LABOUR APPEAL COURT OF SOUTH AFRICA, JOHANNESBURG

Reportable
Case no : JA9/21

In the matter between:

KING C ETSHWAYO DISTRICT MUNICIPALITY Appellant

and

WATER AND SANITATION SERVICES SOUTH First Respondent
AFRICA (PTY) LTD

MUNICIPAL AND ALLIED TRADE UNION OF
SOUTH AFRICA Second Respondent

SOUTH AFRICAN MUNICIPAL WORKERS UNION Third Respondent

THE EMPLOYEES WHOSE NAMES ARE LISTED Fourth to Further
IN ANNEXURE “A” TO THE NOTICE OF MOTION Respondent s

UMGENI WATER Six Hundred and
Sixty
Seventh Respondent

Heard : 5 March 2024
Delivered : 10 January 2025

Coram: Mlambo JA, Nkutha -Nkontwana JA and Jolwana AJA

Summary: Section 197 of the Labour Relations Act 66 of 1995 – Municipality
outsourcing provision of bulk water supply through tender and allowing
outsourcee to use its assets – only assets owned by Municipality returned to it
upon expiration of tender – outsourcee retaining assets owned by it –
difference in asset and labour reliant business es when determining existence
of a transfer .
Held: Return of assets by an outsourcee constitutes a transfer if they are core
assets that allow the same business providing the service to operate in
different hands .
Appeal dismissed.
___________________________________________________________________
JUDGMENT
___________________________________________________________________
MLAMBO, JA

Introduction

[1] This is an appeal with the leave of the court a quo , brought against its
judgment and o rder where it found that the first respondent ’s business was
transferred to the appellant in terms of section 197 of the Labour Relations Act1
(LRA).

[2] The appellant , a local government and district municipality formerly known as
uThungulu District Municipality is located in the KwaZulu -Natal province and
currently known as the King Cetshwayo District Municipality . The first respondent is
an international company that supplies water services in Africa and the Middle East.
It employ s over 1, 200 employees to provide inter alia bulk water solutions to various
municipalities across South Africa. The second and third respondent s are the trade
unions whose members were formerly employed by the first respondent before the
disputed transfer took place . No relief is sought against them. The fourth to further

1 Act 66 of 1995, as amended .

respondents are the 666 employees who were employed by the first respondent
before the disputed transfer. Umgeni Water was joined as a party in the court a quo
as it had taken over some of the functions previously performed by the first
respondent .

Background

[3] In 2003, the appellant awarded a tender to the first respondent who was then
responsible for the management, operation and maintenance of water and
wastewater treatment facilities and asso ciated distribution infrastructure . That tender
ran from 1 July 2003 to 30 June 2008. From the initial tender granted in 2003, the
first respondent was the successful bidder in two further tenders . Those ran from
July 2008 to June 2012 and the third from 1 July 2013 and end ed on 30 June 2015
i.e. three tenders in all . No further tender was put out thereafter , instead the contract
was extended annually from time to time until Umgeni Water took over some of the
services from 1 July 2020 on an inte rim basis .

[4] Following the conclusion of the third tender, the parties concluded a new
service level agreement (SLA). This SLA was later amended to give effect to an
agreement between the parties that the first respondent would render call centre
services on behalf of the appellant .

[5] Before the final extension of the tender to 30 June 20 20, the first respondent
raised the issue of section 197 of the LRA applying at the termination of the SLA . Its
view was that s hould this be the case , then the 666 employees would be transferred
to the appellant municipality. Its view was that in terms of clause 2.2.3.2.1 of the third
tender ’s SLA , if the employees were not transferred to the appellant municipality,
then they should be transferred to the new service provider. Th is clause of the SLA
provided that:

‘Key Labour Principle (with reference to LRA)

All affected employees, currently employed by WSSA (Pty) Ltd on the Works,
will be given the following options:


- to be redeployed within WSSA (Pty) Ltd; or

- to be transferred to the new operator in the event that this contract be
awarded to an alternative operator.

