IN THE LABOUR COURT OF SOUTH AFRICA
HELD AT JOHANNESBURG
CASE NO. JS371/03
In the matter between:
E.C. VAN DER VELDE
Applicant
and
BUSINESS AND DESIGN SOFTWARE (PTY) LTD First Respondent
NATIONAL GOLF NETWORK (PTY) LTD Second Respondent
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RULING ON POINT IN LIMINE
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A VAN NIEKERK AJ
[1] The parties have requested the Court to determine, by way of a
preliminary ruling, the effective date of the transfer of a business for the
purposes of section 197 of the LRA in circumstances where their
agreement provides for a transfer of contracts of employment on a date
that precedes the signature of the agreement and the fulfilment of
certain suspensive conditions.
[2] The parties requested the ruling at the commencement of a trial in
which the Applicant contends that he was unfairly dismissed by the First
Respondent (“B&DS’) for a reason that is automatically unfair, being a transfer
of a business in terms of section 197 of the Labour Relations Act or for a
reason related to the transfer. In the alternative, the Applicant claims that
B&DS unfairly retrenched him. In both instances, relief is also sought against
the Second Respondent (NGN) on the basis that it is a transferee (new)
employer for the purposes of section 197 and that it has incurred liabilities to
the Applicant on that basis.
[3] B&DS alleges that at the time of the Applicant’s dismissal, there was
no employment relationship between it and the Applicant, and that it
should not be party to these proceedings but for a potential joint and
several liability with NGN in terms of section 197(8). That liability is to
pay severance pay to the Applicant should he be found to have been
dismissed for operational requirements, and should his refusal to
accept the alternative employment offered to him be found to be
reasonable.
[4] The facts are largely common cause. On 3 April 2003, B&DS and NGN
signed an agreement in terms of which NGN acquired all of the rights
and obligations of AST National Golf Network, which provides the
handicapping system and golf card used by the majority of golfers and
golf clubs in South Africa. The transaction was described in a
communiqué issued by NGN on 8 April 2003 as a ‘friendly internal
acquisition’. NGN, the purchaser, comprised a consortium made up of
a number of the managers of B&DS that successfully tendered for the
purchase of the business. The Applicant was a member of a competing
consortium that was unsuccessful in its bid to buy the business.
[5] The agreement provided for the sale of the business as a going
concern. There is no dispute that in these circumstances, the
transaction is one that was affected by section 197.
[6] For reasons that are not apparent, the parties agreed that the effective
date of the agreement, notwithstanding the date on which it was
date of the agreement, notwithstanding the date on which it was
signed, was 1 January 2003. All risk and benefit attaching to the
business was deemed to have passed to NGN on the effective date,
and ownership was deemed to have passed to NGN on that date
provided that the cash portion of the purchase price had been paid by
the delivery date, the business day after the last of the suspensive
conditions had been fulfilled. The whole of the agreement was subject
to certain suspensive conditions that were to be fulfilled by 4 April
2003. In the event of the suspensive conditions not being fulfilled, the
agreement makes provision for a reversion to the status quo. There is
no dispute that the suspensive conditions were timeously fulfilled.
[7] Employment related issues are regulated by clause 16 of the agreement of sale.
B&DS and NGN agreed that from the effective date, NGN would take over the
employment of all employees employed in the business as at the effective date, i.e. 1
January 2005. The names of these employees were listed in an annexure to the
agreement. The Applicant’s name appears on that list. Clause 16 provides that the
employees listed in the schedule would be ‘ employed by the purchaser [NGN] during
the interim period in terms of section 197 of the Labour Relation Act 66 of 1995 upon
the same terms and conditions including remuneration and other benefits as those
upon which they were employed by the seller [B&DS] immediately prior to the
effective date.”
[8] The interim period is defined in the agreement as the period between
the effective date and the delivery date. What B&DS and NGN
presumably intended was that once the purchase price had been paid
and the suspensive conditions fulfilled, the affected employees would
be deemed to have been employed by NGN with effect from 1 January
2003, on the terms and conditions that has existed as between them
and B&DS. Presumably, if the suspensive conditions had not been
and B&DS. Presumably, if the suspensive conditions had not been
fulfilled, the deeming provisions would not have applied and the
continuity of the employees’ employment by B&DS would not have
been affected. The employees listed in the schedule were not parties to
the sale agreement. Their consent was not sought for the transfer of
their employment contracts from B&DS to NGN, nor does it appear that
until at least the date on which the agreement was signed, that they
were aware of the deeming provision in relation to their employment.
[9] On 28 March 2003, the Applicant was advised that he had been
retrenched. The circumstances of his termination of employment are
not relevant for present purposes, but the Respondents submit that the
Applicant was fairly dismissed by NGN for reasons related to NGN’s
operational requirements, and that NGN was under no obligation to pay
severance pay because the Applicant unreasonably refused an offer of
alternative employment.
