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Section 197 of the Labour Relations Act (“LRA”) applies whenever there is a transfer of a business, part of a business (including a service) as a going concern.

Section 197 of the LRA varies the common law position by providing for the transfer of employees’ contracts of employment in order to ensure continuity of employment when certain conditions are met. If the conditions are met and section 197 of the LRA applies, the transferee employer steps into the shoes of the transferor employer by operation of law, without the need to consult with or secure the consent of the employees.

In the recent case of Dimension Data (“DiData”) & Others v City of Johannesburg (“COJ”) & Others, the Labour Court considered whether section 197 of the LRA is triggered by a change in a service provider rendering an outsourced service.

The brief facts are that the service agreement between DiData and COJ providing for the rendering of end-user computing (“EUC”) services was terminated. GWB Technologies (“GWB”) successfully tendered to provide these services to COJ. GWB disputed that its appointment to provide the EUC services amounted to a transfer of a business as a going concern triggering the application of section 197 of the LRA.

Business as a going concern

The Court relied on the most recent judgment of the Constitutional Court in Road Traffic Management Corporation v Tasima (Pty) Ltd[1] which held that in order for section 197 of the LRA to apply to a change in service providers, the business that supplies the service must be transferred – not the service itself.  

Indicators such as the transfer of tangible and intangible assets, goodwill, infrastructure, licenses, technology, operating methods, employees or customers must be taken over by the transferee employer. This entails a factual enquiry examined against a legal cause for the transfer – in the case of DiData, it was the termination of the EUC contract.

The weight to be accorded the transfer (or absence of a transfer) of persons or assets, depends on the nature of the business concerned. Certain businesses are heavily asset reliant, whilst others are more reliant on human capital; with their personnel (and their know-how) forming an essential component of the business.

The mere termination of the service agreement, without more, does not constitute a transfer as a going concern for purposes of section 197 of the LRA.

The EUC services is a discrete function which has been consistently performed by an identifiable and organised group of employees who have been transferred from one service provider to the next. This history indicates the existence of a business which is capable of being transferred.

Transfer

The next requirement is whether there is a transfer as a going concern. Upon transfer it is appropriate to take a “snapshot” of the business and activity at that moment and compare it to the business or activity which existed prior to the transfer.

In order for a transfer to take place as contemplated by section 197 of the LRA, there must be components of the original business which have passed on to the third party

Access to the COJ’s IT infrastructure was handed to GWB to enable it to carry on the same activity as previously carried out by the employees, on the same premises and for the benefit of the same client. Based on this, the Labour Court held that the termination of the agreement between DiData and COJ and the appointment of GWB to provide the EUC services triggered section 197 of the LRA.

Conclusion

The Labour Court held that there is often a fine line between the application of section 197 of the LRA or not. The section 197 assessment must be undertaken on a case-by-case basis, based on the nature of the business concerned.

[1] (2020) 41 ILJ 2349 (CC)

Should you require any more information, please contact Melanie Hart at melanie@bv-inc.co.za .