputs supplied to the contractor)].”

The reference to section 197 in the tender documentation, while not determinative, supported the expectation that the section could apply, but the ultimate test is factual.

The fact that the incoming contractor did not take over the outgoing contractor’s employees or certain office equipment was not dispositive, as the business was asset reliant. The core infrastructure necessary to perform the service – the grout plants (or a right of use), ranges, utilities and raw materials – was owned and supplied by the client for both contractors, meaning the core operational capacity was maintained.

The court dismissed the appeal, holding that the business was transferred as a going concern under section 197, which resulted in the automatic transfer of the employees.

Key takeaways

• Section 197 applies if a business’s core economic activity and operational capacity are retained post-transfer, regardless of changes in technology, staffing, operational methods or non-core assets.
• A transfer occurs if the business retains its identity. This identity is assessed by considering components like employees, assets and contracts, although the transfer of any single component is not decisive.
• The factual enquiry is holistic, considering all relevant circumstances, and is not limited to the transfer of specific assets or employees.
• Contractual references to section 197 are relevant but not decisive, the substance of the transaction is what matters.
• Employers and service providers involved in tender processes and business transfers must assess operational continuity to determine if section 197 applies and what their obligations are regarding employee transfers.

This judgment underscores the importance of substance over form in business transfers and the robust protection afforded to employees under section 197 of the LRA.