National Education Health and Allied Workers Union v University of Cape Town and Others (CA12/00) [2002] ZALAC 4 (7 February 2002)

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[2002] ZALAC 4
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National Education Health and Allied Workers Union v University of Cape Town and Others (CA12/00) [2002] ZALAC 4; [2002] 4 BLLR 311 (LAC); (2002) 23 ILJ 306 (LAC) (7 February 2002)

IN
THE LABOUR APPEAL COURT OF SOUTH AFRICA
Held
in Cape Town CASE NO: CA12/00
In
the appeal between
National
Education, Health and Appellant
Allied
Workers Union
And
University
of Cape Town First Respondent
Supercare
Cleaning (Pty)Ltd Second Respondent
Metro
Cleaning Services cc Third Respondent
Turfmeck
cc Fourth Respondent
Eco
Environment (Pty)Ltd Fifth Respondent
JUDGEMENT
________________________________________________________________
ZONDO
JP
Introduction
[1] This
is an appeal against a judgement that was handed down by Mlambo J
sitting in the Labour Court in a dispute between the appellant
and
the respondents concerning the interpretation and application of the
provisions of sec 197 of the Labour Relations Act, 1995
(Act NO 66 of
1995) (
“The Act”
).
Factual
background
[2] The
first respondent is the University of Cape Town. The appellant is a
registered trade union that, prior to the dismissal referred
to later
in this judgement, had as its members many employees that are
employed by the first respondent. The second, third, fourth
and fifth
respondents are contractors to whom the first respondent out sourced
certain of its non-core services in or about September
1999. Such
outsourcing occurred pursuant to a decision of the council of the
first respondent that certain non-core services be out-sourced
so
that the first respondent could focus on its core services. As a
result of the decision to outsource such services, the first
respondent dismissed over 200 of its employees who were involved in
the non-core services. The dismissal was for operational
requirements.
The overwhelming number of the employees who were
dismissed were members of the appellant.
[3] Prior
to the dismissal of the employees the first respondent had held
consultations with the appellant and other stakeholders
about the
reasons for seeking to outsource some of its non-core services and
about the possible dismissal of employees involved in
the activities
that would be affected by the decision to outsource. No agreement had
been reached between the parties. After a tender
process the first
respondent awarded each one of the second upto the fifth respondents
certain services. The outsourcing contracts
were to endure for three
years. The first respondent sought and obtained a commitment from the
second upto the fifth respondents
that, if they were awarded the
outsourcing contracts, they would give the employees of the first
respondent that would be dismissed
for operational requirements as a
result of the decision to outsource, an opportunity to apply for
employment with them and that
they would consider their applications
in good faith. After consultations with the appellant on the
dismissal of the employees had
reached deadlock, the first respondent
proceeded to dismiss the employees. Some of the employees applied to
one or other of the second
to the fifth respondents for such
employment but others did not. Of those who applied, about all were
appointed. However, some of
those who were appointed failed to report
for duty on the days they were required to.
Proceedings
in the Labour Court
[4] The
appellant then brought an application in the Labour Court for an
order declaring that the outsourcing of the relevant services
by the
first respondent to each one of the second upto the fifth respondents
constituted a transfer of a part of the first respondent’s
business
as a going concern as contemplated in sec 197 of the Act, and that
the employees’ contracts of employment had automatically
transferred from the first respondent to the second respondent upto
the fifth respondents and for other relief which is no longer
of any
relevance in this matter. The Court a quo dismissed the application
with no order as to costs. The appellant then sought and
obtained
leave from the Court a quo to appeal to this Court.
The
appeal
[5] Before
us Mr Wallis, who appeared for the appellant, submitted that the
first question for this Court to decide is whether, when
a business
or a part of a business is transferred as a going concern in terms of
sec 197(2)(a) of the Act, an agreement between the
business
transferor and the business transferee to transfer the contracts of
employment of the employees of the business transferor
to the
business transferee is required before such contracts can transfer or
whether they simply transfer automatically by operation
of law. In
this regard he argued that no agreement involving the transferor and
the transferee to transfer such contracts of employment
is required.
He argued that the transfer of the employees’ contracts of
employment transfer automatically by operation of law.
Mr Wallis
submitted that, if this Court decided that the agreement of the
business transferor and the business transferee was required,
the
appeal must fail because it was common cause that no such agreement
existed in this matter.
[6] Mr
Duminy who, together with Mr Stelzner, appeared for the first
respondent, and Mr Pretorius who, together with Mr Breitenbach,
appeared for the second respondent, disputed the correctness of Mr
Wallis’ contention. They argued that, before the contracts of
employment could transfer, the agreement of the business transferor
and the business transferee was required. Mr Duminy further submitted
that in fact this case had nothing to do with the transfer of
contracts of employment but was about whether the first respondent
had a right to dismiss its employees for operational requirements as
it did. If it had, so Mr Duminy’s argument proceeded, the
question
was whether, in that regard, the first respondent had acted fairly.
If it had not, that would be the end of the matter.
He submitted that
there was nothing in the Act that precluded the first respondent from
dismissing its employees for operational
requirements provided that
it did so fairly - even if this was before a transfer of the business
as a going concern.
Can
there be a transfer of contracts of employment under s197(2)(a) read
with ss(1)(a) of the Act without an agreement between business
transferor and the business transferee that contracts of employment
will transfer to the business transferee?
[7] Before
one can attempt to establish the correct interpretation of ss(2)(a)
of s 197, it is important to bear in mind the constitutional
and
statutory context in which s 197(2)(a),, like any other provisions of
the Act, must be interpreted. In this regard certain provisions
of
both the Constitution and the Act are relevant.
[8]
Sec
23(1) of the Constitution - which is part of the Bill of Rights in
the Constitution- provides that
“(e)veryone has the right to
fair labour practices”.
Sec 39(2) of the Constitution provides
that
“(w)hen interpreting any legislation, and when developing
the common law or customary law, every court, tribunal or forum must
promote
the spirit, purport and objects of the Bill of Rights.
[9] Sec
232 of the Constitution provides that customary international law is
law in the Republic unless it is inconsistent with the
Constitution
or an Act of Parliament. Sec 233 deals with the application of
international law. It reads:
“When interpreting any legislation, every
court must prefer any reasonable interpretation
of the
legislation that is consistent with international law over any
alternative interpretation that is inconsistent with international
law.”
[10] In
my view the provisions of s233 of our Constitution are critical in
the interpretation of any legislation in our country where
there are
two possible interpretations to provisions of an Act one of which is
reasonable and consistent with international law.
The importance of
s233 lies in the fact that it enjoins courts to prefer such an
interpretation over any other interpretation that
is inconsistent
with international law. It seems to me that through s 233 our
Constitution seeks to ensure that our behaviour and
practices are
aimed at meeting international standards.
[11] The
provisions of s1 and s3 of the Act must also be taken into account in
interpreting s 197. Section 1 of the Act states the
purpose of the
Act. It provides that the purpose of the Act is
“to advance
economic development, social justice, labour peace and the
democratisation of the workplace”.
It seeks to achieve this
purpose by fulfilling the primary objects of the Act. Those include
giving effect to and regulating the fundamental
rights conferred by s
23 of the Constitution- which includes the right to fair labour
practices. Those objects also include giving
effect to obligations
incurred by the Republic as a member state of the International
Labour Organisation. Another primary object
of the Act is the
promotion of employee participation in decision making in the
workplace.
[12] Section
3 of the Act provides as follows:
“Any person applying this Act
must interpret its provisions
:
(a) to
give effect to its primary objects;
(b) in
compliance with the Constitution;
(c)
in compliance with the public international law obligations
of the Republic”.
It is within the above constitutional and
statutory context that the Act must be interpreted. It is accepted by
now that the Act must
be interpreted purposively. Against this
background I proceed to attempt to interpret s 197(2)(a) which, of
course, must be read
within the context of the whole section and the
Act as a whole.
[13] Sec
197 reads thus:-
“
197
Transfer of contract of employment:-(1) 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 employee’s consent, unless-
(a) the
whole or a 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
employer’s 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
employee’s 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.”
[14]
There
is no doubt that in enacting the provisions of s197, the drafters of
the Act were prompted by Council Directive NO 77/187/EEC
that was
issued by the Council of the European Communities on the 14
th
February 1977 and, may be, the Transfer of Undertaking (Protection of
Employment) Regulations, 1981 of the United Kingdom. For that
reason
it is appropriate before attempting an interpretation of s 197 to
refer to them and see what differences and similarities
they have
with our s197.
Council
Directive NO 77/187/EEC
[15] The
preamble to the Directive includes the following:.
“
Whereas
economic trends are bringing in their wake, at both national and
Community level, changes in the structure of undertakings,
through
transfers of undertakings, businesses or parts of businesses to other
employers as a result of legal transfers or mergers;
Whereas
it is necessary to provide for the protection of
employees
in the event of a change of employer, in particular, to ensure that
their rights are safeguarded;”
[16] Section
I of the Directive consists of articles 1 and 2. It deals with the
scope of the Directive and the definitions. Article
1(1) reads thus:
“
1. This
Directive shall apply to transfer of an undertaking, business or part
of a business to another employer as a result of a legal
transfer or
merger”.
The
provisions of article 1(2) and (3) deal with the territorial scope of
the Directive and the non-application of the Directive to
sea-going
vessels respectively. Article 2 provides definitions of certain
terms. For purposes of the Directive a
“transferor”
is
defined as any
“natural or legal person who, by reason of a
transfer within the meaning of article 1 (1), becomes the employer in
respect of the
undertaking, business or part of the business.”
[17] Section
II of the Directive deals with the
“safeguarding of employees’
rights”.
The provisions relating to this subject are contained
in articles 3, 4 and 5. Articles 3, 4 and 5 of the Directive read
thus:
“
SECTION
II
SAFEGUARDING
OF EMPLOYEES’ RIGHTS
Article
3
The
transferor’s rights and obligations arising from a contract of
employment or from an employment relationship existing on the
date of
a transfer within the meaning of Article1(1) shall, by reason of such
transfer, be transferred to the transferee.
Member
States may provide that, after the date of transfer within the
meaning of Article1(1) and, in addition to the transferee, the
transferor shall continue to be liable in respect of obligations
which arose from contract of employment or an employment
relationship.
Following
the transfer within the meaning of Article 1(1), the transferee
shall continue to observe the terms and conditions agreed
in any
collective agreement on the same terms applicable to the transferor
under that agreement, until the date of termination
or expiry of the
collective agreement or the entry into force or application of
another collective agreement.
Member
States may limit the period for observing such terms and conditions,
with the proviso that it shall not be less than one year.
Paragraphs
1 and 2 shall not cover employees rights to old - age, invalidity or
survivors’ benefits under supplementary company
or inter - company
pension schemes outside the statutory social security schemes in
Member States.
Member
States shall adopt the measure necessary to protect the interests of
employees and of persons no longer employed in the transferor’s
business at the time of the transfer within the meaning of Article 1
(1) in respect of rights conferring on them immediate or prospective
entitlement to old age benefits, including survivors’ benefits,
under supplementary - schemes referred to in the first subparagraphs.
Article
4
The
transfer of an undertaking, business or part of a business shall not
in itself constitute grounds for dismissal by the transferor
or the
transferee. The provision shall not stand in the way of dismissals
that may take place for economic, technical or organisational
reasons entailing changes in the workforce.
