1

SASLAW PRESENTAION PAPER ON SECTION 197

SECTION 197- BEFORE THE 2002 AMENDMENTS.
1.

Section 197 was enacted together with the LRA, 1996. It then read as follows:
197
(1)

Transfer of contract of employment

A contract of employment may not be transferred from one employer

(referred to as the old employer) to another employer (referred to as the new

employer) without the employees consent, unless
(a)

the whole or any part of a business, trade or undertaking is transferred

by the old employer as a going concern; or

(b)

the whole or a part of a business, trade or undertaking is transferred as

a going concern
(i)

if the old employer is insolvent and being wound up or is being

sequestrated; or
(ii)

because a scheme of arrangement or compromise is being entered

into to avoid winding-up or sequestration for reasons of insolvency.

(2)

(a)

If a business, trade or undertaking is transferred in the

circumstances referred to in subsection (1)(a), unless otherwise agreed, all the

rights and obligations between the old employer and each employee at the
time of the transfer continue in force as if they had been rights and obligations
between the new employer and each employee and, anything done before the
transfer by or in relation to the old employer will be considered to have been
done by or in relation to the new employer.
(b)

If a business is transferred in the circumstances envisaged by

subsection (1)(b), unless otherwise agreed, the contracts of all employees that
were in existence immediately before the old employers winding-up or
sequestration transfer automatically to the new employer, but all the rights and
obligations between the old employer and each employee at the time of the
transfer remain rights and obligations between the old employer and each
employee and anything done before the transfer by the old employer in respect
of each employee will be considered to have been done by the old employer.
(3)

An agreement contemplated in subsection (2) must be concluded with

the appropriate person or body referred to in section 189(1).

(4)

A transfer referred to in subsection (1) does not interrupt the

employees continuity of employment. That employment continues with the

new employer as if with the old employer.
(5)

The provisions of this section do not transfer or otherwise affect the

liability of any person to be prosecuted for, convicted of, and sentenced for,
any offence.
THE EFFECT OF SECTION 197
2.

In National Education Health & Allied Workers Union v University of Cape

Town & Others (2003) 24 ILJ 95 (CC). The Constitutional Court held that a
transfer takes place when the business remains the same but in different
hands.

3.

The Constitutional Court laid down two important general principles in the UCT
case. The first concerns the dual purpose of section 197. The Court stated:
Section 197 strikes at the heart of this tension and relieves the employers and
the workers of some of the consequences that the common law visited on
them. Its purpose is to protect the employment of the workers and to facilitate
the sale of businesses as going concerns by enabling the new employer to
take over the workers as well as other assets in certain circumstances. The
section aims at minimising the tension and the resultant labour disputes that
often arise from the sales of a businesses and impact negatively on economic
development and labour peace. In this sense, section 197 has a dual purpose;
it facilitates the commercial transactions while at the same time protecting the
workers against unfair job losses.

4.

The second important general principle established in the judgment concerns

how one must go about establishing whether the business remains the same
but in different hands. The Court said:
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. A
number of factors will be relevant to the question whether a transfer of a
business as a going concern has occurred, such as the transfer or otherwise of
assets both tangible and intangible, whether or not workers are taken over by
the new employer, whether customers are transferred and whether or not the

same business is being carried on by the new employer. What must be

stressed is that this list of factors is not exhaustive and that none of them is
decisive individually. They must all be considered in the overall assessment
and therefore should not be considered in isolation.
..
The fact that the seller and the purchaser of the business have not agreed on
the transfer of the workforce as part of the transaction does not disqualify the
transaction from being a transfer of a business as a going concern within the
meaning of section 197. Each transaction must be considered on its own merit
regard being had to the circumstances of the transaction in question. Only then
can a determination be made as to whether the transaction constitutes the
transfer of a business as a going concern...
ASSIGNMENTTAKES PLACE
5.

The automatic consequences which flowed from section 197 were further
succinctly explained in Telkom SA Ltd & others v Blom & others [2003] 7 BLLR
638 (SCA). At paragraph [9] of the judgment the court cited the following
passage from the Constitutional Court judgment in the UCT case:
[64]

Reading the section as a whole, and, in particular, having regard to the

fact that all the rights and obligations flowing from employment with the
transferring employer are transferred to the new employer in the case of a
solvent business; that in the case of an insolvent business the contracts of
employment are transferred; that the transfer of business does not interrupt the
workers continuity of employment; the inference that the transferee employer
takes over the workers and that the transferee employer is, by operation of law,
substituted in the place of the transferor employer is irresistible. It follows by
necessary implication.
[65]

If there is any doubt on this score, the recent amendment to section

197 puts matters beyond doubt by providing that the new employer is
automatically substituted in the place of the old employer in respect of all
contracts of employment. Indeed its declared purpose is the clarification of the
transfer of contracts of employment in the case of transfers of a business,
trade or undertaking as a going concern.
6.

Thereafter the SCA in Telkom commented as follows on the above extract:

[10]

Ngcobo J did not use the word assignment, but his description of the

nature and effect of the transfer of an employment contract contemplated by

the Act leaves me in no doubt that an assignment takes place. In legislating
that all the rights and obligations between the old employer and each
employee at the time of the transfer continue in force as if they were rights and
obligations between the new employer and each employee, and that the
transfer of business does not interrupt the workers continuity of employment,
the lawgiver makes its intention plain. In the words of Ngcobo J, the inference
is irresistible that the new employer takes over the workers and is by operation
of law substituted in the place of the old employer. This is what happens on
assignment. In my view the further inference is also irresistible that in the
course of this process the contractual relationship between the old employer
and each employee, i.e. the employment contract between them, is brought to
an end. This is a natural result of the assignment: the original employer falls
out of the picture, and, as between him and the employees, the contract is
extinguished. From the effective date of this transfer 1 April 2000 the
employees were no longer obliged to perform services for Telkom and Telkom
was no longer entitled to their services. They were then employed by Molapo.
AVOIDING SECTION 197 AND ITS AUTOMATIC CONSEQUENCES
7.

Obviously, section 197 does not apply if no transfer takes place as envisaged.
So, for example, in Buys v Impala Distributors & another (2008) 29 ILJ 641
(LC), the Court held that outsourcing of only part of the warehouse and
distribution functions for a fee based on distribution per ton, while retaining the
major portions thereof, did not amount to a transfer. On the facts the Court
found that no transfer had taken place. It must be borne in mind, however, that
the two principles of ensuring continuity while securing jobs must always be at
the forefront of the enquiry to determine whether a transfer had taken place.
Another court may have on the same facts reached a different conclusion.

8.

Parties could also avoid the consequences of section 197 by contracting out of
it by concluding an agreement envisaged in section 197(2). The right to
contract out is, however, limited.

9.

The old and the new owner cannot by themselves contract out. This requires

the consent of the worker or workers affected or their union together with the
old and new employer in other words all three parties have to be party to the
agreement. The reason why the workers consent is necessary is because
inevitably, workers rights in terms of section 197 are diminished when there is
a contracting out.
LENGTH OF SERVICE
10. In Foodgro (a division of Leisurenet Ltd) v Keil [1999] 9 BLLR 875 (LAC) the
Court restricted the ability to contract out further to exclude provisions
depriving workers who were transferred from losing their years of service:
I realise that my conclusion makes it impossible for a new owner to contract
out of retrenchment benefits due to an employee who is taken over as part of
the transfer of a going concern. Retrenchment benefits only accrue on
retrenchment, so if they can be said to form part of an employers obligations
to an employee at all, they are contingent upon that particular employee being
retrenched. If there is, at the time of transfer of the business, any likelihood of
retrenchment, the cost to the new owner would have to be tailored into the
price negotiated for the concern.
This restriction was restated in AST Holdings (Pty) Ltd v Roos [2007] 10 BLLR
891 (LAC):
[28]

