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[2017] ZALCJHB 329
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Sisonke Partnership t/a DSV Healthcare v Medtronic South Africa (Pty) Ltd and Others (J1864/17) [2017] ZALCJHB 329; (2017) 38 ILJ 2812 (LC) (14 September 2017)
Reportable
THE
LABOUR COURT OF SOUTH AFRICA,
HELD
AT JOHANNESBURG
C
ase No: J 1864/17
In
the matter between:
SISONKE
PARTNERSHIP T/A DSV
HEALTHCARE
Applicant
and
MEDTRONIC
SOUTH AFRICA (PTY) LTD
First Respondent
STANLEY MATSEKE & 4
OTHERS
Second and
further Respondents
Heard
:
24 and 25 August
2017
Delivered
:
14 September 2017
Summary:
(Urgent application – declarator – alleged transfer of an
undertaking under s 197 – termination
of warehousing and
logistics contract – original warehousing contract entailed s
197 transfer from client – on termination
of contract
warehousing and logistics function reverted to client – no
transfer of undertaking as going concern)
JUDGMENT
LAGRANGE
J
Introduction
[1]
The applicant (‘Sisonke’) seeks a declaratory order on an
urgent basis that the termination of an agreement with
the first
respondent (‘Medtronic’) constitutes a transfer of
undertaking in terms of section 197 of the Labour Relations
Act, 66
of 1995 (‘the LRA’). It also seeks consequential relief
that the employment contracts of the second to six
respondents (‘the
individual respondents’) were transferred to Medtronic with
effect from the date of alleged transfer
on 21 August 2017. The
individual respondents did not oppose the application. It is common
cause that five permanent employees
and seven temporary employees
were engaged by the applicant specifically for the services rendered
to Medtronic by Sisonke.
Urgency
[2]
The application was launched on 14 August and was initially enrolled
for hearing on 24 August but was postponed by agreement
until 25
August to allow Sisonke to respond to a supplementary affidavit filed
by Medtronic. Between April and July 2017, there
was correspondence
and discussions which took place between Sisonke and Medtronic about
whether the termination of the contract
and the planned in-house
operation of the warehousing function performed previously by Sisonke
on Medtronic’s behalf entailed
a transfer of an undertaking
under section 197 of the LRA. In the first week of August the parties
could not agree and it became
apparent that their disagreement could
only be settled in court. The urgency of the application was not
seriously contested and
I am satisfied that, it was not unreasonable
of the applicant to launch the application when it did. In effect the
applicant is
seeking final relief and given the absence of prejudice
to the respondents it would serve little purpose re-enrolling the
matter
again. Though not decisive, another consideration is that it
is important that the employment status of the individual applicants
be clarified so as to determine whether their employment contracts
with Sisonke remain intact or whether they have been transferred
to
Medtronic by operation of law.
Background
The
LSA outsourcing arrangement between Medtronic and Sisonke
[3]
In 2012 Sisonke and Medtronic entered into a logistics services
agreement (‘the LSA’). In terms of the LSA Sisonke
was to “provide warehouse and warehouse management services
(including goods in, stock management, order management, goods
out
and value-added services in respect of products/materials imported by
Medtronic)”. The applicant was obliged to provide
the services
in question in respect of all Medtronic’s products as specified
in an annexure to the agreement. Sisonke is
a logistics company
providing “logistics solutions to the public and private
sector”.
[4]
In terms of the LSA, certain IT systems including specific hardware
and software, racking equipment and five permanent staff
were
transferred to Sisonke by Medtronic. Although certain employees were
excluded from the transfer due to specific operational
requirements
of Sisonke, the entire business unit and infrastructure transferred
to it. Medtronic agrees that Sisonke provides
warehouse and warehouse
management services to it but denies that Sisonke runs its entire
logistics and warehouse function.
[5]
It might be arguable that when the LSA was concluded and when staff
and equipment were transferred from Medtronic to Sisonke
pursuant to
that agreement a transfer of a discrete part of Medtronic’s
warehousing and logistics function amounting to a
transfer of an
undertaking under section 197 occurred. The parties themselves do not
agree whether the original transaction fell
under section 197 or not.
However, it is not necessary to determine if that was a consequence
of the conclusion of the LSA for
the purposes of identifying the
legal nature of the operational changes arising at the termination of
the LSA, which is the subject
matter of this application.