Member
States may provide that the first subparagraph shall not apply to
certain specific categories of employees who are not covered
by the
laws or practice of the Member States in respect of protection
against dismissal.
If
the contract of employment or the employment relationship is
terminated because the transfer within the meaning of Article 1(1)
involves a substantial change in working conditions to the detriment
of the employees, the employer shall be regarded as having
been
responsible for termination of contract of employment or of the
employment relationship.
Article
5
If
the business preserves its autonomy, the status and function, as
laid down by the laws, regulations or administrative provisions
of
the Member States, of the representatives or of the representation
of the employees affected by the transfer within the meaning
of
Article 1(1) shall be preserved.
The
first subparagraph shall not apply if, under the laws, regulations,
administrative provisions or practice of Member States, the
conditions necessary for the re - appointment of the representatives
of the employees or for the reconstitution of the representation
of
the employees are fulfilled.
If
the term of office of the representatives of the employees affected
by a transfer within the meaning of Article 1(1) expires
as a result
of the transfer, the representatives shall continue to enjoy the
protection provided by the laws, regulations, administrative
provisions or practice of Member States.”
[18]
A
comparison of s 197 with Council Directive NO 77/187/EEC
As
will already have been seen above, subsection (2)(a) of s197 provides
that,
“(I)f a business is transferred in the circumstances
referred to in ss(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.”
Article 3(1) of the Directive provides that:
“(t)he
transferor’s rights and obligations arising from a contract of
employment or from an employment relationship existing on
the date of
a transfer within the meaning of Article 1(1) shall, by reason of
such transfer, be transferred to the transferee.”
[19] What
are the differences between our ss(2)(a) of s 197 and article 3(1) of
the Council Directive? Both govern a transfer of a
business or trade
or undertaking. In this regard it may be said that article 3(1) is
wider than ss(2)(a) in that the transfer of
a business or undertaking
that ss(2)(a) refers to is limited to one that occurs
“in the
circumstances referred to in subsection (1)(a).”
In my view
that means nothing more and nothing less than simply that the
transfer of the business is one
“as a going concern”
.
Article 3(1) does not have that kind of limitation and applies to
every
“transfer of an undertaking, business or part of a
business to another employer as a result of a legal transfer or
merger.”
A common feature in the two provisions is that they
both have the phrase
“rights and obligations”.
[20] Another
difference is that ss(2)(a) governs
“all the rights and
obligations between the old employer and each employee at the time of
the transfer”
whereas article 3(1) limits the rights and
obligations that it seeks to govern to
“rights and obligations
arising from a contract of employment or from an employment
relationship existing on the date of a transfer”
. Another
difference is that article 3(1) provides that such rights and
obligations
“shall, by reason of such transfer, be transferred
to the transferee”
whereas ss(2)(a) provides that
“all
rights and obligations ... . continue in force as if they had been
rights and obligations between the new employer and each
employee
...”.
It seems that in terms of article 3(1) it is the
occurrence of the transfer that operates to transfer the rights and
obligations.
In terms of ss(2)(a) it is the transfer of a business as
a going concern that operates so as to ensure that
“all rights
and obligations ... continue in force as if they were rights and
obligations between the new employer and each employee.”
Another difference between our ss(2)(a) and article 3(1) is that the
transfer of a business referred to in ss(2)(a) is one
“as a
going concern”
whereas the transfer of an undertaking or
business referred to in article(3)(1) is a transfer within the
meaning of article 1(1)
which is a
“transfer of an undertaking,
business or part of a business to another employer as a result of a
legal transfer”
. Based on the discussion that appears later in
this judgement about what it means to transfer a business as a going
concern, I am
of the opinion that that difference does not make a
material difference in a case such as this one.
[21] The
second part of article 3(1) permits member states to provide (in
national legislation)
“that, after the date of transfer within
the meaning of article 1(1) and in addition to the transferee, the
transferor shall continue
to be liable in respect of obligations
which arose from a contract of employment or an employment
relationship”
. What this means is that, after the transfer, the
transferee becomes liable but a joint liability may be provided for
in respect
of the transferor and the transferee. Under the provisions
of ss (2)(a) a joint liability in respect of the old employer and the
new employer may also occur in respect of obligations which arose
from the contracts of employment or the employment relationship
before the transfer but only by agreement. I say only by agreement
because of the
“unless otherwise agreed”
provision in
ss(2)(a).
[22] Article
3(2) compels the transferee, after the transfer, to observe
“the
terms and conditions agreed in any collective agreement on the same
terms applicable to the transferor under that agreement
until the
date of termination or expiry of the collective agreement or the
entry into force or application of another collective
agreement”.
Subsection (2)(a) does not have a provision that specifically
refers to the observance of a collective agreement that was in
existence
at the time of the transfer. Article 3(3) provides that
paras (1) and (2) of article 3
“shall not cover employees’
rights to old age, invalidity or survivors’ benefits under
supplementary company or inter-company
pension schemes outside the
statutory social security schemes in member states.”
Subsection
(2)(a) has no such exclusion.
[23] Article
4(1) provides that:
“the transfer of an undertaking, business or
part of a business shall not in itself constitute grounds for
dismissal by the transferor
or the transferee. This provision shall
not stand in the way of dismissals that may take place for economic,
technical or organisational
reasons entailing changes in the
workforce”.
S 197 does not have a provision that corresponds
with that of article 4(1). However, it seems to me to be obvious
that, if there is
a statutory provision that provides for the
transfer of rights and obligations from the old employer to the new
employer if there
is a transfer of a business as a going concern, an
employer cannot be allowed to evade such a provision by the simple
device of dismissing
the employees prior to the transfer simply
because there is to be a transfer. If that were allowed, such a
statutory provision would
not be worth anything.
[24] In
the light of the above comparative analysis of the provisions of both
article 3 of the Directive and ss(2)(a) of s 197 the
question that
arises is whether or not, the differences that exist between these
provisions are material for purposes of the case
before us. In my
view, although ss(2)(a) of s197 might not contain in form the same
provisions as those of article 3 and article
4 of the Directive, in
substance it contains provisions that seek to achieve the same
objective. In my view, therefore, s 197 cannot
be interpreted in
vaccum. It must be interpreted against the background of the
Directive that obviously prompted its enactment. Although
such
differences as there are in the language of the two provisions must
not be ignored, they must also not be exaggerated. I think
such
differences as there are must be taken into account and their
materiality weighed in a particular matter. If, in a particular
matter, the differences are not material, the provisions of the
Council Directive must be taken into account in construing s 197.
If
they are material, appropriate caution must be exercised to ensure
that s 197 is not ultimately given a meaning that was clearly
not
intended simply because such a meaning applies to the Directive.
The
UK’s Transfer of Undertakings (Protection of Employment)
Regulations 1981
[25] Pursuant
to the Council Directive the United Kingdom promulgated the Transfer
of Undertakings (Protection of Employment) Regulations
1981 (
“the
Regulations”
). Regulation 3 deals with a
“relevant
transfer
”. In so far as the provisions of Regulation 3 are
relevant to the case before us, they read thus:
“
3
A relevant transfer
(1) Subject
to the provisions of these Regulations, these Regulations apply to a
transfer from one person to another of an undertaking
situated
immediately before the transfer in the United Kingdom or part of one
which is so situated.
[2] Subject
as aforesaid, these Regulations so apply whether the transfer is
effected by sale or by some other disposition or by operation
of law.
[3] ...
[4] It
is hereby declared that a transfer of an undertaking or part of [one
(a) may
be effected by a series of two or more transactions; and
(b) may
take place whether or not any property is transferred to the
transferee by the transferor.]
[5] ......................”
[26] Regulation
5 is headed:
“Effect of relevant transfer on contracts of
employment, etc.”
Regulation 5 is very important for purposes
of comparing the relevant provisions in the UK with our s197 -
especially ss(2)(a). It
reads thus:-
“
Effect
of relevant transfer on contracts of employment, etc.
(1) [Except
where objection is made under paragraph (4A), a relevant transfer
shall not operate so as to terminate the contract of
employment of
any person by the transferor in the undertaking or part transferred
but any such contract which would otherwise have
been terminated by
the transfer shall have effect after the transfer as if originally
made between the person so employed and the
transferee.
[2] Without
prejudice to paragraph (1) above [but subject to paragraph (4A)
below,], on the completion of a relevant transfer-
(a) all
the transferor’s rights, powers, duties and liabilities under or in
connection with any such contract, shall be transferred
by virtue of
this Regulation to the transferee; and
(b) anything
done before the transfer is completed by or in relation to the
transferor in respect of that contract or a person employed
in that
undertaking or part shall be deemed to have been done by or in
relation to the transferee.
[3] Any
reference in paragraph (1) or (2) above to a person employed in an
undertaking or part of one transferred by a relevant transfer
is a
reference to a person so employed immediately before the transfer,
including, where the transfer is effected by a series of
two or more
transactions, a person so employed immediately before any of those
transactions.
[4] Paragraph
(2) above shall not transfer or otherwise affect the liability of any
person to be prosecuted for, convicted of and
sentenced for any
offence.
[4a] [Paragraphs
(1) and (2) above shall not operate to transfer his contract of
employment and the rights, powers, duties and liabilities
under or in
connection with it if the employee informs the transferor or the
transferee that he objects to becoming employed by the
transferee.
[4b] Where
an employee so objects the transfer of the undertaking or part in
which he is employed shall operate so as to terminate
his contract of
employment with the transferor but he shall not be treated, for any
purpose, as having been dismissed by the transferor.]
[5] [Paragraphs
(1) and (4a) above are] without prejudice to any right of an employee
arising apart from these Regulations to terminate
his contract of
employment without notice if a substantial change is made in his
working conditions to his detriment; but no such
right shall arise by
reason only that, under that paragraph, the identity of his employer
changes unless the employee shows that,
in all the circumstances, the
change is a significant change and is to his detriment.
”
[27] Regulation
6 deals with the effect of a relevant transfer on collective
agreements. It reads thus:
“
6
Effect of relevant transfer on collective agreements
Where
at the time of a relevant transfer there exists a collective
agreement made by or on behalf of the transferor with a trade
union recognised by the transferor in respect of any employee whose
contract of employment is preserved by Regulation 5(1) above, then-
(a) without
prejudice (collective agreements presumed to be unenforceable in
specified circumstances) that agreement, in its application
in
relation to the employee, shall, after the transfer, have effect as
if made by or on behalf of the transferee with that trade
union, and
accordingly anything done under or in connection with it, in its
application as aforesaid, by or in relation to the transferor
before
the transfer, shall, after the transfer, be deemed to have been done
by or in relation to the transferee; and
(b) any
order made in respect of that agreement, in its application in
relation to the employee, shall, after the transfer, have effect
as
if the transferee were a party to the agreement.”
[28]
A
comparison of s 197(2)(a) with Reg 5
Regulation
5 must be read with Regulation 3 because Regulation 3 sets out the
scope of application of the Regulations. Reg 5(1) provides
that the
regulations apply
“to a transfer from one person to another of
an undertaking situated immediately before the transfer in the United
Kingdom or part
of one which is so situated.”
An undertaking is
defined in Regulation 2 as including
“any trade or business.”
The second part of ss(2)(a) of s 197 applies
“(I)f a business,
trade or undertaking is transferred in the circumstances referred to
in subsection (1)(a)...”