There is also nothing in section 197 which would preclude the new

employer and the employee from agreeing to a variation or alteration of the

employees rights and obligations under his contract of employment with the
old employer when the transfer takes place. The words unless otherwise
agreed in section 197(2)(a) contemplate such an agreement. That does not
mean, however, that the new employer and the employee may agree that,
upon transfer of the contract of employment, the employee will forfeit his/her
period of service with the old employer. That issue was dealt with in Foodgro,
supra. In that case, Froneman DJP said in paragraph [25]:
Under section 197(2)(a) the relevant parties may alter the terms of the
transferred contract, but they cannot escape the fact of its existence. Because
an employees continuity of employment is not a right or obligation, or a term of

the employment contract, express provision was made in + that the transfer of
the employment contract would not interrupt that continuity. There is no
provision in it, similar to section 197(2), which allows the parties to alter an
employees continuity of employment by agreement.
[29]

In the same case, Conradie JA said in paragraph [32]:

Section 197(2)(a) permits the employee and the new employer to modify the
terms of the existing employment contract. They may, as I read the section, do
this by renegotiating its terms regulating their future relationship and also by
adjusting rights and obligations which had at the time of transfer already
accrued. Although the old contract may suffer so many modifications that it
survives only in skeletal form, its survival is not unimportant. It provides the
continuity of employment of which subsection (4) speaks. Some incidents of
the old contract would be unalterable. One of them is the date of its
commencement. That is a historical fact which cannot be altered by
agreement. Any benefits which the law attaches to that commencement date
could similarly not be changed. One of the benefits which the law attaches to
the commencement of an employment contract is, of course, severance
benefits upon retrenchment (section 196 of the Act). (own emphasis)
11.

On the basis of Foodgro, supra, the date upon which the continuous service
with that employer commenced, is a historical fact that cannot be altered by
agreement.

12. These cases were decided on the wording of section 197 before the 2002
amendments.
THE 2002 AMENDMENTS
13. Section 197 was amended by Act 12 of 2002 to read as follows:
197. Transfer of contract of employment.(1)

In this section and in

section 197A
(a)

business includes the whole or a part of any business, trade,

undertaking or service; and

(b)

transfer means the transfer of a business by one employer (the old

employer) to another employer (the new employer) as a going concern.

(2)

If a transfer of a business takes place, unless otherwise agreed in

terms of subsection (6)

(a)

the new employer is automatically substituted in the place of the old

employer in respect of all contracts of employment in existence immediately

before the date of transfer;
(b)

all the rights and obligations between the old employer and an

employee at the time of the transfer continue in force as if they had been rights
and obligations between the new employer and the employee;
(c)

anything done before the transfer by or in relation to the old employer,

including the dismissal of an employee or the commission of an unfair labour

practice or act of unfair discrimination, is considered to have been done by or
in relation to the new employer; and
(d)

the transfer does not interrupt an employees continuity of employment,

and an employees contract of employment continues with the new employer

as if with the old employer.
(3) (a) The new employer complies with subsection (2) if that employer
employs transferred employees on terms and conditions that are on the whole
not less favourable to the employees than those on which they were employed
by the old employer.
(b) Paragraph (a) does not apply to employees if any of their conditions of
employment are determined by a collective agreement.
(4)

Subsection (2) does not prevent an employee from being transferred to

a pension, provident, retirement or similar fund other than the fund to which the
employee belonged prior to the transfer, if the criteria in section 14 (1) (c) of
the Pension Funds Act, 1956 (Act No. 24 of 1956), are satisfied.
(5) (a) For the purposes of this subsection, the collective agreements and
arbitration awards referred to in paragraph (b) are agreements and awards that
bound the old employer in respect of the employees to be transferred,
immediately before the date of transfer.
(b)

Unless otherwise agreed in terms of subsection (6), the new employer

is bound by
(i)

any arbitration award made in terms of this Act, the common law or any

other law;
(ii)

any collective agreement binding in terms of section 23; and

(iii)

any collective agreement binding in terms of section 32 unless a

commissioner acting in terms of section 62 decides otherwise.

(6) (a) An agreement contemplated in subsection (2) must be in writing and

concluded between
(i)

either the old employer, the new employer, or the old and new

employers acting jointly, on the one hand; and

(ii)

the appropriate person or body referred to in section 189 (1), on the

other.
(b) In any negotiations to conclude an agreement contemplated by paragraph
(a), the employer or employers contemplated in subparagraph (i), must
disclose to the person or body contemplated in subparagraph (ii), all relevant
information that will allow it to engage effectively in the negotiations.
(c)

Section 16 (4) to (14) applies, read with the changes required by the

context, to the disclosure of information in terms of paragraph (b).

(7)

The old employer must

(a)

agree with the new employer to a valuation as at the date of transfer of

(i)

the leave pay accrued to the transferred employees of the old

employer;
(ii)

the severance pay that would have been payable to the transferred

employees of the old employer in the event of a dismissal by reason of the

employers operational requirements; and
(iii)

any other payments that have accrued to the transferred employees

but have not been paid to employees of the old employer;

(b)

conclude a written agreement that specifies

(i)

which employer is liable for paying any amount referred to in paragraph

(a), and in the case of the apportionment of liability between them, the terms of
that apportionment; and
(ii)

what provision has been made for any payment contemplated in

paragraph (a) if any employee becomes entitled to receive a payment;

(c)

disclose the terms of the agreement contemplated in paragraph (b) to

each employee who after the transfer becomes employed by the new
employer; and
(d)

take any other measure that may be reasonable in the circumstances

to ensure that adequate provision is made for any obligation on the new
employer that may arise in terms of paragraph (a).

(8)

For a period of 12 months after the date of the transfer, the old

employer is jointly and severally liable with the new employer to any employee
who becomes entitled to receive a payment contemplated in subsection (7) (a)
as a result of the employees dismissal for a reason relating to the employers
operational requirements or the employers liquidation or sequestration, unless
the old employer is able to show that it has complied with the provisions of this
section.
(9)

The old and new employer are jointly and severally liable in respect of

any claim concerning any term or condition of employment that arose prior to
the transfer.
(10)

This section does not affect the liability of any person to be prosecuted

for, convicted of, and sentenced for, any offence. (own emphasis)
14. Once again, the section only operates if a transfer as defined takes place.
15. The automatic consequences that flowed in the absence of a valid contracting
out were now expressed in much clearer language. One of the significant
matters in the amendment was the broadening of the definition of the concept
business to include a service.
16. The reason for the amendment was to clarify the position and specifically to
bring outsourcing arrangements within the reach of section 197.
17. Whether a transfer takes place however remains a question of fact which must
be decided having regard to the factors set out set out in the UCT case.
INITIAL CASE LAW
18. In Schatz v Elliott International (Pty) Ltd [2008] ILJ 2286 (LC), the Court held
that it needs to assess the facts in each case to determine whether all relevant
components and elements which might constitute a business are present, and
whether they are sufficiently and coherently structured in order to be an
identifiable economic entity capable of being transferred.
19. In a SAMWU & Another v SA Local Government Association (LAC. Case No
C411/2007) the Court said:
I deal first with the second prayer in the notice of motion, i.e. that the Court
direct that all future transfers of employment of the applicants members from
the relevant municipality take place in terms of s 197(2), in the absence of any
written agreement concluded under s 197(6). In my view, the relief sought in
respect of any future transfers is misguided, for at least two reasons. First, in

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NEHAWU v University of Cape Town 2003 (3) SA 1 (CC), the Constitutional

Court observed that the fact that the seller and a purchaser of a business have
not agreed on the transfer of the workforce as part of a transaction does not
disqualify the transaction from being a transfer of a business for the purposes
of s 197.