Termination
of the LSA between Medtronic and Sisonke
[6]
On 2 February 2017 Medtronic notified Sisonke that it was terminating
the agreement with effect from 21 August 2017. Sisonke
claims that in
April an agreement was concluded in terms of which Medtronic would
reabsorb the previously outsourced business.
Sisonke argues that,
this agreement entails the transfer of the logistic and warehousing
portion of Medtronic, from it back to
Medtronic with effect from 21
August. It claims that this is the same business Medtronic
transferred to it in 2012. However, Medtronic
denies concluding any
such agreement and there is no evidence of written confirmation of
the same. As at the date of the termination
of the contract, Sisonke
employed the individual respondents and seven temporary employees to
fulfil its obligations under the
contract with Medtronic.
[7]
Medtronic does concede that certain upright storage baskets are being
returned to it at the end of the contract and the shelves
used by
Sisonke to store long products horizontally, though there is a
dispute whether the latter shelving was returned at the
insistence of
Medtronic or Sisonke. In any event, Medtronic claims that it has no
need for the flat storage shelving for long products
as it has
custom-built shelves for long products in its own warehouse. Of the
approximately 9528 storage bin locations required
for Medtronic’s
products, only 130 of those locations are required for long products.
[8]
Medtronic claims that its products only occupied approximately 8% of
the storage capacity of Sisonke’s warehouse. Paradoxically,
Sisonke does not admit or deny this contention nor does it put up an
alternative version despite, one must assume, being in a better
position than Medtronic to attest to this.
[9]
Sisonke alleges that Medtronic will have to provide 9398 bin
locations at its own warehouse, which Sisonke formerly had to provide
at its warehouse facility to service the applicant’s
requirements. However, Medtronic states that these storage facilities
will in future be supplied by itself at its own warehouse. The
storage bins used by Sisonke do not form any part of any equipment
which the applicant is returning to it for future storage purposes.
At the end of the contract, Medtronic’s products were
loaded
onto pallets in the existing storage bins in which they were stored
by Sisonke and the bins were relabelled at Medtronic’s
request.
Medtronic maintains that the relabeling of the boxes was simply an
inventory control measure, and the use of the bins
was simply to make
the transfer of the products to Medtronic easier. Moreover, empty
storage boxes which contained no stock at
the time products were
transferred to Medtronic, are simply being retained by Sisonke.
[10]
The storage and receipt of supplies by Sisonke on behalf of Medtronic
(“goods in”) was previously captured using
Sisonke’s
own Delta software system. In turn that system provides limited
information to Medtronic’s own SAP system
confirming that the
goods have been received and stored. The SAP system in turn provides
information to the Delta system concerning
Medtronic’s products
dispatched to Sisonke’s warehouse. How the stock was managed
and moved around in Sisonke’s
warehouse was determined by
Sisonke and captured on its Delta system.
[11]
The equipment such as mechanical handlers and picker trolleys used to
move stock around and retrieve stored products is being
retained by
Sisonke applicant. Similarly, the barcoding system used by Sisonke to
identify stock location will not be transferred
to Medtronic.
[12]
In relation to the management and dispatch of orders (“goods
out”) from Medtronic’s customers, the orders
would be
placed with Medtronic and captured on the Medtronic’s SAP
system. The SAP system would convey the order information
to
Sisonke’s Delta system. The Delta system was then used to
identify the stock locations of products in its warehouse and
compile
a schedule for pickers to retrieve the stock and package the orders
for delivery. Once the items have been taken out of
stock and ready
for dispatch, Sisonke staff would enter a delivery number on the SAP
system which would generate a delivery note.
Sisonke would be
responsible for arranging the delivery of the order using a courier
service.
[13]
The only item of computer hardware that will be returned to Medtronic
is the SAP operated system used by Sisonke to generate
delivery notes
for Medtronic’s customers. This consisted of four desktop
computers, printers and a server unit. Medtronic
states that its SAP
system requires significant reconfiguration to enable it to run
warehouse stock management at its own in-house
distribution centre.
The system of order management and the ‘goods out’
process applicable to Medtronic’s products
stored at Sisonke’s
warehouse was an integral part of Sisonke’s own larger
warehouse operation and will not be transferred
to Medtronic. The IT
assets originally provided to Sisonke by Medtronic were solely for
the purpose of generating and printing
delivery notes and invoices
before products were dispatched, but were not utilised to manage the
storage of products in Sisonke’s
warehouse.
