The Supreme Court of Appeal (SCA) this morning overturned the finding of the Labour Appeal Court (LAC) whereby the latter held that so-called “second generation outsourcing” of a business or service falls within the ambit of Section 197 of the Labour Relations Act.

According to Johan Botes, director in Employment Law at Cliffe Dekker Hofmeyr business law firm, “The effect of the SCA’s judgment is that every outsourcing (or in-sourcing) transaction should be judged on its own facts and merits to see whether it is covered by Section 197. There is no automatic transfer of the outsourced service back to the old employer or onwards to a new service provider once an outsourcing arrangement comes to an end.

In South African Airways (Pty) Ltd v AUSA and others, the SCA overturned the judgment of the LAC. The LAC, incorrectly according to the SCA, held that outsourced services were returned to SAA by operation of law (as opposed to by agreement) when SAA terminated the outsourcing agreement with its service providers.
 

“In terms of Section 197 of the LRA, the contracts of employment of the employees involved in a service transfers automatically to the new employer once the service is transferred by the old employer to the new employer as a going concern,” Botes explains.

Botes says the judgment of the SCA brings relief to employers who in the wake of the decision of the LAC were forced to create creative contractual remedies when outsourcing services.

“Many employers viewed the decision of the LAC as an unnecessary impediment on their ability to manage their business during challenging times as it significantly complicated the process of outsourcing non-core services.

“Businesses typically go through stages where non-core services are outsourced in an effort to focus on core activities and to reduce direct operating costs. In the light of the now overturned LAC decision, businesses were forced to cater for the prospect of welcoming all employees associated with the outsourced service back into their fold once the outsourced agreement has been terminated. There was also the risk that unscrupulous service providers could poach the old employer’s valuable employees that were outsourced to the service providers, only to replace them with its own poor performing staff prior to transferring the service back to the old employer. The old employer would thus be forced to take the previously outsourced service back together with all the staff associated with the service at the time when the service terminates,” Botes explains.

“The SCA held that the interpretation afforded to the disputed provision in Section 197 by the LAC that “by” in the Section should actually be read as “from” one employer to another “... impermissibly distorts the meaning ...” thereof. The wording of the section is clear and unambiguous and requires that the old employer must be instrumental in effecting the transfer of a business as a going concern.

“The SCA held further that there was no suggestion in the current matter that SAA abused the process. The LAC’s rationale in holding that its own interpretation of Section 197 should be preferred in order to prevent abuse of outsourcing by employers was at odds with the ordinary meaning of the words chosen by the legislature,” says Botes.

He notes the SCA held further that there was no suggestion in the current matter that SAA abused the process. Even if such abuse was possible, the SCA reasoned, this was “... no reason to distort the plain meaning of the section.”

The SCA followed previous Constitutional Court guidelines on the interpretation of statutes pointing out that other remedies were available if it was felt that the section in the Act was unconstitutional.

“Regrettably, the relief may be short-lived in that the Minister of Labour announced his intention to amend the wording of Section 197 in accordance with the finding by the LRA. The finding by the SCA that each transaction must be judged on its own merits may still survive the proposed amendment to the LRA. This is still good news for employers seeking to avoid the automatic punitive effects of the LAC judgment and the proposed amendment to the LRA,” adds Botes.

Written by Johan Botes, director of employment law at Cliffe Dekker Hofmeyr