In my view the only difference between
the transfers to which the Regulations apply in the United Kingdom,
leaving out the provisions
of Reg 3(2)-(5) and the transfers to which
the second part of ss(2)(a) applies in South Africa, is that, as in
the case of the Directive
and our ss(2)(a), the transfer to which the
second part of ss(2)(a) applies must be one done
“in the
circumstances referred to in subsection (1)(a),”
which as I
have already said, simply means
” as a going concern
”.
[29]
Regulation 5(1) begins by stating that a relevant transfer shall not
operate so as to terminate the contract of employment by
the
transferor in the undertaking or part transferred. It then provides
that
“any such contract which would otherwise have been
terminated by the transfer shall have effect after the transfer as if
originally
made between the person so employed and the transferee.”
In this regard it must be noted that, although ss(2)(a) does not
in terms refer to a contract of employment having
“effect after
the transfer as if originally made between the person so employed and
the transferee”,
it nevertheless uses terminology that
resembles in some way the terminology used in Reg 5(1). The
terminology used by ss(2)(a) is
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 had been rights
and obligations between the new employer and each employee...”
[30] Regulation
5(2)(a) refers to the transfer of
“all the transferor’s
rights, powers, duties and liabilities under or in connection with
any such contract”
by virtue of the Regulations
“to the
transferee.”
The contract referred to is the contract of
employment.
Subsection (2)(a)seeks to express the same idea in
these terms:
“all 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”.
Furthermore, ss(2)(a) has a part that is
expressed
as follows
: “ ... 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.”
The
terminology in Reg 2(b) is the following:
“anything done before
the transfer is completed by or in relation to the transferor in
respect of that contract or a person employed
in that undertaking or
part shall be deemed to have been done by or in relation to the
transferee.”
[31] Then
there is also the provision of ss(5) of s 197. Subsection (5) reads
thus:
“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”.
Reg 5(4) reads:
“Paragraph (2) above otherwise affect the shall not transfer or
liability of any person to be prosecuted for, convicted of and
sentenced for any offence”.
Save for the words
“(t)he
provisions of this section do not...”
and one punctuation mark,
the wording of subsection (5) of s 197 seems to have been taken over
from Reg 5(4) of the Regulations.
The effect of a relevant transfer
on collective agreements is governed by the provisions of Reg 6.
There is no express corresponding
provision in s 197 in relation to
collective agreements.
[32] Reg
8 provides that where, before or after a relevant transfer, any
employee of the transferor or transferee is dismissed, that
employee
must be treated as unfairly dismissed if the transfer or a reason
connected with it is the reason or principal reason for
his
dismissal. As I have already said above, although there is no express
corresponding provision in s 197, it seems to me that,
that
notwithstanding, the transfer of a business cannot per se be accepted
as a fair reason to dismiss an employee where ss(2)(a)
applies.
Regulation 9 governs the effect of a relevant transfer on trade union
recognition. There is no express corresponding provision
in s 197.
[33] In
the light of the above comparative analysis of the provisions of
ss(2)(a) and ss(5) of s 197 and those of Reg 3 and Reg 5,
the
inference seems inescapable that the drafters of s 197 were aware of
the Regulations and sought to borrow from them in drafting
of s197.
Indeed, it appears that the provisions of the Regulations can, with
appropriate caution, be borne in mind in construing
the provisions of
s 197 in general and ss(2)(a) in particular. In my view court
decisions that have interpreted these regulations
may be taken into
account in interpreting on s 197 provided certain differences in
language that may be material are borne in mind.
Statutory
provisions in some countries on the transfer of contracts of
employment upon the change of employer aimed to give effect
to the
Directive
[34] It
appears from the International Labour Law Reports that various
countries have laws that seek to achieve the same objective
that the
Council Directive seeks to achieve. In Finland the position seems to
be governed by an Act called the Employment Contract
Act. Section 7
of that Act is titled:
“Transfer of Rights.
Change in
ownership
”. Subsections 1 and 2 of that Act read thus:
“
(1)
Except for claims that have matured for payment, no rights derived
under a contract of employment shall be transferred to a third
party
by either the employee or the employer without the consent of the
other party.
(2) In
the case of a change in ownership of an undertaking, the rights and
duties of the former employer shall devolve directly on
the new
employer...”.
[35] In
The Netherlands the position appears to be governed by article 1639bb
of the Civil Code which is part of the rules that are
intended to
adapt Dutch legislation to the Council Directive. Article 1639bb of
the Civil Code reads thus:
“On transfer of an enterprise, the rights and
obligations arising at that moment for an employer from the contract
of employment
between him and a worker in that
enterprise
are transferred automatically to the transferee. The employer-
transferor however remains liable for one year, besides
the
transferee, for the obligations resulting from the said contract
which date from the period before the transfer”.
(see
International Labour Law Reports vol 9 at 247).
[36] In
seeking to give effect to the Council Directive, France has enacted
section L.122.12 of their Labour Code. In 2 that section
reads thus:.
“Where there is a change in the employer’s
legal status because of, inter alia, inheritance, sale, merger,
change in the type
of business or the establishment of a partnership,
all contracts of employment in force at the time of such change shall
continue
to apply between the new employer and the staff of the
undertaking”.
(International
Labour Law Reports vol 10 213).
[37] It
will have been gathered from the above comparison of the provisions
of the Directive with those of ss(2)(a) and the comparison
of the
provision of ss(2)(a) and ss(5) with the provisions of the
Regulations of the UK that one of the prominent differences between
the provisions of, on the one hand, the Directive and the Regulations
and, on the other, the provisions of our s197(2)(a) is that
in terms
of our s 197 the transfer of a business must be one as a going
concern whereas neither the Directive nor the Regulations
contain
that phrase to describe the transfer of a business or undertaking
that they apply to. For that reason it is fundamental to
understand
when a transfer of a business can be said to be one
“as a going
concern”
so as to properly establish the scope of application
of ss(2)(a).
What
does it mean to say that a business is being transferred “as a
going concern”?
[38] The
Act does not define the phrase
“going concern”.
That being
the case resort can be had to English dictionaries. The New Shorter
Oxford English Dictionary defines the phrase
“going concern”
as
“a business in operation and thriving”.
The New
Oxford Illustrated Dictionary (vol1) edited by J. Coulson et al
defines
“going concern”
as
‘business in operation”
.
In
“The New International Webster’s Dictionary of the English
Language”,
Deluxe Encyclopaedic edition, the phrase
“going
concern”
is defined as a
“business or organisation that is
active and has gotten beyond the planning stage”
. In
“The
Shorter Oxford English Dictionary on historical principles”
by
William Little & others vol 1 the phrase
“going concern”
is defined as
“one in actual operation”.
The new edition
of the
“Longman’s Dictionary of Contemporary English,”
3
rd
edition
,
defines
“going concern”
as
“a
business that is financially successful”.
The millennium
edition of Collins English Dictionary says when
“going”
is
used in the phrase
“a going concern”,
it means
“thriving”.
If one has regard to the fact that the phrase
“as a going
concern”
is used in both ss(1)(a) as well as in ss(1)(b) of s
197 despite the fact that the two paragraphs deal with a transfer in
solvent
circumstances and in insolvent circumstances respectively, it
appears to me that the meaning of the term intended in s 197 cannot
be one that suggests a business that is financially successful or
thriving.
[39] The
term
“going concern”
has been the subject of divergent
interpretations in respect of Value Added Tax legislation matters in
different countries. In “
Juta’s VAT-Value Added Tax Manual”
edited by Kruger and others, Juta, 1994 par 526 there is an
interesting discussion on this phrase within the context of VAT
legislation.
That discussion is in the context of statutory
provisions in Value Added Tax legislation to the effect that the
supplies of goods
that are not exports nor export- related but are
nevertheless zero-rated include the supply of an enterprise
“as
a going concern in whole or in part, if that part is capable of
separate operation, to a registered vendor”.
(sec 11(I)(e) of
the Value Added Tax Act.)
[40] Kruger
et al point out that the concept of a disposal of a business or part
of a business as a
“going concern”
could be found under
the Sales Tax Act 103 of 1978 as well because that Act also provided
that a disposal of a business or part of
a business as a going
concern was exempt from General Sales Tax. Kruger et al also state
under par 5.2.6., at 1-5-17 “
Vatcom expressed the opinion that
to give a statutory definition of the transfer of a going concern
could lead to inflexibility and
in many instances create potential
for avoidance”.
In Footnote 5 at 1-5-17 in their book they
also state that in 1990 the New Zealand Minister of Finance agreed
with a recommendation
to include a definition of the term
“going
concern”
in the Goods and Services Tax Act of 1985. The
suggested definition was the
“supply of a taxable activity
between registered persons, where, without further action on the part
of the transferee, it is capable
of uninterrupted operations by the
transferee; and the supply is to form part of the taxable activity of
the transferee”.
[41] Vatcom,
a committee that was appointed by the Minister of Finance on the
Value-Added Tax Bill, recommended the publication of
the following
guidelines in the form of a general ruling by Inland Revenue (now
SARS) as to what is a
“going concern”,
namely,:-
‒
the
enterprise or a part of it that is capable of separate operation
should without any further action on the part of the recipient
be
capable of uninterrupted operation by the recipient
‒
the
enterprise, or, a part, should be a going concern at the time of the
transfer;
‒
the
transfer of the enterprise, or part, should include the transfer of
assets that are central to the enterprise;
‒
the
express sale of goods will often, but not necessarily, indicate the
transfer of a going concern.
[42] Kruger
et al refer to the fact that the Inland Revenue did not issue a
comprehensive ruling on what is a
“going
concern”.
However, it noted in 5.4.1.5 of
its Guide for Vendors that “
the term ‘going
concern’
means that
the enterprise is sold
‘lock, stock and barrel” and the enterprise is capable of being
continued without change
”. In this regard
it is appropriate to note that the New Oxford English Dictionary
defines the term
“lock, stock and barrel”
as meaning
“absolutely
everything”
or
‘in
its entirety”.
[43] Kruger
et al discuss at 1-5-18-1-5-22 the position in New Zealand where,
according to them, a provision identical to sec 11(I)(e)
of our Value
Added Tax
Act applies. In that discussion
they point out that the Department of Inland Revenue in New Zealand
had stated that a taxable activity
supplied as a going concern should
be:
‒
able
to be carried on by the recipient;
‒
accompanied
with an express supply of goodwill;
‒
a
supply of all assets, both tangible and intangible, that are central
to the business.
[44] Kruger
et al point out that the requirement that there should be a supply of
all assets - both tangible and intangible -
“does not
necessarily mean that every single asset owned by the transferor’s
enterprise must change hands as a result of the
sale of that
enterprise as a going concern”.
[45] At
1-5-18 Kruger et al refer to two New Zealand cases that deal with the
issue of
“going concern”.
The one case is given as Case P
32(1992)
14
NZTC
4
,231 and the other as Variety Leisure Corporation v Commissioner of
Inland Revenue
(1988) 10 NZTC 5
,255. Case P32 is said to have dealt
with the sale of a run-down boarding house which was intended to be
used as tourist accommodation
after the necessary alterations and
repairs had been made. The sale agreement specifically provided for
vacant possession. There
Willey J referred with approval to the view
adopted by the court in the Variety Leisure Corporation case. That
view was that the
expression
“going concern”
meant
“that
the particular activity is not closed down on sale but remains active
and operating before, during and after the transfer
to new
ownership”.