[14]
Essentially, Medtronic contends that none of the assets previously
used to receive, store or retrieve its products in Sisonke’s
warehouse are being taken over by it for use in its warehousing
operation at its own distribution centre, though it appears that
it
will be able to use the IT equipment for despatching products to some
extent. The IT equipment and software used to manage the
warehousing
of its products by Sisonke as well as the warehouse facility and
equipment will remain with the Sisonke except for
some upright
storage equipment which is being returned to it, and the SAP
hardware. Medtronic also submits that the limited assets
that are
being returned to it by Sisonke are not sufficient to continue the
services provided by the applicant, which it will now
conduct
in-house. It maintains that after the termination of the services
agreement, the applicant will still be able to use its
existing
technology and warehouse infrastructure to render warehousing
services to Sisonke’s other customers
[15]
There is a dispute about whether only the second and third
respondents were originally transferred to the applicant pursuant
to
the LSA or whether the fourth, fifth and sixth respondents were also
transferred. However, the issue the court is required to
decide is
what the status of the current transaction is.
Evaluation
[16]
What is not in dispute is that the receipt of goods, warehousing and
dispatch of Medtronic’s products previously performed
by
Sisonke under the LSA, will now be done in-house by Medtronic at its
own distribution centre. Thus, Medtronic has internalised
a service
which it previously outsourced to Sisonke. Sisonke had previously
incorporated Medtronic’s warehousing and distribution
function
within its own operation.
[17]
Mr Nel
for the applicant argued that, essentially, exactly the
same business is being conducted at Medtronic’s premises that
was
being conducted by Sisonke on its behalf and that the only reason
for the consolidation of warehousing operations is that, Medtronic
took over a competitors operations and required more warehousing
facilities. All that has transpired is that, the location of the
operation has moved from Sisonke’s warehouse to Medtronic’s
distribution centre. Even if the infrastructure changed,
the
essential character of the business undertaking remained the same.
Mr
Frahm-Arp
conceded that Medtronic’s distribution
centre would be performing the same warehousing function that Sisonke
provided
under the LSA, but argued that the applicant could not
demonstrate that the warehousing operation of Sisonke was transferred
as
a ‘going concern’ to Medtronic. The limited
computer hardware and upright storage baskets returned to Medtronic
are inadequate to permit Medtronic to replicate the warehouse
operation formerly conducted by Sisonke on Medtronic’s behalf.
Insofar as some of the brown storage bins containing Medtronic’s
stock held by Sisonke are being used to transport the stock
to
Medtronic, that is for the practical convenience of moving the stock,
not to utilise the bins for permanent storage of stock
in Medtronic’s
distribution centre. Further, Sisonke’s warehouse operation
under which Medtronic’s warehousing
requirements were met, will
continue to operate.
[18]
Both parties referred to the
cases of
SVA Security (Pty)
Limited v Makro (Pty) Limited (a division of Massmart) and Others
[1]
and
TMS Group Industrial
Services (Pty) Ltd t/a Vericon v Unitrans Supply Chain Solutions
(Pty) Ltd & Others
.
[2]
Medtronic contended that the facts of this matter were closer to the
SVA
case,
whereas Sisonke contended they lay somewhat between the two.
[19]
Section 197(1) of the LRA states:
“
In this section and in section
197A—
(a) ‘business’ includes
the whole or part of any business, trade, undertaking or service; and
(b) ‘transfer’ means the
transfer of a business by one employer (“the old employer”)
to another employer
(“the new employer”) as a going
concern.”
(emphasis
added)
[20]
The Constitutional Court in
Aviation Union of SA v SA
Airways (Pty) LTD & Others .(Aviation Union)
[3]
said:
“
It must be emphasized that what
is capable of being transferred is a business that supplies the
service and not the service itself.
Were it to be otherwise, the
termination of a service contract by one party and its subsequent
appointment of another service provider
would constitute a transfer
within the contemplation of the section. That is not what the section
was designed to achieve as is
apparent from its scheme, historical
context and its purpose.”