- staff compliment will fluctuate throughout the duration of the contract as
schemes are commissioned and decommissioned. ’

[6] The appellant municipality deni ed that there was a section 197 transfer and
took the view that the first respondent was attempting to avoid its financial
obligations by transferring the employees to it instead of undertaking a retrenchment
process if it was not going to use t hem on futu re projects. It further denied that the
conditions for a section 197 transfer can be defined by the parties to a contract. Its
view was that without establishing a transfer of a business as a going concern, there
can be no talk of a section 197 transfer, despite the contractual wording used. It
asserted that there was no transfer because if the first respondent ’s version was
accepted, then ever y tender put out by government would result in the application of
section 197 once such a tender expired or had otherwise ended. Lastly, the
appellant, attacked t he extensions of the contract after the expiry of the third tender
as unlawful as they alleged ly were non -compliant with section 217 of the
Constitution2, due to the lack of an open and competitive bidding process.

[7] Having failed to reach agreement on the transfer of the employees or the
application of section 197 of the LRA, the first respondent approached the Labour
Court for a declarator that the transfer took place.

In the Labour Court

[8] Relying on the Constitutional Court ’s decision in Rural Maintenance (Pty)
Limited and Another v Maluti -A-Phofung Local Municipality3 (Rural Maintenance ) the

2 Constitution of the Republic of South Africa, 1996.
3 [2016] ZACC 37 ; (2017) 38 ILJ 295 (CC) .

court a quo found , and the appellant accepted that the character of the entity
receiving the business was irrelevant. It found that the consideration s that mattered
were that such entity must be capable of being an employer , that what is t ransferred
should not change character post -transfer and that the Public Finance Management
Act4 does not exempt the provisions of the LRA from applying to organs of state .

[9] The court a quo also dismissed Umgeni’s contention that the appellant sought
to rid itself of a bloated workforce, holding that section 197 applies as a matter of
law, making motive irrelevant to its application. However, it accepted that subject to
Umgeni and the appellant entering into an agreement for the provision of bul k water
services, their then interim arrangement was not a transfer for the purposes of
section 197. This as Umgeni had not decided which of the water services it would
provide to the appellant .

[10] The court a quo then endeavoured to determine which of the water services
provided by the first respondent were now left with the appellant . It found that the
assets which were owned by the appellant but used by the first respondent such as
boreholes, pipes and reservoirs , were the essen tial components of the business of
supplying bulk water services. Upon termination of the SLA , the return of these
assets to the appellant therefore constituted a transfer of a business as a going
concern because the appellant , should it provide the servic e itself, or any service
provider it appoints , will need those critical assets to provide the service. Thus, the
employees were not a labour service being provided, and their lack of transfer to the
appellant did not mean there was no section 197 transfer.

Submission s in this Court

[11] The appellant submits that the causa for the transfer was at best the
termination of the SLA and at worst for the first respondent , the termination of an
unlawfully extended contract (the 2013 tender). It then goes to allege that on the
facts, there was no transfer of a business in that the first respondent failed to define
the nature of the business that was transferred. In support of this, it says that no

4 Act 1 of 1999.

assets (at most a non -exclusive right of use being terminated), employees or
customers were transferred. In relation to the customers, it submit s that no
customers were taken over. In this regard it says that it (appellant ) was the first
respondent’s customer in term s of the terminated service agreement and as such , it
could not then become a customer of itself , i.e. water users were never customers of
the first respondent . It then go es on to state that the first respondent concedes that
certain assets were not transferred to the appellant , such as the tools and equipment
i.e. vehicles, office space, laboratory equipment and the telecommunication system
used to run the call centre. It further submit s that the first respondent conceded that
these were the assets r equired to provide the service and that the employees were
not an essential feature to provide the service.

[12] In relation to the overlap in services provided, namely, the call centre
management and water t ankering services that it insourced, the appellant submits
that the call centre operates with its own internal staff and that the water tankers
were always its property and that it utilises its own drivers . The appellant further
support s this assertion by noting that the first respondent accepts that when it
operated the call centre, it only had four employees and no drivers. It conclude s this
point by stating that the first respondent ’s business can continue, showing that it was
merely a service that was provided to it, and then terminated at the expiration of the
SLA.

