Where an undertaking (or part thereof) of any kind is transferred to another undertaking as a going concern section 197 of the Labour Relations Act (LRA) comes into effect. This forces the new entity to take over all the employees of the old undertaking and to recognise all the terms and conditions of these employees including their years of service.

Both the sale/merger of a business and the outsourcing of a business function to a contractor constitute the transfer of a going concern. Even the transfer of a contract from one contractor to another can fall under section 197 of the LRA.

In the case of COSAWU vs Zikhethele Trade (Pty) Ltd (2005, 14 LC 11.3.2 ) as reported in Contemporary Labour Law 14 No. 12) the Labour Court decided that the takeover of a contract by one contractor from another constituted the takeover of a going concern. This decision means that:

• if contractor A loses the contract which is then outsourced to B (the new contractor) then B is required to take over all the employees of A who were employed on the contract!

• The new contractor is therefore not able to use its existing employees to carry out the work; it must use the workers who were employed by the outgoing contractor.

• If, in the process of the takeover, the employees of contractor A are dismissed to make way for B’s employees, this would be an automatically unfair dismissal in terms of section 187(1)(g) of the LRA! On the other hand, if B retrenches its own employees to make way for the employees being transferred by A this could also be an automatically unfair dismissal under section 187.

• For a contracting business to win a contract may no longer be a victory because this double-edged sword could destroy the contracting business.

This decision was been hailed as a resounding victory for trade unions trying to preserve the jobs of their members involved in business takeovers and outsourcing arrangements. At the same time the decision constitutes a massive blow for contractors and for businesses wishing to outsource certain functions.

Due to the massive dangers involved contractors and other employers should  not enter into outsourcing agreements before consulting a reputable labour law expert to establish whether winning a new contract will mean a victory or a disaster.

To book for our 11 March JHB seminar on CHANGES AND DANGERS IN LABOUR CASE LAW please contact Ronni on 0845217492 or ronni@labourlawadvice.co.za.

Submitted and written by lvan lsraelstam, Chief Executive, Labour Law Management Consulting