[46] In
Kenmir Ltd v Frizzel and others
[1968] 1 All ER 414
, which is also a
case which dealt with the sale of a business, Widgery J said the
following at 418E-G:-
“
In
deciding whether a transaction amounted to a transfer of a business,
regard must be had to its substance rather than its form,
and
consideration must be given to the whole of the circumstances,
weighing the factors which point in one direction against those
which
point in another. In the end, the vital consideration is whether the
effect of the transaction was to put the transferee in
possession of
a going concern, the activities of which he could carry on without
interruption. Many factors may be relevant to this
decision though
few will be conclusive in themselves. Thus if the employer carries on
business in the same manner as before, this
will point to the
existence of a transfer, but the converse is not necessarily true,
because a transfer may be complete even though
the transferee does
not choose to avail himself of all the rights which he acquires
thereunder. Similarly, an express assignment
of goodwill is strong
evidence of a transfer of the business but the absence of such an
assignment is not conclusive if the transferee
has effectively
deprived himself of the power to compete. The absence of an
assignment of premises, stock-in-trade or outstanding
contracts will
likewise not be conclusive, if the particular circumstances of the
transferee nevertheless enable him to carry on
substantially the same
business as before.”
[47] In
the case of Landsorganisation I Danmark Tjenerforbundei I Danmark v
Ny Molle Kro
[1987] ECR 5465
the question that was put to the
European Court of Justice by the Danish Court was whether the words
“transfer... to another employer as a result of a legal transfer
or merger’ in article 1(1) of Council Directive 77/187 of EEC
of 14
February 1977 ... cover the situation in which, following the
lessee’s breach of a lease agreement, the owner of a leased
undertaking rescinds that agreement and subsequently himself takes
over the running of the undertaking”.
The answer that was given
by the European Court of Justice was that the Directive did apply
even to such a case. In par 13 of its
judgement the Court said in
part:
“ It follows from the preamble and from those provisions
that the purpose of the Directive is to ensure, as far as possible,
that
the rights of employees are safeguarded in the event of a change
of employer by enabling them to remain in employment with the new
employer on the terms and conditions agreed with the transferor”.
[48] In
Spijkers v Gebroeders Benedik Abattoir and Alfred Benedik En Zonen
1986 ECR 119
the European Court of Justice was called upon to answer
certain questions relating to the application of the Directive. The
one question
was whether it could be said that there was a transfer
within the meaning of article 1(1) of the Council Directive where the
building
and stock were taken over and the transferee was thereby
enabled to continue the business activities of the transferor and did
in
fact subsequently carry on the business activities of the same
kind in the buildings. The second question was whether the fact that,
at the time when the buildings and stock were sold, the business
activities of the transferor had entirely ceased and that in
particular
there was no longer any goodwill in the business prevented
there being a ‘transfer’ as defined. The third question was
whether
the fact that the circle of customers was not taken over
prevented there being such a transfer.
[49] In
dealing with the question whether there had been a transfer within
the meaning of article 1(1) of the Directive in Spijker’s
case, the
European Court of Justice equated the transfer of an undertaking
within the meaning of article 1(1) of the Directive to
a transfer of
a business
“as a going concern”
. In par 15 of its
judgement it said:
“For these reasons the answers to the
questions referred to the Court should be that article 1(1) of
Directive 77/187 of 14 February
1977 must be interpreted to the
effect that the expression ‘transfer of an undertaking, business or
part of a business to another
employer’ envisages the case in which
the business in question retains its identity. In order to establish
whether or not such
a transfer has taken place in a case such as that
before the national court, it is necessary to consider whether,
having regard to
all the facts characterising the transaction, the
business was disposed of
as a
going
concern,
as would be indicated inter alia by the fact that
its operation was actually continued or resumed by the new employer,
with the same
or similar activities”.
(my underlining).
[50] What
was said by the European Court of Justice in the Spijkers case as
quoted in the previous paragraph is very similar to what
was said by
Widgery J in Kenmir’s case as quoted above when he said that the
vital consideration in determining whether there had
been a transfer
of a business within the meaning of par 10.2 of Schedule 1
to
the Contracts of Employment Act, 1963 was “
whether the effect of
the transaction was to put the transferee in possession of a going
concern, the activities of which he could
carry on without
interruption.”
Par 10.2 of Schedule 1 of that Act read thus:-
“
If
a trade or business or an undertaking ... is transferred from one
person to another, the period of employment of an employee in
the
trade or business or undertaking at the time of the transfer shall
count as a period of employment with the transferee and the
transfer
shall not break the continuity of the period of employment.”
[51] Dealing
with the distinction between the transfer of a business or
undertaking and the transfer of assets, the House of Lords
had the
following to say, per Lord Fraser, in Melon v Hector Powe Ltd [1981]1
All ER 313 H-J :
“It seems to me that the essential
distinction between the transfer of a business, or part of a
business, and a transfer of physical
assets, is that in the former
case the
business is transferred as a going concern, ‘so that the business
remains the same business but indifferent hands’, (if
I may quote
from Lord Denning MR in Lloyd v Brassey [1969]1 All ER 382 at 384,
[1969]2 QB 98 at 103 in a passage quoted by the industrial
tribunal),
whereas in the latter case the assets are transferred to the new
owner to be used in whatever business he chooses.”
[52] There
is a proposition that, if the business transferor and the business
transferee have agreed that the workforce will not be
taken over by
the business transferee, such transfer of the business as can take
place in those circumstances cannot be said to be
one
“as a
going concern”
. This is said
on the
basis that for a business to transfer as a going concern it must be
in operation and it cannot be in operation if the workforce
is not
taken over. I do not agree with this proposition. I elaborate below.
[53] Although,
generally speaking, I share the view that workers are very important
in any business, I do not agree that, if you do
not take over the
workforce, you cannot be said to be taking over the business at all
or you cannot be said to be taking over the
business without the kind
of interruption that renders the transfer of the business not to be
one as a going concern. An example
may be appropriate at this stage.
Mr A owns the business of a petrol filling station. He sells me the
premises from which it is operated,
the stock-in-trade and takes the
necessary steps, whatever they may be, to ensure that I carry on
where he leaves off in respect
of his contractual obligations to his
customers and suppliers. He sells me the goodwill but we agree that I
will not take over his
three petrol attendants and they will stop
working on the evening preceding the morning on which I will start
running the station
on which day I will bring three employees of my
own to work as petrol attendants. In such a case it cannot, in my
view, be said that
there was any interruption to the business at all
and yet one workforce will have gone and a new workforce will have
come in. I can
see no reason why in those circumstances it cannot be
said that the business was transferred to me as a going concern.
[54] Another
example entailing a longer period between the last working day of the
one workforce and the first working day of the
new workforce may also
be given. Mr A owns a factory. He sells the factory to Mr B. The two
agree that Mr A will dismiss his workforce
with effect from the 15
th
December when the factory shuts down for the Christmas break and that
Mr B will take over a s from the 7
th
January after the end
of the annual shut down when his own workforce will commence work.
Despite the fact that for over three weeks
there was no activity in
the factory and that Mr A’s workforce is not taken over, I do not
think that it can be said that the period
of inactivity of the
factory from the 15
th
December to the 7
th
January constituted an interruption of the operation of the factory
or constituted such an interruption of the operation of the factory
as would on its own preclude the transfer from being one as a going
concern even if all the other factors are present.
[55] In
Secretary of State for Employment V Spence and others [1986]3 All ER
616 (CA) Spencer and Sons (Market Harborough) Ltd, was
put into
receivership under the provisions of a debenture in favour of the
Commercial Bank of Wales. The receivers were appointed
with effect
from the 16
th
November following which a number of
employees were made redundant. The receivers thought that there might
be enough work to keep
the employees working until early on Friday 25
November. The business was advertised for sale.
[56] British
Telecom, whose work constituted abut 80% of Spencers Ltd’s work,
threatened to withdraw its work and send it elsewhere
if the
receivers had not been able to sell the business by Thursday 24
November. The deadline came and went. Although there was still
hope
of concluding an agreement to sell the business, the receivers
decided to dismiss the workers with immediate effect on the 28
th
November as there was no guarantee of successful negotiations. The
dismissal was at about 11h00. The workers were told to assemble
again
at 2:00pm to collect certain papers. At precisely 2:00pm an agreement
of sale of the business was concluded between the receivers
and Econ
Atkinson. Of course, when the sale agreement was concluded, Spencer
Ltd had no workforce anymore because it had already
been dismissed.
[57] The
agreement of sale was silent on the workforce. Clause 2 of the sale
agreement read as follows:
“
The
vendor shall sell and the purchaser shall purchase title with effect
from 2:pm on the contract date.
The
plant, the stock, the work in progress and the intangible assets.
Subject
as is hereafter provided all the vendor’s rights against third
parties (including without limitation all rights
in connection
with such third parties’ warranties and representation but
excluding the benefit of claims made or notified
to third parties
before the contract date with respect to the assets.
The
goodwill of the business together with the exclusive right of the
purchaser and its assignees to represent itself as carrying
on
the said business in succession to the vendor”.
[58] It
appears that the time 2:00pm was chosen because it was a condition
precedent of the sale agreement that a fresh contract be
concluded
with British Telecom to continue with giving the business its work
and such fresh contract was concluded at 2:00pm. Mr
Taylor, the
managing director of Econ Atkinson, learn’t of the dismissal of the
workforce of Spencers’ business after the conclusion
of a fresh
contract with British Telecom. This suited him as he wanted to start
on a clean slate. That afternoon Mr Taylor considered
various options
of what he should do with Spencers’ business. He thought of
disposing of the assets, of moving the operation to
one of their
Yorkshire factories or to maintain the business as a going concern in
Market Harborough. He decided on the last mentioned
option and
re-employed the workforce the following morning. The workforce were
given fresh contracts of employment.
[59] Subsequently
a dispute arose between some of the workers and the Secretary of
State for Employment on whether or not such employees
were entitled
to redundancy payments on the basis of their earlier dismissal by
Spencers before being employed afresh by Econ Atkinson.
The Secretary
of State took the point that what had occurred was a transfer of
Spencers undertaking to Econ Atkinson and that the
employees had been
employed by Spencers immediately before that transfer. If he was
right on both points, the Secretary ‘s argument
meant that the
effect of Reg 5 of the Transfer of Undertakings (Protection of
Employment) Regulations, 1981 was to continue the employees’
contracts of employment with Econ Atkinson which would have
disentitled them to redundancy payments.
[60] The
industrial tribunal said the following about the absence of the
workforce and the transaction being a transfer of a business
or
undertaking:
“Applying the above facts to the law we have
first had to decide whether there was a relevant transfer ... Until
the contract with
British Telecom was negotiated, there was no
prospect of work for the business. That was why the receivers made
their decision to
dismiss the workforce on the Monday morning.
Secondly, at the moment that the agreement came into effect, there
was no workforce
of Spencers. We cannot see how
an
undertaking can exist as such without a workforce and, accordingly,
we find that what was transferred was not a business or undertaking
but the assets thereof”.
[61] There
was an appeal to the Court of Appeal.
Although the Court of
Appeal disposed of the appeal on the point that the employees were
not employed immediately before the transfer,
it considered it
appropriate to reject the proposition that, without the transfer of
the workforce, there can be no transfer of an
undertaking or business
within the ambit of reg 5. Through Balcombe LJ, the Court of Appeal
had this to say at 629:
“
In
the circumstances it is unnecessary to deal with the question whether
the industrial tribunal was right on the first issue, namely
whether
there was a transfer of the undertaking, but in case silence on this
point should be taken as agreement with their decision,
I must say
that in my judgement they were clearly wrong. The leading case on the
question of transfer of undertaking is the House
of Lords case of
Melon v Hector Powe Ltd
[1981] 1 All ER 313
and from the headnote I
need only refer to the finding (at 313-314):
‘
The
essential distinction between the transfer of a business, or part of
a business, and a transfer of physical assets, was that in
the former
case the business was transferred as a going concern, so that the
business remained the same business but in different
hands, whereas
in the latter case the assets were transferred to the new owner to be
used in whatever business he chose”.