[13] On the absence of a transfer, the appellant distinguishes this matter from
those in City Power (Pty) Ltd v Grinpal Energy Management Services (Pty) Ltd and
Others5 (City Power ) – on the basis that no technology, assets, employees an d
customers were taken over, Aviation Union of South Africa and Another v SAA (Pty)
Ltd and Others6 (Aviation Union ) – on the basis that assets, inventory, lease of
property, computers and access to network services were not transferred, and Road
Traffic Management Corporation v Tasima (Pty) Limited; Tasima (Pty) Limited v
Road Traffic Management Corporation7 (RTMC ) – where the new operator assumed
full control of the premises, the operation system and extensive infrastructure such

5 [2015] ZACC 8; 2015 (6) BCLR 660 (CC).
6 [2011] ZACC 31; 2012 (1) SA 321 (CC).
7 [2020] ZACC 21; 2020 (10) BCLR 1227 (CC) .

as assets, information and intellectual property . In their view, this matter is similar to
Rural Maintenance8 where the Constitutional Court rejected the assertion that the
alleged transferred business comprised the “ infrastructure for the provision of
electricity s ervices and the employees dedicated to that business ”. The appellant
further argue s that the first respondent failed to transfer other assets which were not
owned by it such as the vehicles and lab equipment. The appellant maintain s that no
section 197 tra nsfer should be found to have occurred, because it would set the
precedent that the termination of every government contract would result in a section
197 transfer.

[14] From the above, the appellant criticise s the judgment of the court a quo on
two main grounds. Firstly that it was incorrect to find a transfer of municipal assets
when in reality, only a non -exclusive right of use was provided to the first respondent
and the ownership always vested with it (appellant ). Second ly that it erred b y finding
that the call centre function had been taken over as this finding imposed an
evidential burden on it to prove that it had not taken the service over.

[15] The appellant’s final submission relates to the Key Labour Principle provision
in the SLA, which it submit s was a quasi -contractual claim. As a result, it should
have been interpreted in line with the Natal Joint Municipal Pension Fund v
Endumeni Municipality9 principles, namely t aking into account the language and
context while seeking to obtain a sensible meaning. On this approach, the appellant
submit s that the clause is not clear that the employees have been given the option to
either transfer to the appellant or to a new service provider upon termination of the
SLA, and that an insourcing arrang ement would not constitute an “award” for the
purposes of the clause.

[16] As to the preliminary point based on the power of attorney, raised by the first
respondent, nothing much need s to be said about this point, the power of attorney
having been filed though belatedly.


8 Rural Maintenance above fn 3.
9 [2012] ZASCA 13; [2012] 2 All SA 262 (SCA).

[17] On the merits, the first respondent submit s that the Key Labour Principles
clause of the tender make s it clear that on termination, the employees would either
be transferred to the appellant or whichever service provider succeeds it in providin g
the bulk water services. Its main contention is that this was not a mere cancellation
of a service contract. It dispute s the appellant’s assertion that the decision in Aviation
Union10 can be di stinguished from this matter. In its view, this case is rele vant as the
Constitutional Court made it clear that where the assets required to perform the
service are removed from the service provider, the business transfers back to the
holder of the required assets.

[18] The first respondent denies that it failed to defi ne the nature of the business
that was transferred. It refers to portions of its founding affidavit in the court a quo
where it stated that its business compris ed of certain tools and equipment, vehicles,
office and workshop facilities and a laboratory. Further that it explained the number
of employees it has and their roles as well as the assets belonging to the appellant
and how they all came together to provide the business of the provision of water
services to the appellant . It is on this basis that it assert s that upon termination of the
SLA, the business transferred back to the appellant .