[10] Mr van As, who appeared for both Respondents, submitted that
B&DS and NGN were entitled to determine the effective date of the
transfer of employment contracts, and that in the absence of some
ulterior motive, the Court should not interfere with that intention. On
that basis, he submitted that the Applicant’s contract of employment
had transferred from B&DS to NGN on 1 January 2003, and that the
restructuring that had resulted in Applicant’s retrenchment had
therefore occurred after the transfer of his employment to NGN. On
28 March 2003, the Applicant’s employer was NGN, he was dismissed
by NGN, and only NGN is liable for the consequences of any unfair
dismissal that may have been effected.
[11] Mr Bleazard, who appeared for the Applicant, submitted that for the
purposes of section 197, the transfer of the business from B&DS to
NGN occurred no earlier than the date on which the suspensive
conditions in the sale agreement were fulfilled, i.e. 4 April 2003. But for
his dismissal on 28 March 2003, the Applicant’s contract of
employment would have been transferred from B&DS to NGN, with the
business, during the first week in April 2003.
[12] In one sense, the issue that the parties have asked the Court to decide
is academic. An essential element of section 197 is the assumption of
liability by the transferee (new) employer for anything done by the
transferor (old) employer prior to the transfer, including any unfair
dismissal, the commission of any unfair labour practice, or any act of
discrimination. (See section 197(2)(c)). On this basis, whether the
transfer of the business was effected in January 2003 or April 2003,
NGN is the respondent that is ultimately liable if the Applicant is found
to have been unfairly dismissed.
[13] However, the date of the transfer for the purposes of section 197
appears to be of some significance to the Applicant and the
Respondents. The effect of Mr Bleazard’s submissions is that fixing
the date of transfer determines the legal identity of the Applicant’s
employer on the date of his dismissal. To the extent that the Applicant
claims to have been unfairly dismissed by reason of the transfer of the
business or a reason related to it, the fact that the date of dismissal
preceded the date of the transfer of the business, would further assist
the Applicant in his cause. Having said this, I did not understand Mr
Bleazard to suggest that the Applicant would necessarily be deprived
of a claim for unfair dismissal if the dismissal took place after a transfer
in terms of section 197. On the contrary, it seems clear to me that
section 187(1)(g) (which lists the reason of a transfer or a reason
related to a transfer in terms of section 197 as automatically unfair)
contemplates a dismissal effected either pretransfer or posttransfer,
by the old employer or the new employer respectively. What is relevant
to the enquiry is whether the proximate cause of the dismissal is one
that the transfer itself or a reason related to the transfer, or for some
that the transfer itself or a reason related to the transfer, or for some
other reason that is potentially fair. But that is not a determination that
needs to be made at this point in the proceedings.
[14] Section 197 reads as follows:
"Transfer of contract of employment
197. (1) In this section and in section 197A
a) 'business' includes the whole or a part of
any business, trade, undertaking or service;
and
b) 'transfer' means the transfer of a business
by one employer ('the old employer') to
another employer ('the new employer') as a
going concern.
2) If a transfer of a business takes place, unless
otherwise agreed in terms of subsection (6)
a) the new employer is automatically
substituted in the place of the old employer
in respect of all contracts of employment in
existence immediately before the date of
transfer;
b) all the rights and obligations between the
old employer and an employee at the time
of the transfer continue in force as if they
had been rights and obligations between
the new employer and the employee;
c) anything done before the transfer by or in
relation to the old employer, including the
dismissal of an employee or the
commission of an unfair labour practice or
act of unfair discrimination, is considered to
have been done by or in relation to the new
employer; and
d) the transfer does not interrupt an
employee's continuity of employment, and
an employee's contract of employment
continues with the new employer as if with
the old employer."
[15] Despite any previous uncertainty, the unambiguous effect of
section 197(2) is an automatic and obligatory transfer of contracts of
employment from the transferor employer to the transferee employer
when there is a transfer of the whole or part of a business as a going
concern. This consequence is achieved by the mechanism of an
automatic substitution of the transferee (new) employer in the place of
the transferor (old) employer, and the requirement that, unless
otherwise agreed in terms of section 197(3), all rights and obligations in
terms of existing contracts continue in force between the new employer
and the affected employee, and the new employer assumes the
employment related liabilities referred to in subsection (2)(c).
[16] The transfer of the whole or part of a business as a going concern
triggers the application of section 197. Section 197(2) provides that ‘ If
a transfer of a business takes place …’ then the consequences
described above follow. Regrettably, the LRA provides no guidance as
to when a transfer of a business can be said to have taken place, nor
does it seem that this issue has been considered previously by this
Court.