Ngcobo J (as he then was) said: Each transaction must be

considered on its own merit, regard being had the circumstances of the
transaction in question. Only then can a determination be made as to whether
the transaction constitutes a transfer of a business as a going concern (at
29B-C). In my view, this necessarily requires that every transaction claimed to
fall within the ambit of s 197 must be scrutinised, on a case by case basis, in
order to ascertain whether the elements established by the section have been
met, i.e. whether there was a transfer by one employer to another, whether
there is an economic entity capable of being transferred, and whether the
economic entity that is transferred retains its identity after the transfer. (own
emphasis)

CONTRACTING OUT OF SECTION 197 UNDER THE AMENDMENTS

20. The right to contract out was retained in the new subsection 6. But again, the
old and the new owner cannot contract out without the consent of the worker or
his or her union. The party that must consent is the one referred to in section
189 of the LRA. This was

clarified in SAMWU & another v SA Local

Government Association (above) where the court said the following:

In my view, section 197(2) clearly establishes a default position. In other
words, provided that the nature of a transaction is such that it falls within the
ambit of s 197, the consequence of an automatic and obligatory substitution of
the transferor employer for the transferee can be avoided or varied only by an
agreement that complies with s 197(6). The dual purpose of s 197 was
explained in the NEHAWU judgment (supra) it serves to protect workers
against loss of employment, but also to facilitate the transfer of businesses.
Section 197(6) provides additional flexibility to both parties. For example,
workers who do not wish to be employed by the transferee employer may elect
not to be transferred and to accept a severance package from the transferor.
The limits on the variation of the consequence of an automatic transfer of

11

employment contracts are determined only by the relevant parties capacity to

agree. However, while s 197(6) establishes scope for flexibility, it also provides
safeguards. It does in the cross-reference to s 189(1), and effectively
establishes a strict hierarchy of bargaining partners with whom contracting-out
agreements may be concluded. This provision is clearly intended to protect the
interests of affected workers and in particular, to ensure that any rights under
section 197(2) that are compromised are compromised only after a process of
negotiation with a properly authorised and legitimate representative body.
Although the process in this instance is one of negotiation rather than
consultation, I see no reason to depart from the principles established by this
Court under s 189 that recognise a hierarchy of persons and bodies, the first
relevant to the particular factual circumstances excluding all others that rank
below it. (See Sikhosana (supra) and Maluleke & others v Johnson Tiles (Pty)
Ltd (2008) 29 ILJ 2606 (LC)). In the present instance, it is common cause that
the unions were parties to collective agreements with the municipalities that
entitled them to be consulted in the event of a proposed retrenchment. That
being so, the respondents were obliged to seek the agreement of the unions to
vary the consequences of the application of s 197 to the transaction. They
sought that agreement, but failed to secure it. In these circumstances, the
default prevailed and the Department was substituted, by the operation of law,
as the employer of those employees who provided primary health care
services for the municipalities. In my view, this occurred in June 2006, on the
date that the services were transferred (see Van der Velde v Business and
Design Software (Pty) Ltd & another [2006] 10 BLLR 995 (LC)).
It follows that the Departments attempts after June 2006 to secure agreements
in terms of s 197(6) from individual employees were futile. When the services
were transferred, so were the contracts of employment and in the absence at
that point of an agreement with the unions, the Department became bound by
the employees terms and conditions of employment as they applied
immediately before the transfer, and also by any collective agreements and
arbitration awards that bound the municipalities (see s 197 (5)(a)). (own
emphasis)

12

CONTRACTING

OUT

OF

LENGTH

OF

SERVICE

UNDER

THE

AMENDMENTS
21. It is debatable whether the limitations dealt with in Foodgro and AST Holdings
continue to apply because of the change in terminology in the amended
section 197. The amended section 197(2) contemplates that the contracting
out agreement envisaged in section 197(6) could alter the continuity of
employment which is what Foodgro found to be impermissible. We refer in this
regard to section 197(2)(d).

On this basis, it is at least arguable that the

restrictions set out in Foodgro and AST Holdings no longer apply.

22. However, the potential difficulty with this argument is that the date of
commencement of employment remains historical fact rather than a term and
condition or right and obligation in an employment contract. The reasoning in
Foodgro and AST Holdings may still be applied under the terms of the
amended section 197. What the amendment contemplates, is that the old and
new employer enter into an agreement which in essence would allow them to
apportion liability for severance payments and other obligations, referred to in
subsection (5), save that for the first twelve months both remain jointly and
severally liable (section 197(8)).
23. It is therefore still impermissible to change a historical fact by changing the date
of employment of the worker, even under a section 197(6) agreement.
24. What the parties can do to achieve the same purpose, is to apportion liability as
the amendments envisaged.
DISMISSAL PROTECTIONS UNDER THE AMENDMENTS
25. In order to further entrench the job security of workers, Section 187(2) of the
LRA provides that a dismissal would be automatically unfair if the:
reason for the dismissal is
(g)

a transfer, or a reason related to a transfer, contemplated in section

197 or 197A;
[Para. (g) added by s. 42 of Act No. 12 of 2002.]
FIRST GENERATION TRANSFERS
26. There was not much controversy about the applicability of section 197 (both
old and new) to first generation transfers, namely where the business is sold

13

from one contracting party to another, classically as with a sale of a business

as a going concern.
27.
FIRST GENERATION SUBCONTRACTING OR OUTSOURCING
28. First generation outsourcing occurs when there is a direct contractual
relationship between the employer and the third party entity to whom the
business or service is outsourced.
29. The controversy that existed over whether section 197 applied in first
generation outsourcing situations where part of a business is subcontracted in
terms of a contract to a third party, was cleared up in SAMWU & others v Rand
Airport Management Company (Pty) Ltd & others [2005] 3 (BLLR) 241 (LAC).
In this case the Court held that the outsourcing of gardening and security
services constituted a service and was capable of being transferred. The
Court, however, held that on the facts of this particular matter, no outsourcing
agreement was actually implemented or entered into and thus no outsourcing
took effect between the first, second and third respondents. The Court,
however, declared that the draft outsourcing agreements between the
respondents were agreements to which section 197 would apply if
implemented.
RELIEF ON ASSUMPTION OF FUTURE EVENTS

30.

This is an important judgment because it indicates that relief may be obtained

on the assumption of what may happen in future.

31. This approach was approved by the majority in Aviation Union of SA & another
v SA Airways (Pty) Ltd & others [2012] 3 BLLR 211 (CC)
[117]The order in SAMWU (supra) was right because to await the
implementation of the agreement results in the perpetuation of the very
mischief that the Legislature sought to avoid in enacting the section.
FINANCIAL BURDEN

14

32. The applicability of section 197 to second generation outsourcing arrangements

or contracts naturally places the burden on the new employer.
33. However, as explained in Foodgro (above):
If there is, at the time of transfer of the business, any likelihood of
retrenchment, the cost to the new owner would have to be tailored into the
price negotiated for the concern.

SECOND GENERATION OUTSOURCING

34. There was much controversy, however, about whether or not section 197
applied to so called second generation transfers that is, where the business
changed hands without there being any contractual privity between the original
owner (that is, the first outsourcee or sub-contractor) and the new one (as
occurs when a tender contract expires and is then awarded to someone else)
or where a contract was cancelled and the business reverted to the original
owner or from a subcontractor back to the primary contractor.
35. The first case to deal with this issue was COSAWU v Zikhethele Trade (Pty) Ltd
& Another [2005] 9 BLLR 924 (LC).
36. Second generation outsourcing was defined at paragraph 27 of the judgment
as follows:
Second generation contractingout typically occurs in circumstances where
a company has outsourced services to a contractor and when the initial
contract comes to an end puts the opportunity to provide the service out to
tender, whereupon the original contractor is unsuccessful in its bid to secure
the contract for an additional term.
37. On the basis of a purposive interpretation of Section 197 the Court held that
the section also applies to second generation outsourcing.
[28]

On the other hand, this Court has held on another occasion that the

lack of a contractual link between the transferor and the transferee is not a
necessary precondition for the application of section 197 (Nokeng Tsa
Taemane Local Municipality & another v Metsweding District Municipality &
others 2 (2003) 24 ILJ 2179 (LC) at 2183).