[19] Again relying on Aviation Union ,11 it submit s that the Constitutional Co urt has
already dealt with the question of the presence or not of a transfer in circumstances
where the core assets are not owned by the service provider. It further rel ies on two
other cases dealing with the significance or lack thereof concerning employees in an
asset heavy business or service. The first is the Labour Court decision in Franmann
Services (Pty) Ltd v Simba (Pty) Ltd and Another ,12 which quoted the decision of the
European Court of Justice in Carlito Abler and Others v Sodex ho MM Cate ring
Gesellschaft GmbH13 (Sodex ho).The Labour Court held that the failure to transfer
staff in an asset heavy business was not indicative of there not being a transfer of a
business. From this, the first respondent submit s that the appellant makes much of
the ownership of the assets, when the true criterion is whether the right to use the

10 Aviation Union above fn 6.
11 Id.
12 [2012] ZALCJHB 86; (2013) 34 ILJ 897 (LC).
13 [2004] IRLR 168.

assets has been transferred. It submit s that the Sodexho14 judgment found favour in
the Constitutional Court’s decision in Rural Maintenance ,15 where it was held that the
degree of importance of each criterion depends on the nature of the business carrie d
out. The first respondent conclude s this submission by pointing out that the nature of
the assets owned by the appellant and used by it were so significant to the supply of
the services that without them, they would not have been able to provide the same
service, as it now vests with the appellant .

[20] The second case is that of TMS Group Industrial Services (Pty) Ltd t/a
Vericon v Unitrans Supply Chain Solutions (Pty) Ltd and Others16 (TMS ), where this
Court affirmed the Labour Court’s finding that the appointment of a new service
provider who continued to use infrastructure such as premises, assets and IT
systems of the outsourcing party constituted a transfer from the previous to new
service provider. In its view, the question to be asked is what the nature of the
service was (the provision of bulk water services), the main assets used to deliver
that service (those owned by the appellant such as boreholes , pipes and reservoirs)
and where those assets were following the termination of the service agreement (by
the appellant ). Thus, the first respondent argues, the main or critical components,
much like the decision in Sodexho ,17 have been transferred to the appellant and
constitute such for the purposes of section 197.

[21] The first respondent submits that the employees were not the main
component of the business, and thus their lack of transfer to the appellant is of no
consequence to the application of section 197. It further submit s that the
consequences for employees cannot depend on an agreement between the new and
old employers outside of section 197 . As to the call centre, the first respondent
support s the court a quo’s finding that the appellant failed to show how the service
operates differently from when the first respondent ran it. Its view is that the
provisions of the contract show that there was contemplation of a transfer once the

14 Id.
15 Rural Maintenance above fn 3.
16 [2014] ZALAC 39; [2014] 10 BLLR 974 (LAC ).
17 Fn 13 above.

first respondent ’s services are terminated because the new service provider would
be providing the same economic activity as the first respondent .

Section 197 of the LRA

[22] Section 197 of the LRA provides as follows in relevant part :

‘(1) In this section and in section 197A –

(a) “business” includes the whole or a part of any business, trade,
undertaking or service; and

(b) “transfer” means the transfer of a business by one employer (“the old
employer”) to another employer (“the new employer”) as a going concern.

(2) If a transfer of a business takes place, unless otherwise agreed in
terms of subsection (6) —

(a) the new employer is automatically substituted in the place of the old
employer in respect of all contracts of employment in existence immediately
before the date o f transfer;

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

(c) anything done before the trans fer by or in relation to the old employer,
including the dismissal of an employee or the commission of an unfair labour
practice or act of unfair discrimination, is considered to have been done by or
in relation to the new employer; and

(d) the transfer d oes not interrupt an employee’s continuity of employment,
and an employee’s contract of employment continues with the new employer
as if with the old employer. ’


[23] In National Education Health & Allied Workers Union (NEHAWU) v University
of Cape Town and Othe rs18 (NEHAWU ), the Constitutional Court said the purpose of
this section was to strike a balance between the interests of employees and
employers when a business is transferred as a going concern. In changing the
common law regime where the new employer wa s free to terminate all existing
contracts of employment , the LRA introduced changes that sought to —

‘[p]rotect the employment of the workers and to facilitate the sale of
businesses as going concerns by enabling the new employer to take over the
workers a s well as other assets in certain circumstances. The section aims at
minimising the tension and the resultant labour disputes that often arise from
the sales of a businesses and impact negatively on economic development
and labour peace. In this sense, sec tion 197 has a dual purpose, it facilitates
the commercial transactions while at the same time protecting the wor kers
against unfair job losses.’19