[17] As I have noted above, Mr van As submitted that the Court should
simply give effect to the contracting parties’ intention, at least in the
absence of any manifest fraudulent or otherwise devious intent. He
submitted that a distinction might be drawn between the notion of a
‘real’ employer, and a ‘deemed’ or ‘substituted’ employer. In either
case, NGN was the Applicant’s employer, because in terms of the
contract between NGN and B&DS, NGN had agreed to take over the
employment contracts with effect from 1 January 2003, and on the
application of section 197, NGN was substituted as the Applicant’s
employer on the same date, being the effective date of the sale. Mr
Bleazard submitted that the ‘effective date’ established and defined by
the contract of sale was nothing more than a fiction. The fiction was
that there was an agreement between B&DS and NGN on 1 January
2003. On the date of the Applicant’s dismissal, 28 March 2003, the
agreement between B&DS and NGN remained conditional. On that
basis, there been no transfer of employment contracts before 28 March
2003, and between 1 January 2003 and 28 March 2003, the Applicant
had remained employed by B&DS. In response, Mr van As submitted
that in accordance with the contractual rules regulating suspensive
conditions, once the suspensive conditions were fulfilled, all of the
consequences of the contract, including clause 16 (regulating the
transfer of employment contracts) came into operation with effect from
the agreed effective date of 1 January 2003.
[18] There may be cogent commercial reasons for sellers and purchasers of
businesses to make the operation of their agreements retrospective. As
between them, there is nothing to preclude the assignment of
employmentrelated responsibilities for defined periods, and their
assuming any related liabilities. Section 197 recognises employees’
interests by requiring disclosure to affected employees of the terms of
the agreed apportionment of liability in respect of certain defined
the agreed apportionment of liability in respect of certain defined
payments. However, in my view, it does not necessarily follow that the
employer parties’ agreement on an effective date for their transaction is
binding on the affected employees, or that for the purposes of section
197, the employer parties to the underlying transaction can unilaterally
decide on the date on which the provisions of section 197 will be
triggered.
[19] As a general rule, section 197 must be purposively applied, so as to
give effect to the Constitution and in particular, to the right to fair labour
practices. Consistent with the concept of fair labour practices, section
197 attempts to strike a balance between employer and employee
interests. The section does so by protecting security of employment
and employee rights when a business is transferred, and it facilitates
transfers of business by permitting transfers of contracts of
employment without employee consent. The section also avoids
retrenchments and the obligation to pay severance pay in
circumstances of business transfers. ( See National Education Health
and Allied Workers Union v University of Cape Town & others (2003)
24 ILJ 95 (CC), and Todd et al Business Transfers and Employment
Rights in South Africa (Lexis Nexis Butterworths 2004) at 22).
[20] For the reasons that follow, and having regard to the purpose of
section 197, it is my view that in the present instance the date on a
transfer for the purposes of the section 197 took place was the date on
which the sale of the business became unconditional and NGN
assumed full control of the business bundle that is the subject of the
transfer. In other words, the date of transfer for the purposes of section
197 cannot be a date earlier than what might be termed the date of
closure, the date on which the transferor employer takes final and
unconditional control and responsibility for the transferred business.
This is not a date that can be made retrospective or postponed by the
will of the transferor and transferee employers, and it is a date to be
determined objectively, and in the absence of any variation agreement
determined objectively, and in the absence of any variation agreement
with the parties defined by section 197(6)(a), regardless of what has
been agreed by the employer parties.
[21] First, section 197 is structured so as to require the substitution of the
transferee employer for the transferor when a business is transferred
from one to the other as a going concern. Whether or not there has
been a transfer of a business as a going concern is a matter that must
be objectively determined, having regard to all of the relevant factors.
This assists a Court to determine how many components of a business
have found their way to the transferee and whether it can accordingly
be said that the business is the same or substantially the same after
the transfer, but in different hands (see Todd et al at 56). The objective
determination that must be made implies that there is some physical
transfer or at least some assumption of control over the tangibles and
intangibles that comprise the business and which are the subject of the
transfer. There is a sense of chronology in section 197 the transfer of
the business occurs, immediately followed by the substitution of the
transferee employer in relation to all contracts of employment in force
on that date. To permit employer parties to manipulate the provisions of
section 197 by effectively ceding employment contracts with
retrospective effect to a date preceding the date of the completion of
the transaction and the assumption of physical control of the business
is inconsistent with the logic and structure of the section.
[22] Secondly, and in relation to the affected employees, section 197 is
predicated on the notion that employees have a right to know the
identity of their employer. This is a right recognised by the common
law, which prohibits the transfer of a contract of employment from one
employer to another without the employee’s knowledge and consent.