15

[29]

Likewise, I am persuaded that a less literal and more purposive

approach is justified in the context of section 197. As stated earlier, the section
is intended to protect employees whose security of employment and rights are
in jeopardy as a result of business transfers. A mechanical application of the
literal meaning of the word by in section 197(1)(b) would lead to the anomaly
that workers transferred as part of first generation contracting-out would be
protected whereas those in a second-generation scheme would not be, when
both are equally needful and deserving of the protection. The possibility for
abuse and circumvention of the statutory protections by unscrupulous
employers is easy to imagine. As in this case, the danger exists that the
employees might not only lose their continuity of employment but also their
severance benefits, for the reason that the old employer having lost its
business to the new employer lacks the means to pay its debts. Accordingly, I
am in agreement with Todd et al Business Transfers and Employment Rights in
South Africa Butterworths 2004 at 27, that section 197(1)(b) might be better
interpreted to apply to transfers from one employer to another, as opposed to
only those effected by the old employer. A pragmatic interpretation of this kind
allows a finding that a business in actual fact can be transferred by the old
employer in such circumstances, but that the transfer occurs in two phases: in
the first, the business is handed back to the outsourcer; and in the second, it is
awarded to the new employer. Importantly this interpretation will be in
conformity with the prescriptions of section 39(2) of the Constitution (108 of
1996) obliging courts when interpreting legislation to promote the spirit, purport
and objectives of the Bill of Rights. By affording the same protection to
employees

affected

by

first

and

second

generation

contracting-out

arrangements, courts will promote the spirit and advance the purport of equal
treatment and fair labour practices. (own emphasis)
38. Relying on UK Law and at paragraphs 30 35 of the judgment Murphy AJ held
that the lack of a contractual link between the old and new employer is not
decisive.

The decisive criterion is whether after the alleged transfer the

undertaking has retained its identity, so that employment in the undertaking is

continued or resumed in the different hands of the transferee. (own emphasis)
39. It was further held that (at paragraph 34):
In order to determine whether there has been a retention of identity it is

16

necessary to examine all the facts relating to both the identity of the
undertaking and the relevant transaction and assess their cumulative effect,
looking at the substance, not at the form, of the arrangements. The mode or
method of the transfer is immaterial.

The emphasis is on a comparison

between the actual activities of and actual employment situation in an

undertaking before and after the alleged transfer.
40. In the light of the facts Murphy AJ concluded that on a narrow comparison
between the actual activities and actual employment situation in the two
companies before and after FPTs award of the tender to Zihethele, the
business as a going concern has retained its identity to a sufficient degree as
to constitute a transfer of business:
41. Other judgments dissented from this view. In Aviation Union of South Africa v
South African Airways (Pty) Ltd [2008] 1 BLLR 20 (LC), Basson J held that,
based on a literal interpretation, section 197 is not applicable in a secondgeneration contracting-out exercise.
42.

In Crossroads Distribution (Pty) Ltd t/a Jowells Transport v Clover SA (Pty) Ltd
[2008] 6 BLLR 565 (LC), the Court also held that section 197 did not apply. The
Court endorsed the interpretation in the Aviation Union case. The Court thus
held that where a principal concludes a new contract with a new service
provider after a previous service provider had cancelled the (old) contract, the
new contract does not constitute the transfer of a business as contemplated by
section 197 of the act.

43. This reasoning in COSAWU was confirmed by the LAC in the case of Aviation
Union of South Africa obo Barnes and Others v South African Airways
(Pty) Ltd and Others (2009) 30 ILJ 2849 (LAC). In this case, SAA disputed
the appellants contention that section 197 applied when the contract between
itself and LGM SA came to an end, and SAA decided not to contract the
services out to another contractor but decided to do the work itself by using the
services of its own employees. The Court disagreed.
44. In his judgment Zondo JP said (at paragraph [24]):
As I understand it, those who hold the view that sec 197 does not apply in this
situation accept that it applies in the first outsourcing agreement between the
outsourcer and the outsourcee if there is a transfer of a business as a going

17

concern but they do not accept that, when there is a further outsourcing to
another party and there is a transfer of business as a going concern, sec 197
applies at that stage. In my view this proposition is destructive of the
purpose(s) of sec 197, namely, to protect workers against the loss of jobs and
the facilitation of a transfer when there is a transfer of business as a going
concern.
45. At paragraph [30] Zondo JP concludes:
[30]

Finally, in my view we should not adopt a construction of sec 197 that

is at war with the very purposive (sic) of the section. I accept that one should
be careful in this regard because a Judge is not free to encroach upon the
territory of the legislature and begin to rewrite a statutory provision. However, I
think it is different where the purpose of the section is clear and certain, as is
the case here, particularly after the purposes of sec 197 were definitively
pronounced upon by the Constitutional Court in NEHAWU v UCT as stated
above. I think that in such a case, if it appears that to give a word its ordinary
meaning would defeat the purpose of the statutory provision in question, then
the word should not be given its ordinary meaning and should be given one
that gives effect to the purpose of the statutory provision and, if there is no
other meaning for the word, the Court should read into the statutory provision a
word that will give effect to the purpose of the statutory provision and make
sense of the statutory provision.
46. Davis JA held as follows (at paragraphs [59] ff):
[59]

In the present case, the agreement between SAA and LGM provided

that SAA could cancel the agreement. Once that right had been invoked, the
business would be transferred from LGM to a third party or back to SAA. In
short, the old employer, being LGM, would be required to transfer that
business to a new employer either SAA or to a third party. There is nothing in
the wording of section 197 which inherently prevents its application to such a
case.
[60]

Wallis at 10 says [w]hat the section says is that that the old employer

is a positive actor in the process. This is not what occurs when an institution
has concluded a contract for the provision of cleaning services and at the

18

expiry puts it out to tender and the existing contractor loses the tender. In those
circumstances the role and function of the old employer is to strive to keep the
contract not to transfer all or any part of the business to someone else.
Sophistry aside, there is no compelling reason to conclude, on the wording of
section 197(1)(b), that the new employer( i.e. the initial transferee) has not
transferred the business to a third party or to the initial transferor. In other
words the initial transferee became the employer after the initial transfer.
Pursuant to the contract which caused the initial transfer, the existing employer
is now obliged to transfer the business to a party which will now become the
new employer. Hence the second generation transfer falls within the scope of
the definition.
[61]

Assume however, that the word by must be interpreted to connote a

positive action on the part of the old employer (in this context LGM) as
contended for by respondent. On the particular facts of this case, the requisite
positive action was taken when the initial agreement was concluded between
SAA and LGM which afforded SAA rights to compel LGM to act by means of a
transfer of the business back to SAA or to a third party.
[62]

In my view, the approach to section 197 adopted by the Court a quo is

neither inexorably congruent with the literal wording of the section nor with the
facts of the present dispute Hence , the conclusion it reached cannot be
supported. Further, the application of the provisions of section 197 is clearly
incongruent with the purpose of this section as already outlined. The
interpretation of section 197(1)(b) as proposed does no violence to the wording
of the section and is manifestly congruent with the purpose of section 197 read
as a whole.
[63]

Accordingly, I find that the court a quo erred in the approach that it

adopted to section 197. On a purposive construction, section 197 covers the

situation, whereby, after SAA cancelled the initial outsourcing agreement, it
invoked clause 27 of the agreement to compel LGM to implement the
handover plan. The application should not have been dismissed in its entirety.
Some declaratory order should have been granted.
THE SCA South African Airways (Pty) Ltd v Aviation Union of South
Africa & others [2011] 2 BLLR 112 (SCA)
47.

The SCA overruled this decision on the facts and law.

19

[32]The purposive interpretation adopted by the Labour Appeal Court was

aimed, it said, at preventing abuse. This concern on the part of the court is
misconceived because there is, as SAA argued, no suggestion of any abuse in
the present case. And even if we accepted that such abuse is possible, that is
no reason to distort the plain meaning of the section. We accordingly conclude
that the Labour Appeal Court erred in adopting an approach to the
interpretation of section 197 which is at odds with the ordinary meaning of the
words chosen by the Legislature. By interpreting the word by to mean
from the court impermissibly distorted the meaning of the word.
48.

The court also found on the facts that:

[41]In the absence of a factual basis for the Labour Court to have concluded
that there was a transfer of a business as a going concern by LGM either to
SAA or to another entity, its decision to dismiss the application was correct.
Accordingly the Labour Appeal Court erred in upholding the appeal to it.
AVIATION UNION OF SA & ANOTHER V SA AIRWAYS (PTY) LTD &
OTHERS
[2012] 3 BLLR 211 (CC)

49.