[4]
[21]
The
SVA
matter concerned the termination of a security service
contract by a national retailer and the appointment of a new security
service
provider. The new provider invited former employees of the
previous contractor to apply for appointments but the former provider
contended the security operation it was running previously had
been transferred to the new contractor under s 197. The
new
contractor employed about two-thirds of the former security workforce
in any event. Although it was common cause that the new
contractor
would be rendering fundamentally the same service as its predecessor,
it would be using its own equipment and there
would be no transfer of
assets between the two providers. The court decided that the matter
ought to have been struck off for lack
of urgency but, as the
applicant sought a final order, the court saw no purpose in the
matter being re-enrolled to decide the application
and proceeded to
decide the merits of the application. Thlothlalemaje J highlighted an
essential feature of s 197 transfers, thus:
“
[25] Whether
a
business, including the whole or part of any business, trade
undertaking or service, has been transferred ‘by one employer
to another employer as a going concern’ was answered by t
he
Constitutional Court in
N
EHAWU
v University of Cape Town
[5]
in the
following terms:
“
The
phrase “going concern” is not defined in the LRA. It must
therefore be given its ordinary meaning unless the context
indicates
otherwise. What is transferred must be a business in operation “so
that the business remains the same but in different
hands”.
Whether that has occurred is a matter of fact which must be
determined objectively in the light of the circumstances
of each
transaction. In deciding whether the business has been transferred as
a going concern, regard must be had to the substance
and not the form
of the transaction. A number of factors will be relevant to the
question whether a transfer of a business as a
going concern has
occurred, such as the transfer or otherwise of assets both tangible
and intangible, whether or not workers are
taken over by the new
employer, whether customers are transferred and whether or not the
same business is being carried on by the
new employer. What must be
stressed is that this list of factors is not exhaustive and that none
of them is decisive individually.
They must all be considered in the
assessment and therefore should not be considered in isolation.”
(Footnotes omitted.)
[22]
The court found that the case
was distinguishable from that of
TMS
on a number of grounds.
Firstly, in
SVA
the
applicant lost its security service contract to the competitor.
Secondly, there was no transfer of any equipment, intellectual
property or tangible/intangible assets between the two security
service providers. Thirdly, what was taken over by the new contractor
was merely the provision of service to the retail client, not the
business of the former contractor. Fourthly, the former security
provider was at liberty to continue its business with other clients.
Lastly, the mere fact that a number of employees of the first
contractor were employed by the second partly as a result of the
client’s intervention did not in and of itself mean that
a
section 197 transfer had occurred.
[6]
[23]
Superficially, there is a
factual similarity between this matter and the situation in
TMS
,
in that a third party (‘Unitrans’) had been contracted to
operate the warehousing and distribution functions of the
client
(‘Nampak’). When that contract expired a new contractor
(‘TMS’) was engaged to provide the same
functions to
Nampak. In this case, the client (Medtronic) will conduct the
operation itself in-house. In
TMS
the LAC confirmed that both
contractors were engaged in providing a warehouse service to Nampak
and that the warehousing service
constituted a discrete business.
[7]
However, the LAC went on to describe another important feature of the
warehousing operation in that instance, viz:
“
[31] ... At the date of the
inception of its agreement with third respondent [Nampak], appellant
[TMS] assumed the right to use
third respondent's assets and
infrastructure in order to continue to provide the same service to
third respondent as it had previously
been provided by first
respondent. As Mr van Esch said in his answering affidavit, the
warehouse services, which were presently
performed by the appellant
can only be performed at the production facility of third respondent.
Thus, the services are 'performed
at the very same site and fixed
premises as the services that were performed by Unitrans in terms of
the warehousing agreement'.
Appellant was required to make use of the
same equipment and IT systems that were previously employed by first
respondent including
forklifts, computers, printers, a computer
system as well as other assets such as furniture.
[31] This uncontested evidence
provided the basis by which to determine whether there has been a
transfer of business as a going
concern by
F
an
old employer to a new employer. The concept of a going concern is not
a novel concept within South African law. For example,
s 11(1)
(e)
of
the Value Added Tax Act of 1981 refers to an enterprise 'which is
disposed as a going concern'. The term 'going concern'
is well known
in comparative value added tax jurisprudence. The New Zealand
High Court, in interpreting the equivalent concept
in New Zealand
legislation, which legislation formed the basis of the South African
Value Added Tax Act, said the following about
the meaning of going
concern:
'The activity must be one which is handed over to the
transferee in such a state that it may be carried on by
the transferee
if he so wishes
.'
CIR v Smith's City
Group Ltd
1992 (14) NZTC 9
,140 at 9,143.