[24] Section 197 sets out the duties of the old and new employers regarding the
legal consequences of the transfe r in relation to employees . The facts that should be
present for a section 197 transfer to take place are: (1) a business, trade,
undertaking or service that is, (2) transferred as (3) a going concern.20

[25] The main contention in the matter before us is whether the return of assets
owned by the appellant municipality to it by the first respondent , can constitute a
transfer for the purposes of section 197 . Secondary to this is if such a return of
assets did constitute a transfer, then whether all the necessary assets were returned
as it is common cause that the first respondent did not return its own assets that it
also used in the provision of the bulk the water services . This latter consideration
relates to whether the retained assets were core assets required for the provision of
bulk water services.


18 [2002] ZACC 27; 2003 (3) SA 1 (CC)
19 Id at para 53.
20 RTMC above fn 7 at para 33 .

[26] In RTMC ,21 the majority of the Constitutional Court affirmed what was said two
decades earlier in NEHAWU . There, the court said “ whether [ a transfer of a business
as a going concern ] has occurred is a matter of fact which must be determined
objectively in the light of the circumstances of each transaction ”.22

[27] It went on to say that the first step is to find a legal cause of a transfer before
deciding whether the jurisdictional facts have been met. The majority held that –

‘[a] legal causa is a prerequisite for t he application of section 197. It follows
that only once the source of the respective rights and obligations to effect and
receive transfer has been ident ified, can it be determined whether the
jurisdictional facts for the application of section 19 7 are present. Once the
legal causa is identified, the factual enquiry outlined in NEHAWU can be
conducted. Thus, an inquiry as to the causa must be conducted bef ore
applying the tes t in section 197 to the facts. Otherwise one is looking at facts
without the legal parameters being in place. ’23

[28] I endorse the court a quo’s finding that the causa potentially giving rise to
section 197 was the termination of the SLA . The nature of the supply of the bulk
water services in this matter fits into the wide definition given to the term s business
or service .24 Clearly, the business or service was the provision of the bulk water
supply and the related services.

[29] Turning to the r equirement that the business be a going concern, i n RTMC ,
the majority of the Constitutional Court held that—

‘[i]n determining whether there has been a transfer as a going concern, a
primary consideration is the nature of the business. A distinction is generally
drawn between labour intensive and asset -reliant services. This consideration

21 Id at para 35.
22 NEHAWU above fn 17 at para 56 .
23 RTMC above fn 7 at para 39 .
24 Aviation Union above fn 6 at para 52 ; Food and Allied Workers Union v Cold Chain (Pty) Ltd and
Another [2009] ZALC 109; (2009) 30 ILJ 2919 (LC) at para 25.

arises because the transfer of employees alone, without the transfer of any
assets, may not necessarily give rise to the transfer of a business as a goin g
concern. ’25

[30] This makes it clear that the role played by either employees or assets are fact
dependant and the lack of transfer of one or the other cannot be dispositive of
whether there was a transfer as a going concern. In this instance, the fact that t he
employees were not transferred would be of no moment if we find that the business
was asset reliant .

[31] In Aviation Union , the minority of Constitutional Court also interpreted the
meaning of going concern when it said:

‘The phrase “going concern” has been construed to include not only that the
business has changed hands but that it is exactly the same business that
continues to operate. We are told that to determine this fact one must look at
various factors, none of which is decisive. These factors inclu de whether or
not the same business is being carried on by the party who received it.
Therefore, proof of the fact that performance of the same services was to
continue, albeit under different hands, does not establish a transfer as a going
concern. Some thing more is required. ’26

[32] I find that the business of supplying the bulk water services was indeed a
going concern because in substance, there is virtually no difference in how it was
conducted before and after the expiry of the SLA . The appellant’s resid ents had the
same water supply before and after the expiry of the SLA. Further to this, the “Key
Labour Principle ” clause of the SLA shows that the appellant knew that should the
first respondent no longer be chosen to provide the bulk water, it would have to take
over the supply of water itself, or to transfer the business to an alternative service
provider. However, this aspect should not be given too much weight because the
application of section 197 is not dependent on the labels parties give to the

25 RTMC above fn 7 at para 9 5.
26 Aviation Union above fn 6 at para 7 4.

transaction or potential transactions. I now turn to the question of whether the
business was transferred from the first respondent to the appellant when the SLA
expired.