The Constitutional Court held that the question whether the section applies to a
particular set of facts must always be determined with reference to three
categories of issue, namely business, transfer and going concern. These
constituted matters of fact to be determined objectively.1
Business

50.

For the section to apply the business must have changed hands, whether
through a sale or other transaction that places the business in question in
different hands.2

1AUSA (above) at para 44(minority)

20

51.

Both the minority and majority judgments rejected the contention that the
reference in section 197(1)(b) relates only to a transfer from one employer to
another employer and not to what is termed second-generation outsourcing. It
accepted that the section applied to second-generation outsourcing. 3

52.

The Court furthermore indicated that in order to determine whether a transfer

as contemplated in section 197 has occurred or will occur, is a factual question.
It must be determined with reference to the objective facts of each case.

53.

The Court said the following:4

Speaking generally, a termination of a service contract and a
subsequent award of it to a third party does not, in itself,
constitute a transfer as envisaged in the section. In those
circumstances, the service provider whose contract has been
terminated loses the contract but retains its business. The
service provider would be free to offer the same service to
other clients with its workforce still intact.
For a transfer to be established there must be components
of the original business which are passed on to the
third party. These may be in the form of assets or the taking
over of workers who were assigned to provide the service.
(own emphasis)
Going Concern

54.

The Court5 confirmed that when determining whether a business was

2AUSA (above) at para 46(minority)

3AUSA (above) at para 105(minority)
4AUSA (above) at para 47 & 48 (minority)

21

transferred as a going concern in terms of section 197 the following test

applied:6
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. A number of factors will be
relevant to the question whether a transfer of a business as a
going concern has occurred, such as the transfer or otherwise
of assets both tangible and intangible, whether or not workers
are taken over by the new employer, whether customers are
transferred and whether or not the same business is being
carried on by the new employer. What must be stressed is
that this list of factors is not exhaustive and that none of
them is decisive individually.

55.

It is thus always necessary to embark on a detailed factual enquiry to determine

whether the business will be transferred as a going concern.

56.

In essence, what s required is snapshot before and after the alleged transfer.

57.

The majority judgment7 also focussed on the substance of the initial

transaction8 with a view to determining whether what was outsourced
constituted (a) simply a provision of a service or (b) a business as a going
concern.

5AUSA (above) at para 50(minority)

6The Court confirmed the test it laid down in Nehawu v University of Cape
Town [2003] BLLR 409 (CC)
7AUSA (above) at para 106-108 (majority)
8The initial transaction in that case was the first outsourcing arrangement to
LGM

22

58.

The Court found as follows:

If the outsourcing institution from the outset did not offer the
service, that service cannot be said to be part of the business
of the transferor. What happens here is simple contracting out
of the service, nothing more, nothing less.
There is no transfer of the business as a going concern. The
outsourcee is contracted to provide the service, and becomes
obliged to do so. And it is the outsourcees responsibility to
make

appropriate

business

infrastructure

arrangements.

These may include securing staff, letting appropriate property

for office or other work space, and acquiring fixed assets,
machinery and implements, computers, computer networks
and the like.

BY:
59. About this the majority of the court said:
[113]It cannot be doubted that the word by must be given
its ordinary meaning. We must ask these questions in the
inquiry
transfer

whether
of

transaction

business by the

in

issue

contemplates

old employer

to the

new

employer. Does the transaction concerned create rights and

obligations that require one entity to transfer something in
favour or for the benefit of another or to another? If so, does
the obligation imposed within a transaction, fairly read,
contemplate a transferor who has the obligation to effect a
transfer or allow a transfer to happen, and a transferee who
receives the transfer? If the answer to both these questions
is in the affirmative, then the transaction contemplates
transfer by the transferor to the transferee. Provided that this

23

transfer is that of a business as a going concern, for purposes

of section 197, the transferee is the new employer and the
transferor the old. The transaction attracts the section and
the workers will enjoy its protection.

60.

The court found on the facts

[124]In the circumstances, the cancellation clause of the agreement
contemplated a transfer of the business as a going concern. The only
debate was about whether the business as a going concern was to
be transferred to SAA or to an interim service provider. As long as
there is a transferor, the identity of that entity or person is of no
material significance. The agreement contemplates transfer by LGM
to SAA or to the interim service provider. It requires a transfer by a
transferor, the old employer, to the transferee, the new employer.

WALLIS : ITS NOT BYE BYE TO BY: SOME REFLECTIONS ON SECTION 197
OF THE LRA 2013 ILJ 779
61.

Commenting on this judgment in an illuminating article Wallis concludes:

As can be seen from these passages, ultimately the outcome of the case did
not turn upon the meaning or effect of the word By but upon its own particular
(and peculiar )facts. Put simply, different judges viewed the same set of facts
differently. From a legal perspective the significance of the CCS judgment is
that it disposed( by a narrow majority) of the view that the clear wording of the
section could, or should, be altered by way of interpretation. It also helped to
clarify that it is not outsourcing as such or the generation of the outsourcing
that matters, but whether there has been a transfer of the whole part of a
business, undertaking or service as a going concern. The transfer must be by
the old employer. That is the person who is the employer at the time of the
relevant transaction. The original employer is the old employer for the

24

purposes of the section when the original outsourcing occurs, but not
thereafter.We are back where we started with a section that requires to
be applied in the context of particular business transactions. Its elements
are now, as I suggest, they always have been reasonably clear. The true
enquiry, we are told by the majority of the CC, is whether there has been a
transfer of a business as a going concern by the old employer to the new
employer . That echoes the language of the section but it leave unanswered the
question of its application for that range of transactions that may broadly be
described as involving outsourcing:
62.

On this basis Wallis says there are four questions: Has there been a transfer?
Was what was transferred the whole or part of a business? Was it a going
concern? Was the transfer affected by the original employer of the affected
employees?

63.

On this analysis Wallis accepts that on the SAA case SAA took back the
business.

64.

But he highlights two scenarios where there will not be a transfer. The first is
where on the facts in NEHAWU the university outsourced its gardening service.
He argues that on the basis of the judgment of the majority section 197 is not
triggered if the outsourcing institution from the outset did not offer the service
and where it is the outsources obligation to make appropriate arrangements for
business infrastructure..

65.

The second is where there is a second generation outsourcing but not transfer
back to the principal ie where the contractor who has been providing an
outsourced service loses the contract to another contractor.

He says in

many, I venture to suggest the majority of, instances , the new tender will
be let in advance of the expiry of the old and , if a new contractor is
appointed, the transition from one to the other will be relatively seamless.
Whilst the principal of the agency by which that occurs, the principal is
not the employer of the affected workers and that employer( the old
employer) for the purposes of s197 has affected any transfer.
66.

He suggests that the constitutionality of the section should be attacked if

workers believe that the protection is inadequate or does not fulfil the purpose
of protecting job security.

25

Harsco Metals South Africa (Pty) Ltd & another v Arcelormittal South
Africa Limited and others[2012] JOL 28260 (LC)
67.

This is not how the court saw the matter in Harsco where precisely this
occurred. There was no transfer back to Arcelormittal when the contract came
to end and Arcerlormittal was never the employer yet the court found that
section 197 was triggered when it appointed a new contractor on tender.

68.

In this case, Harsco Metals (which performed services for Arcelormittal SA

Limited (AMSA) in terms of six separate service contracts) sought an urgent
declaratory order to the effect that the transfer of its business to the Second
and Third Respondents (Phoenix Services International LLC and Tube City IMS
SA (Pty) Ltd) constituted a transfer of a business as a going concern for the
purpose of section 197 of the LRA.

69.

The issue raised was whether, on termination of the service agreements

between Harsco Metals and AMSA, the appointment by AMSA of the Second
and Third Respondents (the new service providers) and the continuation of
the services by them, the application of section 197 was triggered. 9

70.

The Court examined the facts carefully and cumulatively and concluded that
there was indeed a transfer of a business as a going concern.

71.