Thereafter
at 629 H-J Belcome LJ said:”
It seems to me that it cannot be
said that the existence of a workforce is vital to the existence of
an undertaking, and so in this
case the industrial tribunal reached a
decision on this issue which no reasonable tribunal, directing itself
properly on the law,
could have reached. If it had been material, I
would on this issue have allowed the appeal. Since it is not
material, in my judgement
this appeal should be dismissed.”
Belcombe LJ also referred to the fact that the European Court of
Justice had adopted a similar test in Spijkers’ case which is
referred to in this judgement.
[62] In
Merckx and Neuhuys v Ford Motors co Belgium SA
[1996] IRLR 467
the
European Court of Justice also held, in relation to the Directive
that, for it to apply, it is not necessary for there to be
a direct
contractual relationship between the transferor and the transferee
.Furthermore I think that this proposition is inconsistent
with the
judgement of the European Court of Justice in Spijkers’ case, the
judgement of the Queens Bench Division in Kinmir Ltd
V Frizzell, both
of which have already been discussed above. I think it is also
contrary to Rostsart de Hertaing v J Benoidt SA (in
liquidation) and
IGC Housing Service SA
[1997] IRLR 127
at 132 par 21 where the
European Court of Justice held that article 3(1) of the Directive
(which was discussed above and was compared
with our ss(2)(a) of s
197) must be interpreted to mean that, in the event of a transfer of
undertakings, businesses or parts of
businesses,
“the contracts
of employment and employment relationship existing on the date of the
transfer of an undertaking between the transferor
and the workers
employed in the undertaking transfer by the mere fact of the transfer
of the undertaking, despite the contrary intention
of the transferor
or transferee and despite the latter’s refusal to fulfill its
obligations”.
[63] In
the light of all the above I am satisfied that the fact that in s197
the transfer of a business referred to is one
“as a going
concern”
when there is no such express requirement in the
Directive nor in the Regulations in respect of the transfer referred
to therein does
not make any material difference either at all or at
least in the instant case. In those circumstances I think that the
judgements
of the European Court of Justice interpreting the
Directive and the judgements of the English courts interpreting the
Regulations
can provide a useful guide in interpreting our s 197.
[64] Furthermore
I am of the view that the question of whether in a particular case a
business has been transferred as a going concern
is a matter for
objective determination. This does not mean that the intentions of
the parties are irrelevant but it does mean that
the say-so of the
parties cannot be conclusive. In my view there are a number of
factors that are relevant in determining whether
or not a business
has been transferred as a going concern. These may include what will
happen to the good-will of the business,
the stock-in-trade, the
premises of the business, contracts with clients or customers, the
workforce, the assets of the business,
the debts of the business,
whether there has been interruption of the operation of the business
and, if so, the duration thereof
, whether same or similar activities
are continued after the transfer or not and others. I do not think
that the absence of anyone
of these will on its own mean that the
transfer of the business has not been one as a going concern. I would
align myself with the
approach adopted by the European Court of
Justice when, in par 11,12 and13 of its judgement in the Spijkers
case, it said:.
“
[11] ...
It appears from the general structure of directive 77/ 187 and the
wording of Article 1(1) that the directive aims to ensure
the
continuity of existing employment relationships in the framework of
an economic entity, irrespective of a change of owner. It
follows
that the decisive criterion for establishing the existence of a
transfer within the meaning of the directive is whether the
entity in
question retains its identity.
[12] Consiquently
it cannot be said that there is a transfer of an enterprise,
business or part of business on the soul ground
that its assets have
been sold. On the contrary, in a case like the present, it is
necessary to determine whether what has been sold
is an economic
entity which is still in existence, and this will be apparent from
the fact that its operation is actually being
continued or has been
taken over by the new employer, with the same economic or similar
activities.
[13] To
decide whether these conditions are fulfilled it is necessary to take
account of all the factual circumstances of the transaction
in
question, including the type of undertaking or business in question,
the transfer or otherwise of tangible assets such as buildings
and
stocks, the value of intangible assets at the date of transfer,
whether the majority of the staff are taken over by the new employer,
the transfer or otherwise of the circle of customers and the degree
of similarity between activities before and after the transfer
and
the duration of any interruption in those activities. It should be
made clear, however, that each of these factors is only a
part of the
overall assessment which is required and therefore they cannot be
examined independently of each other”.
[65] In
my view the position is that there will be cases where the transferor
and the transferee agree that the workforce will be
taken over by the
transferee but the transaction cannot be described as a transfer of
the business as a going concern if many of
the other factors that are
relevant to a transfer being one as a going concern are absent and
there will be transactions where the
transferor and the transferee
will agree that the workforce will not be taken over but the
transaction will still amount to a transfer
of a business as a going
concern because of the presence of many or all of the other factors
that go to making a transfer of a business
to be one as a going
concern. Accordingly each transaction must, in my view, be considered
on its own merits in the light of all
the surrounding circumstances
of the transaction before a determination can be made whether it
constitutes a transfer of a business
as a going concern.
[66] Against
the above background, it is now necessary to consider the provisions
of s 197 in order to determine the question that
must be determined
at this stage of this matter, namely, whether the agreement of the
business transferor and the business transferee
that the former’s
workforce is to be taken over by the latter is required before the
contracts of employment can tranfer. In this
regard it is necessary
to determine the purpose of the provisions of s 197. Mr Wallis
submitted that the purpose of s 197 is to protect
employees against
the loss of their jobs when their employer transfers his business or
part thereof to another person or entity as
a going concern. Mr
Pretorius contended that that was not the purpose of s 197. He
submitted that the purpose of s 197 was to protect
employees --- not
against the loss of their jobs ----- but against the transfer of
their contracts of employment by their employer
to another person or
entity without their consent. There is also a suggestion that the
purpose of s 197 is to facilitate the transfer
of businesses that may
be necessary in situations of restructuring by providing for the
transfer of the employees’ contracts of
employment from the old
employer to the new employer without their consent so as to avoid the
need for the business transferee to
negotiate new contracts of
employment with the employees if he wishes to take them over on terms
and conditions no less favourable
to them than their present terms
and conditions.
[67] The
question of what the purpose of s197 is was considered by this Court
in
Foodgro, a Division Leisurenet Ltd v Keil (1999) 20 ILJ
2521(LAC)
.There both in the majority judgement of Froneman DJP in
which Nicholson JA concurred as well as in the separate concurring
judgement
of Conradie JA, it was held that the purpose of s197 was
the protection of employees against loss of employment when their
employer
transferred his business as a going concern. The argument
that the purpose of s197 is to facilitate transfers of businesses was
rejected,
and, in my view, correctly so.The position which obtained
before the enactment of s 197 with regard to employees rights and
obligations
when there was a transfer of a business as a going
concern was more favourable to employers than is the positon after
the enactment
of s 197. The business transferee could only take over
the workforce if he wanted to. If he did not want to take over the
workforce,
he had no obligation to take it over. Now s197 visits the
business transferee with liability for all kinds of actions done by
the
previous employer prior to the transfer of the business.
[68] In
Foodgro this Court dealt with the question of what the effect is of a
transfer of his business or undertaking by an employer
to someone
else on the contract of employment of an employee. Both the majority
judgement and the separate concurring judgement concluded,
after a
proper consideration of the issues relevant to this question, that in
such a case the contract of employment of the employee
is transferred
automatically to the business transferee. Although I agree that that
decision on this point was obiter because it
was not necessary for
the determination of the real issue that was before the Court, I am
of the view that the decision was correct.
In my view there can be no
doubt, having regard to the comparative analysis made earlier in this
judgement of s197 and the Directive,
on the one hand, and, s 197 and
the Regulations, on the other, that the purpose of s197 is the same
as the purpose of the Directive
as well as the Regulations, namely,
to protect employees’ employment and other rights whenever there is
a change of the identity
of the employer in a business or
undertaking.
[69] I
do not agree that the fact that at common law a business transferee
would have had to negotiate new contracts with the employees
of the
business transferor would have been a sufficient reason to prompt the
enactment of s197. Under the common law the workforce
of the old
employer would be in a very weak position to make any demands to the
new employer for different terms and conditions of
employment upon
the transfer of the business. The overwhelming majority of workers in
South Africa are unskilled or semi-skilled.
The new employer would
not in practice have to negotiate new contracts if he was prepared to
take the workers on the same terms and
conditions of employment. The
old employer would terminate the contracts of employment of his
workforce and the new employer would
simply take the same contracts,
delete the name of the old employer and replace it with his name and
call upon those employees who
wish to take up employment with him on
the same terms and conditions as those that governed their employment
under the old employer
to sign the contracts. Probably most, if not
all, of unskilled and semi-skilled employees would sign the contracts
if the new employer
offered them new contracts of employment. In the
unlikely event that most did not sign the contracts, the new employer
would find
it very easy to get replacements of unskilled workers in
the job market. In the light of the fact that it would be very easy
for
a new employer to secure the old employer’s workforce if he
wanted them, I do not think that there could have been a need for the
enactment of s 197 for the purpose of assisting new employers in
situations of transfers of businesses or undertakings.
[70] There
are, in my view, two important features of ss(1) which must be borne
in mind when reading the subsection. The one is the
use of the words
“may not”
and the use of the word
“unless”
. The
subsection has two parts. The first part precedes the word
“unless”
and the second part appears after that word. The first part reads:
”A
contract of employment may not be transferred from one employer
(referred to as the “old employer”) to another (referred
to as
“the new employer”) without the employee’s consent ...”
This part does not preclude the transfer of a contract of employment
in general. It only precludes the transfer of a contract of
employment without the consent of the employee concerned. The words:
“may not”
denote a prohibition.
[71] The
second part begins with the word:
”unless”
and then follows
up with paragraphs (a) and (b) of the subsection. The significance of
the word:
“unless”
is that it introduces exceptions to the
prohibition contained in the first part of the subsection. The first
part of the subsection
in effect precludes the transfer of an
employee’s contract of employment from one employer to another
without the employee’s
consent. That general rule accords with the
position at common law. It is also necessary to point out that at
common law the consent
of the old employer as well as that of the new
employer would be required. If it is accepted, as I think it must be,
that the second
part of the subsection creates exceptions to the
prohibition contained in the first part, the second part can only
mean that in cases
that fall under par (a) or (b) the opposite of
what is said in the first part of the subsection obtains. The
opposite of the first
part is: a contract of employment may be
transferred from one employer (referred to as
“the old
employer”
) to another employer (referred to as
“the new
employer”
) without the employee’s consent.
[72] This
means that, while the provisions of ss(1)(a) and(b) dispense with the
requirement of an employee’s consent to the transfer
of his
contract of employment from one employer to another in the
circumstances falling under paragraph (a) and paragraph (b) of
ss1,
there is nothing therein that can be said to be to the effect that a
transfer of a contract of employment may occur without
the employer’s
consent and without the agreement of the new employer. The subsection
states the law in regard to when an employee’s
consent is required
for the transfer of his contract of employment and when it is not. It
does not say that the consent of the employer
is not required nor
does it say that the consent of the new employer is not required. The
effect of this therefore is that, as one
proceeds to consider the
rest of the subsections of s197, one must do so on the basis that as
at the end of ss (1) there is nothing
to the effect that the
employer’s consent to a transfer of a contract of employment
between himself and his employee to another
employer is not required.