[33] The appellant ’s claim in this regard that the termination or end of all
government tenders would be transfers as going concerns in terms of section 197 of
the LRA is not sustainable . Such an approach places form over substance. Instead
each of the section ’s individual requirements must be determined based on the
nature of the business or service carried on before and after the termination or end
of the tender . Indeed, in City Power ,27 a key factor identified by the Constitutional
Court when grant ing leave to appeal was the question of whether the effects of
section 197 can follow for organs of state whose budgets are strictly governed by
legislation. This question was answered in the affirmative. Similarly in this matter,
merely because the outsourcing was done through a government tender , does not in
itself determine wh ether section 197 applies. The nature of the outsourcing
agreement must be determined in each individual case.

[34] The appellant contends that even if we find that the supply of bulk water was
a business, and that the return of municipal assets could in theory constitute a
transfer, because not all assets were transferred , this matter would be akin to that in
Rural Maintenance . It is common cause that the first respo ndent used its own
vehicles and laboratory equipment, obtained its own office space and in the call
centre , used its own telecommunication system. None of these assets or systems
were transferred to the appellant. The question that then arises is whether the assets
that were retained by the first respondent were core assets that were required to be
transferred in order for the same business to continue operating before and after the
expiration of the SLA.

[35] This submission cannot be accepted when one consider s the absolute
necessity of those assets by looking at the business before and after the expiry of
the SLA . The court a quo correctly found that those assets do not change the fact
that what one sees is the same business but in different hands. Put simply, they

27 Above fn 5.

were not core assets. These facts place the matter squarely within the ambit of
Sodexho ,28 TMS ,29 and Dimension Data ( Pty) Ltd and Others v GWB Technologies
CC t/a GWB Technologies and Others .30 The appellant tried to frame this matter in
line with the decision in Rural Maintenance but on the facts, it is clear that it is more
in line with the decision in City Power . In Rural Maintenance , there w as no return of
the core assets required for the bus iness , while in City Power , the core assets of
providing the business which were owned by City Power were returned and provided
to the new service provider who then managed the same business. The result is that
all three requirements for a section 197 tran sfer to the appellant were met and there
was a transfer of the business as a going concern from the first respondent to the
appellant .

[36] The ineluctable conclusion is that the appeal must fail. Section 197 was
clearly implicated as the business of providing bulk water supply was transferred to
the appellant when the service agreement was terminated.

[37] In the circumstances , the following order is granted:

Order

1. The appeal is dismissed.

2. There is no order as to costs.


pp_________________

28 Above fn 13.
29 Above fn 16. In this case, there was a second generation outsourcing agreement where the
outsourcee was given a right of access to use the outsourcers assets and warehouse. This Court,
upholding the Labour Court’s decision found that the business of managing the wareh ouse was “ in
such a state that it [could] be carried on by the transferee if [they] so wishe[d] ”.
30 [2022] ZALCJHB 97; (2022) 43 ILJ 1824 (LC). In this case , the City changed service providers for
its End User Computing services. The Labour Court found tha t the change constituted a section 197
transfer in circumstances where the employees were stationed at the City’s premises and the new
service provider “ utilised the City’s infrastructural assets, including its Information Technology Service
Management too l, networking and Microsoft software, and the City’s Outlook email addresses and
Microsoft patching tool ”. This even as the previous service provider rendered these services “ using
their own laptops, handheld devices, power supply units, and the like ”.

Mlambo JA
Nkutha-Nkontwana JA and Jolwana AJA concur.


APPEARANCES:

FOR THE APPELLANT : P Wallis SC, with him S Kushaba
Instructed by Strauss Daly Incorporated , Umhlanga

FOR THE FIRST RESPONDENT: A Redding SC, with him P Maharaj -Pillay
Instructed by Fairbridges Wertheim Becker Attorneys , Sandton