In coming to this conclusion, the Labour Court considered the AUSA judgment
and affirmed that it is a matter of fact to be determined objectively whether
there has been a transfer of a business as a going concern from the old
employer to the new employer and that this involved an enquiry into (1)
whether there existed a transfer, (2) whether there was a transfer of the
business and (3) whether the business is transferred as a going concern. The
Court said the following:

9HARSCO (above) at para 4

26

In this regard, the approach adopted by the court in

NEHAWU v University of Cape Town was affirmed. This in turn
requires that there should simultaneously be a transfer by one
employer to another, an economic entity capable of being
transferred, and that the economic entity retain its identity
after the transfer.10

72.

The Court also reaffirmed AUSAs decision that section 197 does apply to
second (and further) generation outsourcing and that whether outsourcing
attracts the application of section 197 is to be determined in the same way as
any other transfer.

73.

The Court said the following:

Section 197 is triggered when on the facts there is a transfer
by one employer to another, in circumstances where the
transferred entity is the whole or part of a business, and
where the business (or part of it) is transferred as a going
concern. If the transfer meets these criteria (a matter for
objective

determination),

the

transferee

is

substituted

automatically and by operation of law for the transferor as the

employer of those of the transferors employees engaged in
the business on the date of the transfer.
74.

The Court scrutinised the initial transaction principles set out in the AUSA
majority judgment and said the following11:

10HARSCO (above) at para13

11HARSCO (above) at para 20

27

What Yacoob J does not say, and could never be interpreted

to say, is that unless there was a s 197 transfer from an
outsourcing party to the first contractor there could never be
a subsequent transfer from the first contractor to any second
or subsequent contractor, regardless of the facts and the
nature of the transaction. Such a general rule would be
flawed, as can be seen from the example, inspired by the
Rand Airport judgment. ACSA decides to build a new airport.
It

contracts

with

to

provide

gardening

services.

commences the provision of services in circumstances where

ACSA has never regarded gardening as an integral component
of its business operation. The contract with B terminates, and
C is appointed

to provide the services. It cannot be

suggested, in principle, that there can never be a transfer

from B to C only on account of the fact that there was no
transfer from A to B. The correct approach, in my view, as
recognised by the Labour Appeal Court in Rand Airport and
the Constitutional Court in NEHAWU, is for the court to
scrutinise

the

transaction

in

question

and

the

factual

circumstances surrounding it to determine whether on the

applicable test the application of s 197 is triggered. This
interpretation of the majority judgment in SAA is consistent
with the purpose of s 197, which is to ensure both continuity
of employment within an economic entity irrespective of any
change in ownership, and to facilitate the smooth transfer of
businesses as going concerns.
75.

In determining whether there was a transfer, the Court had regard to the
decision of COSAWU v Zikhethele Trade (Pty) Ltd 12 and held that the
absence of a contractual link between the old and the new employers was not
decisive. Further, in a situation where one contractor succeeds another, section

12[2005] 9 BLLR 924 (LC)

28

197 is not automatically applicable, but nor is it the case that its application is
necessarily excluded. What is more significant than the mode of transfer, was
whether what is transferred is a business in operation that remains the same
but in different hands.13
76.

The Court said that the section 197(1) definition of business is wide and
requires the Court to subject the entity to be transferred to detailed scrutiny.

77.

The Court affirmed that in determining this it was bound by the decision of
SAMWU v Rand Airport Management Co Ltd 14. The Court said the
following:15
In that case, the court concluded that the outsourcing of
gardening and security functions at an airport management
by the employer were businesses capable of being transferred
in terms of s 197, despite that fact that it did not appear that
any assets, goodwill, operational resources or workforce were
to be transferred. No distinction was drawn between a
business that is largely employee-reliant, as opposed to an
asset-reliant business. Nor was it suggested that in the
former, greater weight ought to be attached to the number of
employees transferring as opposed to the latter instance, in
which the number of assets transferring might attract greater
weight. If, as in that case, a grouping of relatively unskilled
employees and the work they perform, with no assets
appearing to be the subject of any transfer, comprises a
business for the purposes of s 197, then it is difficult to
conceive, in the context of an outsourcing transaction, of an

13HARSCO (above) at para 24

14[2005] 3 BLLR 241 (LAC)
15HARSCO (above) at para 27 and 28

29

economic entity that would not be capable of transfer in terms

of the section.
For these reasons, I am satisfied that there is an economic
entity capable of being transferred, in the form of Harscos
business operations conducted pursuant to the six service
agreements concluded with AMSA.

78.

In determining whether there was transfer of a business as a going concern,

the Court had regard to the decision of NEHAWU v University of Cape
Town16. In that case, the Court examined a number of factors such as the
transfer of assets, whether workers would be taken over, whether customers
would be transferred and whether or not the same business would be carried
on by the new employer.

79.

In applying this, the Court in HARSCO went into a detailed factual enquiry into:
79.1.

The nature of the business;

79.2.

what would occur on termination of the contracts of service;

79.3.

what services the new service providers would perform;

79.4.

the degree of similarity of the services performed by Harsco and the

new service provider before and after the transfer;

79.5.

who would be the recipient of the services in terms of the relevant

service agreement both before and after the transfer;

79.6.

what components of the original business would be passed onto or

transferred to the new service providers;

16[2003] 5BLLR 409 (CC)

30

79.7.

what assets (human and non-human) would be left behind by Harsco

Metals;

79.8.

which assets would be purchased by AMSA; and

79.9.

which assets would be utilised and sold on to the new service

providers.

80. In deciding what weight to attach to these factors, the Court affirmed the finding
of Murphy AJ in COSAWU v Zikhethele Trade (Pty) Ltd17 where Murphy AJ
held that the decisive criterion for determining the existence of a business is
whether, after the transfer, the undertaking had retained its identity 18. This
required an examination of all the facts relating both to the identity of the
undertaking, the relevant transaction and an assessment of their cumulative
effect - looking at the substance, not at the form, of the arrangements. The
emphasis should be placed on the activities of and actual employment
situation in, an undertaking before and after the alleged transfer. The Court
went on to say that the primary consideration should be the nature of the
business. This would provide a useful indication of the weight to be attached
particularly to the transfer of assets and whether workers are taken over by the
new employer, and if so, the quantity or number and significance of each. 19
81.

The Court also said that the factual circumstances to be taken into account in
determining whether the conditions for a transfer of whole or part of a business
as a going concern for the purposes of s 197 are met, are primarily the degree
of similarity of the activity carried on before and after the transfer, the type of
undertaking concerned, and the question whether or not the majority of the

17Above
18HARSCO (above) at para 31
19HARSCO (above) at para 32

31

employees are to be taken over by the new employers.20

82.

The Court found that viewed cumulatively and having regard to the fact that on
the transfer date substantially the same services would be provided from the
same locations, there existed an economic entity which, despite changes,
would remain identifiable, though not necessarily identical, after transfer.21

83.

The Court was thus persuaded that the entity that comprised Harscos business
operations performed in terms of the service agreements with AMSA would
continue as a discrete economic entity in the hands of Phoenix and Tube City
on termination of the service agreements between Harsco and AMS, and that
for the purposes of section 197, there would be a transfer of a business as a
going concern.22
Franmann Services (Pty) Ltd v Simba (Pty) Ltd and another [2012]
12 BLLR 1293 (LC)

84.

The Applicant, a temporary employment service, provided employees to work

for the First Respondent until the Applicants proprietor gave notice that he
intended discontinuing the service and winding-up his company. The First
Respondent issued a letter of intent signifying its intention to appoint the
Second Respondent to replace the Applicant. Shortly before its contract was
set to expire, the Applicant launched an urgent application for an order
declaring that its employees engaged to work for the First Respondent would
transfer automatically to the Second Respondent in terms of section 197 of the
LRA.

85.

The Court found that section 197 was not triggered. The Court held that:

20HARSCO (above) at para 37

21HARSCO (above) at para 3
22HARSCO (above) at para 9

32

[12] In other words, the test for determining whether a

business (including a service) has been transferred as a going
concern must incorporate all of the components of the
transferring entity to determine whether that entity is
essentially the same after the transfer. This is an enquiry that
extends beyond the function being provided.

86.

Applying this test, the Court found that :

86.1.

the termination of a contract between a client and service provider is

not in itself a transfer of a business as a going concern;

86.2.