In order for one to conclude that the consent of the old employer
(and that of the new employer for that
matter) is not required for
the transfer of an employee’s contract of employment in a case
falling under par (a) or (b) of ss(1),
it will be necessary to find
provisions in ss(2) - (5) that change the position that appears to
obtain as at the end of ss(1).
[73] Subsection
(2)(a) reads:-
“(2) 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”.
Subsection
(2)(a) only applies to a case where a business, trade or undertaking
is being transferred in the circumstances referred
to in ss(1)(a).
As already stated above those circumstances are where the whole or
any part of a business, trade or undertaking
is transferred
“by
the old employer as a going concern”.
If a business, trade or undertaking is being transferred by the old
employer but not as a going concern, obviously ss(2)(a) would
not
apply.
[74] Subsection
(2)(a) simply spells out the consequences on the rights and
obligations of employment between the old employer and
each employee
and the new employer and each employee if a business, trade or
undertaking is transferred by the old employer as a
going concern.
The consequences it sets out are subject to being
“otherwise
agreed”.
What is glaringly striking about par (a) of ss(2) is
that there is no express reference therein to a transfer of a
contract of employment.
This is remarkable when one has regard to two
facts. One is that the subsection immediately before
ss(2)(a)
, namely ss(1), expressly refers to and deals with the transfer of a
contract of employment. The other is that the paragraph
that
immediately follows par (a) of ss (2), namely, ss(2)(b), also makes
an express reference to the transfer of contracts of employment.
[75] The
fact that in par (b) of ss (2) there is an express provision to the
effect that the contracts of all employees transfer automatically
from the old employer to the new employer whereas there is no such
express provision in par (a) is no indication that it was never
intended that in the situation to which par (a) applies the new
employer would not, upon the transfer of the business in the
circumstances
referred to in ss(1)(a), become a party to the
contracts of employment that the old employer had with each employee.
It was necessary,
in the case to which par (b) applies, that there be
an express reference to contracts in respect of a par (b) situation
because
in such a case there is not one regime of consequences upon
the transfer of the business but two regimes. The one regime is in
respect
of the contracts of all employees existing before the
transfer of business and the other is in respect of all rights and
obligations
and things done by or in relation to the old employer
before the transfer.
[76] In
a ss(2)(b) situation the contracts of all employees automatically
transfer to the new employer but all the rights and obligations
between the old employer and each employee remain the rights and
obligations between the old employer and each employee and anything
done by, or, in relation to, the old employer is
“considered to
have been done by the old employer.”
This is different from par
(a) in that the transfer of a business in the circumstances referred
to in s (1)(a) triggers only one regime
of consequences for all
rights and obligations which would include rights and obligations
provided for in a contract of employment.
The regime is that all the
rights and obligations existing between the old employer and each
employee continue in force and the new
employer steps into the shoes
of the old employer. Because there is one regime of consequences in
the case of the transfer of a business
in a ss(2)(a) situation, a
phrase was necessary that would encompass everything, hence the
reference to
“all the rights and obligations between the old
employer and each employee”.
[77]
Subsection (2)(b) reads thus:-
“
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
employer’s 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”.
[78] It
seems to me that the provision of par (a) of ss(2) clearly provide
something that changes the position that obtains as at
the end of
ss(1). Par (a) of ss(2) states what happens to the rights and
obligations existing between an employee and his employer
when his
employer transfers the business, trade or under taking as a going
concern. It is a provision that deals with a situation
where there is
a change of employer in a business in solvent circumstances. That is
why ss(2)(a) says all the rights and obligations
continue as if they
were rights and obligations between the new employer and each
employee.
[79] Paragraph
(a) of subsection (2) is clear. It says that
“all the rights and
obligations between the old employer and each employee at 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.”
The
terms of par (a) are very wide. The question is whether they are wide
enough to include the rights and obligations arising out
of the
contracts of employment between the old employer and each employee
without the old and/or new employer’s agreement being
required.
[80] I
have already said that the phrase
“as a going concern”
does
not necessarily entail that the employer and the new employer have
agreed that the workforce will be taken over by the new employer.
On
that basis I am of the view that the answer to this question depends
on whether it can be said that, when par (a) of subsection
(2) says
“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,”
this excludes the rights and obligations
arising out of the contract of employment between the old employer
and each employee. In
my judgement there is, and can be, no
justification in the provisions of s197 or of the Act as a whole for
any suggestion that the
wide terms of the second part of par (a) to
ss (2) exclude rights and obligations arising out of the contract of
employment between
the old employer and each employee. The terms of
par (a) are wide enough to include the contractual rights and
obligations arising
out of the contract of employment between the old
employer and each employee. Par (a) refers to
“all”
rights
and obligations. That must include statutory rights and obligations
as well as any rights and obligations arising out of delict.
This
must also mean that, if an employee had a right to sue the old
employer before the transfer, that right continues in force but
now
against the new employer. If the Act intended to exclude certain
rights and obligations from the dispensation provided for in
ss(2)(a), it would have said so expressly as it did in ss(2)(b).
There it made an express provision because it intended such a regime
of consequences.
[81] Par
(a) continues and provides towards the end that
‘ 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.”
This is aimed at firmly entrenching the new employer
in the shoes of the old employer in every respect. It seems to me
that the result
is that if, for example, the old employer had
dismissed an employee before the transfer, the new employer would be
considered to
have dismissed such employee. The result hereof is
that, if such a dismissal is found, after the transfer of the
business, to have
been unfair, any order of reinstatement would
probably have to be made against the new employer.
[82] This
innovation in our law was made in order to protect employees from
losing their jobs when their employer transfers his business
or part
thereof to another as a going concern. I think the provision
appearing at the end of par (a) that visits the new employer
with the
consequences of the sins of the old employer was aimed at
discouraging the old employer from doing anything either alone
or in
collusion with the new employer that would prejudice the employee
before or after the transfer of the business. The disincentive
would
be that, after the transfer of the business, liability attaches to
the new employer for whatever the old employer may have
done in
relation to any employee before the transfer.
[83] By
virtue of the words
“unless otherwise agreed”
appearing in
par (a), it is open to the old employer (and maybe, the new employer)
to negotiate with the employees or their representatives
contemplated
in sec 189(1) a dispensation of rights and obligations different to
the statutory ones that would otherwise continue
in the absence of a
different agreement. Such agreement could even include that the
employees’ contracts of employment are terminated
by agreement and
in return the employees are paid certain packages. The agreement
could well allow the employees to resign or it
could be to the effect
that the old employer pays the employees a certain package in return
for their agreeing that their employment
with the new employer will
be on the basis that they are new employees and the rights and
obligations between each one of them and
the new employer are new
rights and obligations completely different from those that existed
between the old employer and each employee.
[84] If
the old employer and the employees or their representatives are not
able to reach agreement varying the statutory dispensation
on the
rights and obligations, in my view, either party may resort to
industrial action in order to put pressure on the other to
agree to
its demands of what should happen. By the same token, the employees
or their representatives and the new employer may reach
an agreement
that varies the statutory dispensation of rights and obligations that
would otherwise be taken over by the new employer
in respect of each
employee.
[85] The
manner in which the new employer may seek to operate the business may
be such that he has to reduce the workforce for operational
requirements or that for the business to operate in a viable manner
the terms and conditions of employment of the workforce must
be
changed. The new employer would be entitled to dismiss all or some of
the employees if there were good operational requirements
to do so
and he complied with the requirements of sec 189. He may also
institute a lock - out against the employees to put pressure
on them
to agree to different terms and conditions of employment. If they are
not prepared to accept changes to their terms and conditions
of
employment and there are acceptable reasons for the changes to their
terms and conditions of employment, the new employer may
dismiss
them lawfully and fairly and employ a workforce that will be prepared
to work on the terms and conditions of employment that
are required
for the operational needs of the business. The employees may also go
on a strike to change their terms and conditions
of employment for
the better.
[86] If
the proposition that a reference to a transfer of a business
“as
a going concern”
necessarily means that the transferor and the
transferee have agreed that the workforce is being taken over by the
transferee were
correct, this would mean that
“all the rights
and obligations between the old employer and each employee at the
time of the transfer”
that ss (2)(a) refers to can only
“continue in force as if they had been rights and obligations
between the new employer and each employee”
if the transferee
was happy to have the rights and obligations from the old employer
and each employee attaching to him. If the new
employer does not want
such rights and obligations attaching to him, he would say no to the
workforce coming over to him. Once he
said no to the workforce coming
over to him, ss 2(a) would not apply. This cannot be right. In any
event the proposition that only
if the new employer and the old
employer have reached agreement that the new employer takes over the
workforce can the business be
said to be transferred as a going
concern seeks to give the phrase
“going concern”
a meaning
different from the meaning given to the phrase by various English
dictionaries as already shown above.
[87] Another
difficulty with this proposition is this. Like ss(2))a), which has a
pre- condition that must occur before the consequences
set out
therein can follow, ss(2)(b) also has a pre - condition which, upon
occurrence, gives rise to the consequences set out therein.
In
ss(2)(a) the pre-condition is that a business is transferred in the
circumstances referred to in ss(1)(a). In ss(2)(b) the pre
-
condition that the business is transferred
“in the
circumstances envisaged by subsection (1)(b).”
There is
something common in both provisions. That is that the business
is
being transferred as a going concern. The difference between the
circumstances in which the business is transferred under ss(1)(a)
and those in which it is transferred under ss(1)(b) is that the
transfer occurs in solvent circumstances under ss(1)(a) but under
insolvent circumstances under ss (1)(b).
[88] This
means that the circumstances envisaged by ss(1)(b) for the transfer
of a business include the circumstance that the business
is being
transferred
“as a going concern”.
On this proposition the
position must be that under ss (2)(b) read with ss (1)(b) the old
employer and the new employer agree that
the latter will take over
the workforce. Subsection(2)(b) provides that, if a business is
transferred in those circumstances, unless
otherwise agreed,
“
the contracts of all the employees that were in existence immediately
before the old employer’s winding up or sequestration
transfer
automatically to the new employer”
. If to transfer a business
“as a going concern”,
which appears in both ss(1)(a) and
ss(1)(b), necessarily means that the old employer and the new
employer have agreed that the workforce
is being transferred together
with the business to the new employer, it would have been unnecessary
for the Act to also provide,
as it does, in ss(2)(b) that the
contracts (which must include contracts of employment) of all the
employees transfer automatically
to the new employer. It has been
suggested that
”automatically”
in ss (2)(b) means without
the employee’s consent and does not mean without the consent of the
employee and of the old employer
and the new employer. I cannot
agree. The word
“automatically”
in ss(2)(b) must be given
its ordinary meaning which is that something occurs on its own. It
means what it says. It means without
anyone’s consent or
intervention. If the Act intended to say without the employee’s
consent, it would have said so clearly as
it did in ss (1) and would
in all probability have used precisely that expression which it had
just used in ss (1).
[89] There
is a suggestion that it would be unfair if the meaning of ss(2)(a)
was that the workforce of the old employer is imposed
on the new
employer irrespective of the wishes of the two employers. This
suggestion is based on the concern for only one side to
the
transaction, namely, the employer side and totally ignores the side
of employees. Because of this, it leads to a result that
seeks to
protect only the interests of employers and does little to balance
the interests of both the employer side and the employee
side.
