In PE Pack 4100 CC v Sanders and Others, the Labour Appeal Court (LAC) had to consider section 197 of the Labour Relations Act, No. 66 of 1995 (the Act). The case is of importance because it may impact the sale(s) of franchise businesses and the application of provisions of the Act in such circumstances.

Section 197 of the Act makes provision for a business to be transferred as a going concern, and the LAC had to specifically determine whether it applies in the case of franchise agreements.

Background

A franchise agreement existed between Cell C (as the franchisor) and the third and fourth respondents (as the original franchisees). In April 2010 Cell C cancelled the franchise agreements with the original franchisees and entered into a franchise agreement in respect of the same store with the appellant.

The first respondent, who was an employee of the original franchisees, assumed that his employment contract would automatically be transferred to the new franchisee. Cell C disagreed and asserted that it was not buying back the franchise undertakings and had merely terminated the franchise as it was entitled to do. The transfer provisions contained in section 197 were therefore deemed to not apply.

The Court a quo held that the takeover of the business by the new franchisee did constitute a transfer of business as a going concern, and the decision was taken on appeal by the new franchisee (the appellant).

The LAC

In considering whether section 197 applies in the case of franchise agreements, the LAC stated that the nature of the business model is the key to the resolution of the problem.

The majority judgment found that the business model characteristic of franchise arrangements is such that upon termination of the franchise agreement, the franchisor is free to conclude a new franchise agreement with its preferred franchisee. There is no acquisition of a business as a going concern from the original franchisee. The components of the business did not pass into the hands of the new franchisee. Importantly, the Court held that the core assets and infrastructure and branding used in the business are retained at all times by the franchisor.

The LAC thus found that typical franchise arrangements, such as the one in question, do not trigger the transfer provisions of the LRA. The employees of the original franchisee do not transfer into the employ of the new franchisee as they do not enjoy the protections afforded employees in terms of the transfer provisions of the LRA.

It is noteworthy that the LAC was not unanimous in its finding. In a dissenting judgment, it was found that on an analysis of the facts, and irrespective of the business model typically found with franchise arrangements, there was indeed a transfer of a business as a going concern and the employees of the original franchisees were entitled to transfer into the employ of the new franchisee.

It is likely that the majority judgment will be taken on appeal.

Conclusion

We caution that the majority judgment should not be used as a precedent for the contention that all franchise arrangements will fall outside of the ambit of the transfer provisions of the LRA. The analysis required to determine whether a transfer of a business as a going concern has taken place is context-specific and factual. It may therefore be that another type of franchise arrangement would, on the facts peculiar to such arrangement, trigger the transfer provisions. Each set of circumstances need to be judged on their own merits before a determination as to the fate of employees may be made.