The fact that the service provided to the First Respondent will, as of 1
September, be provided by the second applicant is in itself of no
consequence.

87.

On the papers before it, it was not disputed that the Second Respondent has
no intention of acquiring or taking of any of the corporeal and warning
incorporeal assets of the Applicant, and that it has no intention to utilise any
processes instituted by the Applicant or of acquiring any of the Applicants rights
or obligations as against the First Respondent. On that basis, in the light
particularly of there being no assets, tangible or intangible, goodwill and the like
that is to be transferred, and in the absence of any specific evidence relating to
the use of any of the First Respondents assets or infrastructure, there is no
transfer as a going concern.

88.

In so far as any intention by the Second Respondent to employ any of the

Applicants employees is concerned,

the Court was unable to find, on the

evidence before it, that it is more probable than not that either the First or the
Second Respondents, or both, will make offers of employment to the
Applicants employees after 31 August.

33

89.

Although the Second Respondent in particular has been equivocal as to its

future intentions regarding the employment of any of the Applicants employees,
that is not sufficient in itself to warrant a finding that it intends to do so. This is
an issue best dealt with in terms of an express statement to the effect that in
the event of any material change in the circumstances that currently pertain,
this judgment will not preclude any of the parties from exercising any right that
may be acquired by virtue of those changed circumstances.

90.

It was not argued to the court that the employees had two employers .

91.

There was a potential for this argument because section 198 is silent about the
applicability of section 197 in this scenario.
PE PACK 4100CC V ADAM SANDERS [2013] 4 BLLR 348 (LAC)
FRANCHISE

92. In this judgment, the Court was concerned with a change of franchisee. The
court found that there was no transfer. The second and further respondents
were all engaged in the cellphone business, the second respondent having
appointed the third and fourth respondents as franchisees operating from
premises owned or rented by the second respondent. When the second
respondent cancelled the franchise agreements with the third and fourth
respondents, it concluded a fresh agreement with the appellant, who
commenced operating from the premises vacated by the third and fourth
respondents. The first respondent, formerly employed by the third and/or fourth
respondents, was then consulted by the appellants MD about his possible
retrenchment. The first respondent contended that he had transferred
automatically to the appellant by virtue of section 197 of the LRA.
93. The majority of the court held, distinguishing SAA,
[18] In short, appellant had not acquired the business as a going concern from
either third or fourth respondent. It cannot be said, therefore, that components
of the business operated by third or fourth respondent had then been passed
onto the appellant. What effectively had taken place was that the license to
operate a business on behalf of second respondent had been terminated by

34

the latter, insofar as third and fourth respondents were concerned. This was
not the equivalent situation to that of an outsourcing agreement. The franchisor
continued to hold the core assets. They remained those of the franchisor, being
second respondent, both before and after the agreement had been concluded.
There was thus no transfer of infrastructural assets which would sustain an
argument that there was a transfer of a going concern. Once the core assets
remained intact, that is in the ownership of the second respondent as the
franchisor, it becomes difficult to see how a transfer of a business pursuant to
section 197(1) has taken place.
94.

The Court laid down the test as to the applicability of section 197 as follows:
[14] ..
(i)

Does the transaction concerned create rights and

obligations that require one entity to transfer something
in favour of/or for the benefit of another or to another?

(ii)

If the answer to (i) is in the affirmative, does the

obligation imposed within the transaction contemplate a
transferor who has the obligation to effect a transfer or
allow a transfer to happen and a transferee who
received the transfer? If the answer to this question is in
the affirmative, then the transaction constitutes a
transfer for the purposes of s 197.

Grinpal Energy Management Services (Pty) Ltd v City Power

Johannesburg (Pty) Ltd [2013] 1 BLLR 34 (LC)
95.

The Court pointed out that whether an outsourcing arrangement attacks the
provisions of section 197 of the LRA, is a question of fact. The Court found on
the facts that the infrastructure used for conducting the business in issue (the
installation and maintenance of electricity metering systems) transferred back
to the city after the contract was cancelled.

35

IS

CONSULTATION

BEFORE

THE

TRANSACTION

TAKES

PLACE

OBLIGATORY
96. The fact that section 197 of the LRA does expressly require consultation before
a transfer agreement is concluded, is no bar to the Court compelling
consultation if to do so would remedy a wrong or give effect to the primary
objects of the Act. Hence, on this basis the LAC in Kgethe and Others v LMK
Manufacturing (Pty) Ltd and National Rubber Products CC 23, the Labour
Appeal Court in dealing with a transfer in terms of section 197 of the LRA held
as follows:
As demonstrated above, there is good reason to apprehend that in
fact a transfer as a going concern was effected or, alternatively that a
transfer of employment contracts in contravention of section 197(1) had
been effected, and that the rights of the appellants are being infringed.
In such circumstances and in order to enable the effective
exercise of its jurisdiction to issue the declarators referred to, the
labour court has the power to order the disclosure of information
bearing on the existence or otherwise of those rights. Such an
approach not only promotes fairness, but is also practical in that
it facilitates the determination of what rights exist and may have
the effect of obviating unnecessary litigation.

97. The purpose of the LRA is to promote social justice, industrial peace, industrial
democracy and fundamental rights. All these purposes would be achieved by
recognizing a duty to consult.

98. The provisions of section 197 permit the assignment of a contract of

employment without the consent of the workers.
23 1998 (3 BLLR 248 (LAC)

36

See:Telkom SA Ltd & Others v Blom & others [2003] 7 BLLR 638 (SCA)

99. As Brassy observes in Commentary on the Labour Relations Act, Vol 3 at

A8-171 172, at common law, an employer may not transfer an employee to
another employer without the employees consent and any attempt by the
employer to do so, will constitute an anticipatory breach of contract.

100. The application of section 197, when the transfer takes place, is automatic and
workers have no say at that point. As Todd et al observe in Business, Transfers
and Employment Rights at 88, the section removes the right of workers to
choose their employer. Section 197 eliminates the place of consent required by
the common law by providing instead for an automatic transfer of a contract of
employment. What the Applicant contends for, is not consent but consultation
before the decision to transfer is made or implemented.

Even though the

authors acknowledge that the EC Directive requires consultations, they go on

to submit for various reasons that there is nevertheless no duty to consult
unless retrenchments are contemplated.

101. In

the

matter of

VUSUMZI

MAPHONGWANA &

OTHERS v

KSD

MUNICIPALITY & OTHERS Case no: P412/12 the court held at para 8 :
Absent the agreement, nothing prevented the respondents from transferring
the applicants contracts of employment as envisaged in section 197(2) of the
LRA which did not require the municipality to consult with or seek the consent
of the applicants before they could be transferred. As the applicants transfer
on 1 July 2012 is lawful, the applicants therefore have no right which can be
protected by the interim order they are seeking.

102. In submission, this view is wrong and does not give effect to the primary objects
of the LRA or the Constitution.

37

103. The contract of employment is one of personal service (see Santos

Professional Football Club (Pty) Ltd v Igesund 2003 (5) SA 73 (C)), the
Court at 78G held that a worker has an interest in who his contract may be
transferred to. Although his consent is not required in the context of section
197, the workers employer has changed. Workers are not chattels. Workers
have the right to dignity. This right is constitutionally protected.
104. As Nugent said in Minister of Home Affairs v Wactenuka and another 2004
(4) SA 326 SCA at para 26, the freedom to engage on productive work is an
important component of human dignity and as observed by Davis JA in Kylie v
CCMA [2010] 31 ILJ 1600 (LAC) at par 26 section 23 of the Constitution at its
core protects the dignity of those in an employment relationship.
105. One of the recognized reasons for the audi alteram partem principle is precisely
that it should be inferred in a statute to give effect to the right to dignity. Dignity
is one of the foundational values of the Constitution.
President of the Republic of South Africa and Others v South
African Rugby Football Union and Others [1999] ZACC 11; 2000 (1)
SA 1 (CC); 1999 (10) BCLR 1059 (CC) (SARFU) at para 171

Bel Porto School Governing Body and Others v Premier of the

Province, Western Cape and Another [2002] 9 BCLR 891 (CC)

Hoffmann v South African Airways [2000] 12 BLLR 1365 (CC)

106. Both ORegan J and Chaskalson P linked the right to life and the right to dignity
together, each as a condition for the other and as the most important of all
rights. Chaskalson P concluded:

38

By committing ourselves to a society founded on the recognition of

human rights we are required to value these two rights above all
others.