[90] The
proposition that in terms of s 197 the agreement of the old employer
and the new employer that the employees will be taken
over by the new
employer is required before the consequences set out in the second
part of ss(2)(a) may follow means, in my view,
that the new employer
must, before he can agree to take over the employees, decide whether
he is happy to not only take the workers
on the same terms and
conditions but also to take over from the old employer all liability
for all the latter’s actions and omissions
“done before the
transfer by the old employer”
in relation to each employee. It
seems to me that the effect of this is that on this proposition, if
the new employer decides to take
over the workforce, he would be
prepared to also take over from the old employer the latter’s
liability for all his
“sins”
of the past.
[91]
If the business transferee would like to take over the employees but
not the liability of the old employer for its sins, he
must not agree
to take over the employees at all. He would need to let the old
employer terminate the contracts of employment of
the employees so
that, thereafter, he can offer the employees the same contracts. In
that way he gets the workers but not the liability
for the old
employer’s sins. If I am correct in this analysis, then I can see
no reason why any employer would choose the route
of agreeing to take
over the employees and be burdened with so much else when he can
easily get the employees without having to assume
liability for
someone else’s actions and omissions. The result of all of this is
that the proposition that the agreement of the
old employer and the
new employer that the workers will be taken over by the new employer
is required before the second part of ss(2)(a)
can operate renders
ss(2)(a) utterly useless - both to employers and to employees. This
is so because the second part of ss(2)(a)would
only operate when the
old and the new employers want it to but not when they don’t want
it to. I think that would be untenable.
[92] On
the construction that I have adopted, s 197 is a particularly useful
provision that addresses a problem that has existed in
our law for a
long time and that has been highlighted in case law (see
Kebeni v
Cementili Products (Ciskei)(Pty)Ltd (1987) 8 ILJ 442
(IC))
which
the legislature is presumed to have been aware of when seeking to
change the legal position. On my construction s197 establishes
the
following principles:
(a) Ordinarily
an employee’s contract of employment cannot be transferred without
his or her consent.
(b) When
a business is transferred by one employer to another as a going
concern in solvent circumstances, neither the consent of
the
employees nor that of the business transferor and business transferee
is required; before the contracts of employment of the
employees
become contracts between each employee and the new employer unless
there is agreement with the workers or their representatives
to the
contrary, the new employer assumes liability for all the actions done
by the old employer in relation to each employee and
also acquires
any rights that the old employer may have had in relation to each
employee; for all intents and purposes the business
transferee takes
the position of the transferor.
(c) When
a business is transferred as a going concern in insolvent
circumstances, the contracts of employment transfer automatically
to
the new employer but the new employer does not assume liability for
the actions of the old employer nor does he acquire the rights
and
obligations that existed between the old employer and each employee;
those remain the rights and obligations between the old
employer and
each employee.
(d) In
either case the continuity of employment of the employees is not
affected when the contracts transfer.
[93] The
proposition that under ss(2)(a) read with ss(1)(a) the business
transferor and the business transferee are free to agree
to transfer
or not to transfer the contracts of employment of employees to the
new employer - and that such contracts do not transfer
automatically
has another weakness. The effect of that proposition is that, where a
business is being transferred in solvent circumstances,
the employees
lose their jobs unless the business transferor and the business
transferee agree otherwise but, when a business is
transferred in
insolvent circumstances, the employees are guaranteed their jobs
under the new employer despite any objection from
the latter. I would
have thought that logic and common sense dictated that, if the Act
had to choose in which of the two situations
the new employer should
be given a right to say no to the employees coming over to him, it
would have been in the situation where
the business is being
transferred in insolvent circumstances than in solvent circumstances.
I can see no sense in a construction
of sec 197 that lays down a
principle that, if a business is being transferred in solvent
circumstances, the transferee has a veto
to prevent the workforce
from coming over with the business but has no right to say no to such
a workforce coming over to him when
the business is being transferred
to him in insolvent circumstances. It is a construction of s 197 that
would definitely discourage
business people from rescuing failing
businesses when they should be encouraged to do so.
[94] In
the light of all of this I am satisfied that, when ss(1)(a) and
ss(2)(a) of s 197 of the Act are read together, the new employer
takes over the contracts of employment of the employees of the old
employer without his agreement being required if the business
is
transferred to him by the old employer as a going concern. Since this
is a minority judgement - my Colleagues have reached the
opposite
conclusion, it is not necessary for me to deal with other issues that
would otherwise have required to be dealt with if
the conclusion of
this Court had been the one I have reached.
RMM
Zondo
Judge
President
IN THE LABOUR
APPEAL COURT OF SOUTH AFRICA
Held
in Cape Town Case No CA 12/00
In
the appeal between
National
Education, Health and Appellant
Allied
Workers Union
and
University
of Cape Town First Respondent
Supercare
Cleaning (Pty)Ltd Second Respondent
Metro
Cleaning Services cc Third Respondent
Turfmeck
cc Fourth Respondent
Eco
Environment (Pty)Ltd Fifth Respondent
JUDGMENT
VAN DIJKHORST AJA:
This judgment deals with the interpretation of
section 197 of the Labour Relations Act 66 of 1995 (the act) and its
application
to outsourcing.
The first respondent, the University of Cape
Town, after protracted internal deliberations and after abortive
consultations with
the appellant (the union), on 26 August 1999
resolved to outsource certain of its non-core activities. These
were mainly cleaning,
gardening and sports ground maintenance
services but tea making and photo copying tasks were also affected.
The work was contracted
out to the second to fifth respondents,
entities that specialize in these fields. There were four different
contracts with these
entities, each being awarded a specialized
task. No machinery or equipment was transferred by the university.
The university gave
notice to 267 of its employees that their
services were to be terminated on 30 September 1999 for operational
reasons. Retrenchment
benefits were paid. During September the
affected employees tendered to continue their employment with the
university and to commence
with the other respondents when the
transfer occurred. This offer was rejected but they were invited to
apply to the new contractors
for employment, the university having
stipulated in its contracts with the contractors that the latter
would favourably consider
their employment..Most of the dismissed
employees applied to the respondents for employment and the majority
were accepted, but
a lesser number reported for duty and as time
passed their numbers dwindled.
The union instituted urgent proceedings in the
Labour Court in which it sought declaratory relief under section 197
of the act (and
alternative relief which is not pursued in this
appeal and need not be discussed). It sought a declaration that the
outsourcing
was a transfer of a part of the university’s business,
trade or undertaking as a going concern as envisaged in section
197(1)(a),
that the employment contracts of the affected employees
were transferred automatically to the respondents concerned in terms
of
section 197(2)(a) and that the notice of termination given
contravenes section 197(2)(a) of the act and is of no force and
effect.
( The application is vague in some respects. There is no
information about the identities or number of employees affected by
each
of the four contracts. There is no clarity about the detail of
the apportionment of duties between the four contractors. The relief
sought does not specify which contracts of employment are to be
declared transferred to which respondent. The matter was, however
not argued on this basis and I will not discuss this aspect further.
The notice of motion refers to a transfer whereas, on the
union’s
version there were four.)
The Labour Court dismissed the application.
Mlambo J held that the sections referred to only provide for a
transfer of rights and
obligations from one employer to another in a
transfer of a business as a going concern when those employers agree
that the contracts
of employees will be transferred. The learned
judge, however, held that he was bound by the contrary decision of
this court in
Foodgro (a division of Leisurenet) v Keil (1999) 20
ILJ 2521 (LAC). He found on the facts that the outsourcing did not
constitute
a transfer of the whole or part of a business as
contemplated in the section and thus refused relief. No costs were
awarded. Hence
this appeal. The first and second respondents have
noted cross appeals on the costs issue. There was no appearance for
the other
respondents.
Section 197 of the act reads as follows:
“
(1) 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 employee’s 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
employer’s 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 employee’s
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.”
For the sake of
brevity I use the word “business” as including trade and
undertaking and a part thereof. I use “sale”
to include
exchange, donation or some other contract in terms of which a
business is transferred.
The section
commences with a restatement of the common law rule that a contract
of employment may not be transferred without consent
of both parties
thereto. It immediately creates an exception to this rule in one
instance only, the transfer of a business as
a going concern. This
much is clear from sub-section (1). In such a case the consent of
the employee is not necessary. This
drastic inroad upon the common
law rule evidences an intention on the part of the legislature that
transfers of businesses as
going concerns be facilitated. Having in
ss(1) provided for the transfer of contracts of employment without
the consent of the
employees, the legislature was obliged to spell
out the consequences. This it did in the following subsections. This
is the scheme
of section 197 taken as a whole.
The key to the
interpretation of the section is in my view the fact that the
section deals with the transfer of contracts without
the consent of
employees and is silent about the agreement of employers inter se.
This is a strong indication that that aspect
was not statutorily
amended.
My reasoning is
further as follows:
Ss(1) clearly deals
with
consensual
transfers of contracts of employment between
employers without the consent of the employee, which it prohibits
except in a limited
field.
Unless
there is a clear indication to the contrary in following subsections
viz that the section no longer deals with consensual transfers
only,
that remains the position throughout the section.
Ss (2)(a) in its
referral back to ss(1)(a) gives no sign of a change of intention; on
the contrary. Ss (2)(b) refers to“ automatic”
transfer only in
the context of the transfer of a business
and not in the context
of the transfer of a trade or undertaking
and then only in the
context of insolvent circumstances. In this context “automatic”
must therefore mean “without the consent
of the employee”. To
hold otherwise would mean that in the case of an insolvent business
contracts of employment are transferred
whether the new employer
wants that or not, but in all other cases they can only be
transferred consensually between employers. This
would be absurd.
The concept
“transfer as a going concern” implies an agreement between
employers on what is or what part is transferred. This
obviously will
include agreement on the labour force.
There is therefore
no room for automatic non-consensual transfers between employers of
employees which are not intended to be part
of the going concern.
[Those not intended do not form part of the “part” of the going
concern transferred.]
The key phrase in
this section is “going concern”. Lack of emphasis thereon or a
misunderstanding thereof leads to misinterpretation
of the section.
A business is a going concern only if its assets, movable and
immovable, tangible and intangible, are utilized
in the production
of profit (or, in the case of an undertaking, the attainment of its
goals).In every business its employees are
a vital component and in
labour intensive industries the major asset. To say that there can
be a sale of a business as a going
concern without all or most of
the employees going over is to equate a bleached skeleton with a
vibrant horse. A going concern
is ”one in actual operation” cf
General Motors SA (Pty) Ltd v Besta Auto Component Manufacturing
and another
1982 (2) SA 653
(SE) 657C-G. The Concise Oxford
Dictionary defines it as a “ business already in operation”.
That can not be the case where
there is no workforce. In West’s
Legal Thesaurus and Dictionary “going concern ” is defined as
“an existing solvent business
operating in its ordinary and
regular manner”.(For present purposes the word “solvent” must
be disregarded.)
Purchasers and
sellers of businesses as going concerns are at liberty to define
what is included in that concept, and generally
do. (cf Smithfield
Cold Storage Co v Kamp
1920 AD 183
; General Motors SA v Besta Auto
and Another supra which concerned movables and work in progress. )
When used in section 197(1)
the phrase “going concern” must
necessarily include the employees and where the seller and purchaser
negotiate and agree on
a sale as a going concern of a business or
part thereof, the necessary implication is that they agree that the
employees or a material
part thereof are part and parcel of the
transaction.