[32] This dictum is particularly
illuminating in the present case. The activity which was carried on
by first respondent flowed
from the relationship entered into between
appellant and third respondent. The necessary facilities were
handed over to the
appellant in a state in which appellant was able
to carry on the very same activity which had previously been
conducted by first
respondent. It performed these services on the
premises of third respondent. It employed third respondent's computer
systems and
other equipment and carried on the same activity of
warehousing described in the evidence provided by virtue of third
respondent's
Mr van Esch. This evidence justifies the conclusion that
there was a transfer of a business as a going concern from the old
employer
to a new employer.
[33] This approach to s 197 is not
novel. It flows from the decisions of the Constitutional Court
in
NEHAWU
and
Aviation
Union of SA
as well as
two recent decisions of this court,
City
Power
and
Hydro
Colour Inks (Pty) Ltd v Chemical Energy Paper Printing Wood &
Allied Workers Union
(2011)
32
ILJ
1625
(LAC)
at
paras
12-13
and para
16.”
[8]
(Emphasis added)
The
LAC concluded that the business of warehousing Nampak’s
products was transferred as a going concern to TMS by Unitrans
[9]
[24]
In this instance, as in both the
SVA
and
TMS
cases, a
discrete service performed by a third party ceases to be provided by
that party in its entirety and the service is then
performed by
another entity, except that here the entity taking over the
rendering of the service is the client, Medtronic.
Unlike what
happened in
SVA
, where no assets of the original contractor
were going to be used by the new service provider operator, in this
instance there
are some assets which are being returned to Medtronic.
These will be of some limited use in the warehousing operation at its
own
premises. Those items are the desktop computers used in
dispatching products and the related software, albeit significantly
modified
according to Medtronic to be compatible with its own larger
warehouse operation, and a portion of the storage bins (for upright
storage of long items) that might be utilised in the relocated
warehousing operation.
[25]
I am not persuaded on the evidence that the bins used to transfer
products to Medtronic will form an integral part of Medtronic’s
warehousing operation going forward. Apart from anything else, it is
noteworthy that storage bins which happened to be empty, but
which
had been used to store a particular product item, at the time the
contract came to an end were not destined to be delivered
to
Medtronic.
[26]
Importantly, the handover of those items to Medtronic by themselves
will not enable Medtronic to simply continue running the
warehousing
operation Sisonke operated, even if one leaves aside the issue that
the operation will now be conducted at different
premises. Medtronic
still had to install the necessary shelving, make provision for
equipment for moving stock around the warehouse
and devise its own
system for managing the movement of products in the warehouse to
replace the Delta system used by Sisonke. It
is obvious from a
consideration of these factors alone that what Sisonke handed over to
Medtronic was nothing like an up and running
warehouse operation,
which merely was relocated to Medtronic’s premises.
Accordingly, I am satisfied that the termination
of the LSA and the
items and products dispatched by Sisonke to Medtronic consequential
to the termination of the LSA did not entail
the transfer of the
whole or part of any business, trade, undertaking or service and
accordingly did not amount to a transfer
under s 197 of the LRA.
Costs
[27]
There is no reason why the costs of this application should not
follow the result, given that the parties to the litigation
are
essentially litigating over the consequences of their contractual
arrangements, and the individual respondents did not oppose
the
application.
Order
[1]
The matter is dealt with as one of urgency and the non-compliance
with the rules for the
conduct of proceedings in the Labour Court in
respect of forms and time periods is condoned.
[2]
The application for a declarator is dismissed.
[3]
The applicant must pay the first respondent’s costs.
_______________________
Lagrange
J
Judge
of the Labour Court of South Africa
APPEARANCES
APPLICANT:
A
J Nel instructed by Lee and
McAdam
Attorneys
FIRST
RESPONDENT:
L
Frahm-Arp of Fasken
Martineau
SECOND
AND FURTHER RESPONDENTS
No
appearance
[1]
(J720/17) [2017] ZALCJHB 137 (3 May 2017)
[2]
((2015) 36
ILJ
197 (LAC)
[3]
2012 (1) SA 321
(CC); (2011) 32
ILJ
2861
[4]
Aviation
Union
at para 52
[5]
2003 (2) BCLR 154
;
2003 (3) SA 1
(CC); (
2003)
24
ILJ
95 at para 56.
[6]
SVA,
p
aras [26]
– [29]
[7]
TMS
208,para
[30]
[8]
TMS
at
208-209.
[9]
TMS
at
209, para [36].