(para 144 and 327 in S v Makwanyane and Another 1995 (6) BCLR
665 (CC))

107. The judgment of the Namibian Supreme Court in Africa Personnel Services
(Pty) Ltd v Government of The Republic of Namibia SA 51/2008 makes the
trenchant point that:

We have discussed the principle that labour is not a commodity earlier in

this judgment and pointed out that, unlike a commodity, it may not be
bought or sold on the market without regard to the inseparable connection
it has to the rights and human character of the individual who produces it.
We emphasized the importance of labour legislation in bringing about
social justice at the workplace; to redress bargaining imbalances between
employers and employees and to protect employees, especially those who
are most vulnerable, against exploitation.

108. In his seminal work, The Right to a Hearing Before Dismissal Problems and
Puzzles [1998] 9 ILJ 147 at 162 165, Cameron in discussing the rationale for
the right to a pre-dismissal hearing, says as follows:
Fairness recognizes the dignity of the human being which in turn will
promote equitable labour relations. The reason for this is stated in an
English judgment on the principles of natural justice which is quoted in
the same case : Nor are those with any knowledge of human nature

39

who pause to think for a moment likely to under estimate the feelings
of resentment of those who find that a decision against them has been
made without being afforded an opportunity to influence the cause of
events.

109. Recognizing the duty to consult, establishes transparency and avoids labour
disputes by promoting industrial peace and indeed, job security. The facts in
SA Chemical Workers Union v Unitrans Supply Change Solutions (Pty)
Ltd t/a Unitrans Freight & Logistics & another [2009] 30 ILJ 2469 (LC),
establishes this problem. Pillay J held that the entire dispute that came about
as a result of the fact that the employees refuse to recognize their new
employer, could have been avoided with minimal costs and hardship for all
concerned if the parties had communicated more effectively (see 2475H).

110. The promotion of industrial democracy and social justice were objectives
added to the current Act. The old Act did not recognize this objective. The
objective of social justice requires one to treat workers as human beings, and
not chattels. The objectives of industrial democracy requires workers to be
heard before making decisions which impact their lives.
111. Foreign jurisprudence, recognizes the duty to consult. See: EC Commission
v United Kingdom 1994 ICR 664, 1994 IRLR 392 ECJ, Lambeth London
Borough v UCATT and Banking Insurance and Finance Union v Barclays
Bank plc discussed in para 69 of Chapter 11 Business Transfers and
Employee Rights by J McMullen, where the Court recognized that the duty to
consult occurred prior to transfer. The duty applies to both transferor and
transferee.

40

112. It may be argued that the legislature has not expressly recognized the duty to
consult in section 197 whereas it has done so in other sections of the LRA. To
this there are two responses:

112.1.

the legislature does not prohibit consultation or adherence to the

audi rule.

In the absence of statutory authorizations, the non-

application of the rules of procedural fairness can only be justified

where it is necessary to promote some value or end which is of
importance equal to or greater than natural justice. Omar v Minister
of Law & Order, Fani v Minister of Law & Order, State President v
Bill 1987 3 SA 859 (A) 892

112.2.

Applying the expression unious rule of Interpretation is not

permissible where this rule may lead to injustice.
Papa v Perumal 1937 AD 200 at 208

Kellaway EA, Principles of Legal Interpretation, Statutes,

Contracts & Wills at 153 to157

113. Recognizing the duty to consult before a section 197 transfer is effective, is a
proper remedy to give effect to the human dignity of workers.

See Hoffmann v South African Airways [2000] 12 BLLR 1365 (CC)

In terms of section 197 of the Labour Relations Act will organisational rights which
are embodied in a collective agreement transfer pursuant to section 197 of the
Labour Relations Act?

41

COLLECTIVE AGREEMENTS DO THEY TRANSFER?

111.

There are two possible interpretations: one that answers the question in the

affirmative and one that answers it in the negative.

112.

Subsection 5 of section 197 provides as follows:

(5)
(a)

For the purposes of this subsection, the collective agreements and arbitration

awards referred to in paragraph (b) are agreements and awards that bound the old
employer in respect of the employees to be transferred, immediately before the date
of transfer.
(b)

Unless otherwise agreed in terms of subsection (6), the new employer is

bound by
(i)

any arbitration award made in terms of this Act, the common law or any other

law;
(ii)

any collective agreement binding in terms of section 23; and

(iii)

any collective agreement binding in terms of section 32 unless a

commissioner acting in terms of section 62 decides otherwise. (own emphasis)

113.

The word any is very broad. It includes those provisions of the agreement

that affect the union only as well as those that form part of an individual employees
contract of employment. This would include a collective agreement about
organisational rights. However the collective agreement must relate to the
employees transferred before it will be transferred with those employees
114.

It may be that collective bargaining arrangements which exist at the transferor

employer are wholly unsuited and not practically capable of implementation at the
transferee employer. In such a case the transferee employer may well be entitled to
terminate such a collective agreement in terms of section 23(4) of the LRA, having
given reasonable notice in terms thereof. A definitive opinion in this regard can only
be given in relation to specific facts.

42

115.

The second interpretation is more restrictive. This section must be read

together with section 23 (1)(c) and section 32 of the LRA. The former deals with
plant level collective bargaining agreements and the latter with sector level
agreements concluded at a bargaining council.
116.

Section 23 provides as follows:

23.

Legal effect of collective agreement

(1)

A collective agreement binds-

(a)

the parties to the collective agreement;

(b)

each party to the collective agreement and the members of every other party

to the collective agreement, in so far as the provisions are applicable between them;
(c)

the members of a registered trade union and the employers who are

members of a registered employers' organisation that are party to the collective

agreement if the collective agreement regulates(i)

terms and conditions of employment; or

(ii)

the conduct of the employers in relation to their employees or the conduct of

the employees in relation to their employers; (own emphasis)

117.

Consequently, on the restrictive argument, only those provisions in a plant

level collective agreement which regulate terms and conditions of employment or

conduct will transfer to the new employer.
118.

Todd et al in Business Transfers and Employment Rights in South Africa

comment on the topic with reference to the old version of section 197.They argue
that only those collective agreements that are in respect of the transferring
employee must be taken over by the employer. Interestingly though, they posit that
an agreement regulating trade union access to the workplace can easily be
described as being in respect of specified employees. They also point out that the
European directives require the new employer to continue to observe collective
agreements until they expire (at page 78).

43

119.The Courts are more likely to favour a broad interpretation. After all, unions
secure organisational rights to benefit employees. Moreover, the wording in
subsection 5 , more specifically any collective agreement binding in terms of section
23 is broad and is not limited to those agreements mentioned in section 23 (c) but
embraces all agreements concluded under section 23.
120.

This broad view is also supported when the status of sector level agreements

is considered. As far as sector level agreements concluded in terms of section 32,

such agreements bind the new employer unless otherwise decided by a
Commissioner under section 62. Sector level agreements often regulate matters
beyond terms and conditions of employment and conduct but also regulate
organisational rights.
121.

Organisational rights are therefore not excluded and will transfer to the new

employer.
122.

As stated above and from a practical point of view the new employer may

however , after the transfer, terminate the collective agreement in accordance with
its terms if any and failing which by giving reasonable notice in accordance with
section 23 (4) and then re-negotiate its terms. From a practical point of view this is
probably the safest way of dealing with collective agreements that may be non-suited
to the new employers business.
RESTRAINTS OF TRADE
123. Do restraints of trade transfer to the new employer or are they enforceable by
the old?
124. If the business infrastructure no longer exists in the hands of the new employer
then there is probably no proprietary interest. On a literal interpretation all rights and
obligations transfer and the restraint is probably enforceable by the new employer
but not the old.
F A BODA