Section 197 creates a statutory exception to the common law rule,
since when a business is transferred in circumstances where the
since when a business is transferred in circumstances where the
section applies, it has the consequence of the substitution of one
employer for another, by operation of law, irrespective of the consent of
the employee. But the section has a series of inbuilt protections for
employees. Section 197(7) obliges the transferor and transferee
employers to agree on defined employmentrelated liabilities for
severance pay and certain accrued earnings, and to disclose the terms
of their agreement to affected employees. In a transaction that
complies with section 197, an employee would be aware therefore of
the identity of the new employer and which of the employers had
assumed the liabilities concerned. In the case of dismissal for transfer
related reasons (such as are alleged to exist in the present matter) the
identity of the employer that effects any dismissal is of obvious
significance to an employee. If the employer parties to a transfer were
able to manipulate the transfer date by agreeing deemed dates on
which the business transfers or on which section 197 is triggered, there
is potential prejudice to an affected employee.
[23] Thirdly, to allow the employer parties to fix the date of transfer of a
business for the purposes of section 197 permits the prospect of
abuse. Section 197(8) provides that in respect of the liabilities
mentioned above, the old employer remains jointly and severally liable
to an affected employee, with the new employer, for a period of 12
months after the date of the transfer. If the employer parties to an
agreement effecting the transfer of a business were able to manipulate
the transfer date, it may be possible, by fixing an effective date 12
months and one day prior to any physical transfer of the business to
circumvent this protection, particularly when the transferee employer is
a shell. This no doubt was one of the reasons for enacting section
a shell. This no doubt was one of the reasons for enacting section
197(8) the prospect of unscrupulous employers using section 197 to
transfer employees into a shell company and then putting those
companies into liquidation to avoid payment of unpaid remuneration,
severance pay, accrued leave, and the like. While I appreciate Mr van
As’s point that the Court is always entitled to intervene in the event of
fraud or the fixing of a date of transfer for some other ulterior motive,
this is a matter best dealt with at the level of principle.
[24] Finally, on the facts, the Respondents did not conduct themselves
consistently with the proposition advanced by Mr van As. The AST
Group made the announcement of the sale of the business on 8 April
2003. The terms of the announcement make it clear that in AST’s
announcement of its interim results on 27 March 2003, it advised that
in relation to businesses identified as noncore, it was ‘ in the process
of closing or disposing of those businesses .’ The announcement of the
transaction to third parties in the form of member clubs of the AST
network was made on 8 April 2003. In this announcement, notice was
given of certain management appointments and responsibilities in the
business over which NGN had assumed control, all of which are cast in
the future tense.
[25] All of the factual circumstances therefore point to a consummated
assumption of control of the business by NGN and closure of the
transaction, after the sale of the business became unconditional on 4
April 2003.
[26] In summary, for the purposes of section 197, the business of B&DS
transferred to NGN on a date no earlier than 4 April 2003. The
fulfilment of the suspensive conditions of the sale agreement may have
had the effect that in contractual terms, the whole contract became
enforceable and that it became enforceable retrospectively as if it had
been unconditional from the outset. But for the purposes of the Labour
Relations Act, a transferee employer is substituted for et transferee
employer only once any contract underlying the transaction is
complete, and the transferee has objectively assumed responsibility
and control of the business that it has acquired.
[27] It follows that B&DS dismissed the Applicant. I emphasise that this is
the conclusion I reach on the basis of the application of section 197. If there
are any contractual consequences following on any employment related
warranties or other assumptions of liability flowing from the agreement of sale,
those are matters to be determined by another Court as between the two
Respondents. For the purpose of these proceedings, the determination of the
factual issues giving rise to any unfair dismissal are to be determined as
between the Applicant and B&DS, his employer on the date of dismissal. If the
Applicant’s dismissal is found to be unfair (either automatically unfair because
the reason for dismissal is the transfer or a reason related it or because B&DS
fails to prove that any dismissal effected by reason of its operational
requirements satisfies the requirements of substantive and procedural
fairness) then any remedy granted by the Court would, in terms of section
197(2)(c), operate as against NGN. In addition, there is the matter of B&DS’s
potential joint and several liability for severance pay if any order in that regard
is necessary.
[28] My ruling therefore is that both Respondents are properly before the
Court in any proceedings to determine the merits of the Applicant’s claim, and
the matter will continue on that basis on the agreed dates of 8 and 9
December 2005.
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ANDRE VAN NIEKERK,
Acting Judge of the Labour
Attorneys for Applicant Brian Bleazard
For the Respondents Advocate M van As
Instructed by Snyman & Associates
Date of hearing 11 November 2005
Date of judgment: 18 November 2005