In the absence of
a provision like section 197(1), upon the transfer of a business
even as a going concern all contracts with the
old employer would be
terminated and new contracts would have to be negotiated with the
purchaser of the business. This held detrimental
effects for all
parties and only benefit to the purchaser. The latter had the
hassle of negotiations and the administration of
new contracts but
also had the considerable advantage that he could in this way cut
his labour costs. The old employer was saddled
with the
retrenchment procedure and severance payments. The employees were
the worst off. They were confronted with a take over
and lost their
employment. But the section is not without advantage to employees.
Every transfer of
a business as a going concern is preceded by a definition of what
is sold. The parties determine what exactly
the business comprises
and in the case of a part, what part. As it is a going concern the
seller and the purchaser both know that
employees are taken over,
who they are and what their conditions of employment are. This is
not only the case in the normal commercial
transfers dealt with in
section 197(1)(a), but also in abnormal transfers arising from
insolvency dealt with in section 197(1)(b).
In the latter case the
trustee or liquidator will define what he puts on sale as a going
concern and inform intending purchasers
of the contracts of
employment to be taken over.
It is therefore
clear that the question of a non consensual or automatic transfer of
employment contracts between seller and purchaser
does not and
cannot arise in either case. The word “automatically ” in
section 197(2)(b) refers to the fact that the consent
of the
employee is not required.
In section 197 (2)
the most important question of the position of employees is
addressed. When contracts of employment become freely
transferable,
the continued existence of rights and obligations has to be assured.
In the case of normal commercial transfers
the employee goes over
with all rights and obligations intact. Even existing disciplinary
warnings and accrued leave retain their
validity in respect of the
new employer in terms of section 197(2)(a). In contradistinction
thereto section 197(2)(b) provides
(in the case of businesses only)
that upon transfers in insolvent circumstances only the employment
contracts are transferred whereas
the existing rights and
obligations remain behind, to be exercised viz a viz the old
employer or his estate.
The rigidity of
the provisions of section 197(2) may be ameliorated by agreement
with the person or body ( eg the trade union)
that has to be
consulted by the employer upon dismissals for operational
requirements referred to in section 189(1). This is provided
for in
section 197(3).
Counsel for the
appellant sought to negate the effect of section 197(1) by arguing
that it states a prohibition on transfers of
employment contracts
coupled with an exception to the general rule, introduced by the
word “unless”. It does not determine
whether the transfers are
automatic i.e. without the consent of the purchaser and seller or
not. That answer is to be sought in
section 197(2). When reading
that section the first part of section 197(1) to which it refers,
is to be ignored and the focus
is to be solely on the phrase in (a).
Such approach would, according to the argument, lead to the
conclusion that all transfers,
whether there is agreement or not to
include the workforce, would be covered by the section. This
argument is in my view fallacious.
It totally ignores the meaning
of the phrase “as a going concern”.Furthermore, had it been the
intention to refer only to
the portion in paragraph (a) and not to
the first part of the sub-section introduced by (1) the section
would have referred to
paragraph (a) of sub-section (1) and not to
sub-section (1)(a).
Counsel for the
appellant sought to bolster his case by copious reference to the
case law of the European Court of Justice interpreting
the Acquired
Rights Directive 77/187/EEC adopted in 1977 by the European
Commission. This directive also gave rise to the British
Transfer
of Undertakings (Protection of Employment ) Regulations
1981 SI
1981/1794
(TUPE) and its concomitant spate of jurisprudence. The
directive was amended in 1998 by the European Commission’s Council
Directive
98/50/EC. I will not quote the texts of these legislative
provisions. Those that preceded our act are to be found in
Foodgro
supra
2525H to 2527D. The case law is discussed in Schutte &
others v Powerplus Performance (Pty) Ltd & another (1999) 20 ILJ
655 (LC) . It can safely be accepted that the drafters of our
legislation were fully aware of the content of the directives and
the manner of their interpretation by the courts. But it should
always be bourne in mind that our act is the product of extensive
negotiations in Nedlac and that the courts should not attempt
judicially to obliterate compromises which in their view do not go
far enough.
In
Foodgro
at
2527G Froneman DJP stated that “ the usefulness of these
comparative provisions should not be overstated. The differences in
wording from section 197 are quite obvious, as is the fact that they
find their applications in societies different in history
and
development from our own.” The learned judge did, however, point
out that these provisions were aimed at the protection of
employees
as he had concluded the provisions of section 197 were. To these
observations one should add a reference to the principle
of
interpretation that a material difference in wording from previous
statutes is an indication of a different goal.
I turn now to the
reasoning in the
Foodgro
case. The issue which came up for
decision was whether an employee who had consented to the transfer
of the business in which
she was employed to a new employer and who
had worked for him for some months, could voluntarily validly sign a
new contract of
employment with that employer whereby she lost her
accrued years of service. The answer in both the majority and
minority judgments
was a clear negative. In both judgments it is
based on section 197(4) which lays down that a transfer referred to
in section 197(1)
does not interrupt the employee’s continuity of
employment. The question whether contracts of employment are
automatically transferred
whether the seller and purchaser want that
or not, was never an issue as the lady concerned was transferred
with her consent and
both old and new employers agreed on the
transfer.. Any remarks by Froneman DJP in the majority judgment
which are sought to
be thus interpreted were
obiter
and we
are not bound thereby. Nevertheless they warrant close attention.
In that case counsel for Foodgro contended that the
ease with which
businesses are transferred is very important for the economic
well-being of the country and therefore the employees
should be
permitted to contract out of onerous provisions in section 197.
The reference was clearly to section 197(4). Froneman
DJP countered
this argument by holding that the pursuit of economic development by
means of a particular interpretation of the
act is qualified by the
goals of social justice, labour peace and the democratization of the
workplace. The learned judge referred
to Kebeni v Cementile
Products (Ciskei) (Pty) Ltd (1987) 8 ILJ 442 (IC) where safeguards
in the transfer agreement deeming all
existing contracts of
employment to be transferred to the purchaser were required and held
that the provisions of section 197 were
primarily aimed at the
protection of employees. His reasons (at 2525D to G) were:
(a)
If the aim was to assist
purchasers to acquire businesses without incurring obligations to
employees section 197 was unnecessary
as the common law catered
adequately for that situation.

(b)
“The provisions relating to automatic transfers of contracts of
employment (s 197(1) and (2)
) and the non-interruption of an
employee’s ‘continuity of employment’ (s 197(4)) secure
advantages not previously enjoyed
by employees.”
(c) Even after automatic transfers of
contracts of employment under
s 197 employees may still unilaterally
resign.

(d) New employers become
subject to the additional sanctions or remedies under the act upon
transfer of the
employment contract.
This reasoning can
be answered as follows:
(a) The fact
that the purchaser’s
position in a consensual transfer has now become more onerous than
under the common law is no ground for
holding that the legislature
intended to burden him still further.

(b) This is correct but if this statement is intended to hold that
automatic transfers occur
not only in cases of consensus thereon
between seller and purchaser, no reasons are advanced.

(c) & (d) This is
correct whichever
interpretation is followed.
This is the sum total of the learned judge’s
reasoning.
There is no reference to or interpretation of the phrase
“going concern” in its context. The question whether the
intention
behind section 197 can be derived from section 197(1)
itself, was not considered. Nor was it necessary as the focus was
on section
197(4), correctly in my view.
Conradie JA who
gave a minority judgment emphasized that section 197 is a useful
provision for the new employer and the old employees
alike, held
that the intention was that a transfer should not operate so as to
terminate existing contracts of employment and found
that
modification was permitted but not replacement in terms of sections
197(2) and 197(4).
I hold therefore
that the decision in
Foodgro
does not stand in the way of a
finding by this court that section 197 (1) is to be interpreted so
as to limit its scope to cases
where the transfer follows upon an
agreement between seller and purchaser defining the subject matter
of the sale as the business
as a going concern (i.e. employees
included).
It was argued by
counsel for the appellant that such an approach would open the door
to intentional avoidance of the operation of
section 197 contrary to
the intention of the legislature by the dismissal of all employees
prior to the sale and their re-employment
thereafter.

There are three answers to
this objection. First: It presupposes an intention behind the
section which is not to be found
therein. Second: This avoiding
action brings with it all the negative consequences of the old order
for the seller which he may
well wish to avoid. Third: If it is
really a transfer of a going concern with the workforce included but
for economic reasons
shrouded in a two-stage process whereby stage
one is the dismissal of the employees with a tacit or secret
understanding that
they will be re-employed by the purchaser (so as
to avoid payment of retrenchment benefits) and stage two is their
re-employment,
the court will shred the shroud and adjudicate upon
the real transaction. The applicabilty of section 197 (2) will
depend upon
the facts of each individual case.
It follows that
Mlambo J in the Labour Court was correct in his interpretation of
the section that consensual transfer of contracts
of employment is a
prerequisite for its operation. It is not necessary to go further.
It was conceded by counsel for the appellant
that such a finding
would dispose of the appeal.
26 The
appeal must therefore be dismissed with costs. There is a
cross-appeal against the
Labour Court’s
refusal to award costs when dismissing the application. The second
respondent’s submissions are: The appellant
is not an individual
employee but a large trade union and thus unlikely to be discouraged
by the making of a costs order from approaching
the Labour Court in
future.(cf Malandoh v SABC (1997) 18 ILJ 544 (LC)). The appellant and
the second respondent do not have an ongoing
relationship which may
be damaged by the making of a costs order (cf Afrox Ltd v SA Chemical
Workers Union and Others (2) (1997)
18 ILJ 406 (LC)). There are no
special considerations or considerations of fairness in this case
which counteract the general rule
that costs follow the result. (cf
National Union of Mineworkers v East Rand Gold and Uranium Company
Ltd
[1991] ZASCA 168
;
1992 (1) SA 700
(A) 739 A-F; Cargo Motors v Hamilton (1996) 17
ILJ 113 (LAC)).
There is force in
these submissions. The learned Judge a quo did not give reasons for
his decision to make no costs order and there
is no indication in the
judgment that these factors were duly considered. In my view it is
incorrect to apply a rule of thumb on
costs mechanically. The second
respondent is entitled to its costs in the Labour Court
.
In the case of the University, first respondent, there is
an ongoing relationship with the appellant. I doubt that this
relationship
will be affected to a larger extent by an adverse costs
order than it has probably been affected already by this case itself.
The
other factors mentioned are also present in the first
respondent’s case. There is no reason to differentiate between the
two respondents.
The first respondent is entitled to its costs in the
Labour Court.
27 The
following order is made:
1 The appeal is
dismissed with costs.
2 The cross-appeal
is upheld with costs. The costs order of the Labour Court is set
aside and the following order is substituted therefor:
“The
applicant is ordered to pay the costs of the respondents.”
3 The costs in both
this Court and the Labour Court will include the costs of two
counsel.
Van
Dijkhorst AJA
I
concur:
Comrie
AJA
For
Appellant: MJD Wallis SC
instructed
by Cheadle Thompson and Haysom
For
First Respondent: WRE Duminy SC and RGL Stelzner
instructed
by Deneys Reitz
For
Second Respondent: PJ Pretorius SC and AM Breitenbach
instructed
by Bowman Gilfillan Inc
(initially
by Findlay & Tait Inc)
Date
of hearing: 25/5/2001
Date
of judgment: 7 February 2002