Second generation outsourcing: Did the LAC get it right?

Introduction: s197

• The consequences if s197 applies to a business transfer

• When does it apply?– Transfer– Of a ‘business’– As a going concern

• ‘Business’? = the whole or part of any business, trade undertaking or service. Or a coherent collection of resources that facilitates a business activity.

Introduction: continued

• As a going concern?

– NEHAWU v University of Cape Town: ‘the business remains the same but in different hands’

– An objective test having regard to substance and not form taking into account what has transferred i.e. activity, employees, customers, tangible and intangible assets etc.

Second generation outsourcing?

• What is it?

• Why is it a problem in the context of s197?

• Beware of getting distracted by terminology: it has no magic and is of little help.

AUSA v South African Airways (LAC)

• The facts

• Zondo JP: Contest between the literal and purposive approaches to statutory interpretation. It would be destructive of the purpose of s197 if it did not apply to second generation and further contracting out. The court could thus depart from the literal meaning of the statute to give effect to its clear purpose.

AUSA v South African Airways (LAC)

• Davis JA:

– Was not convinced that ‘by’ indicates that the old employer plays an immediate and positive role in the transfer.

– Was concerned that the interpretation of s197 advanced by SAA would undermine its purpose and could only be sustained if the provision could bear no other meaning.

– Emphasised the fact that the contract between SAA and LGM required LGM to take positive action to transfer the business back to SAA or to another designated contractor.

AUSA v South African Airways (LAC): Discussion

• Clear that there is no reason in principle why s197 cannot apply to second generation and further outsourcing.

• To prevent that across the board would undermine the purposes of s197

• But Davis JA’s judgment leaves room for an argument that s197 was only found to apply to second generation outsourcing because of the facts before the court in the SAA case.

Why should s197 apply to second generation transfers?

• That gives effect to the purposes of s197, the LRA and, ultimately, the Constitution.

• Why would a limitation of rights be appropriate?

– Reduced employment security– Terms and conditions whittled away– Arbitrary distinction between initial and subsequent outsourcing

• But challenges remain

Example

• Employer A sells luxury motor vehicles. When vehicle are purchased they come with a five year maintenance and service plan. In addition, the vehicles that are sold by Employer A are brought to it to be serviced even once the service and maintenance plan has expired. Employer A wanted to concentrate its energies on its core business of vehicle sales. It therefore contracted with Employer B in 2005 to provide a vehicle repair and maintenance service.

Example (cont.)• Employer B was responsible for all vehicle repairs and

services. The vehicles were referred via Employer A. The work on the vehicles was done by highly-skilled mechanics on premises owned and supplied by Employer A using tools and equipment owned by Employer A. Employer B was responsible for purchasing parts for the vehicles.

In 2010 the contract between Employer A and Employer B came to an end and the opportunity to provide the vehicle repair and maintenance service was put out to tender. Employer C is considering tendering to provide the service.

Example (cont.)

• Employer B’s 50 employees want to know whether they will be transferred to work for the new contractor. The successful tenderer will work from the same premises as those used by Employer B and will use the same tools and equipment. Employer B, if it loses the opportunity to provide the service, is intending to sell the spare parts it has collected given that Employer B will have no further use for them.

Discussion

• Will there be a s197 transfer between Employer B and a new contractor if Employer B was unsuccessful in the tender process?

– Does it matter that this is a second generation outsourcing?

– Is what will be transferred a ‘business’? i.e. the whole or any part of a business, trade, undertaking or service. Is B being deprived of a coherent grouping of resources that facilitates a business activity?

Discussion

• Will the business be transferred as a going concern?

– Does it matter that B does not own everything that will be transferred?

– Does it matter if there is no contract between B and the new contractor?

– Will the business be essentially the same business in the hands of the new contractor as it was in the hands of B?

Discussion: practical problems

• How will potential tenderers know how to price and pitch their bids? i.e. how will they access the information they need from a potential competitor?

• Use sources other than the existing contractor?

• Time for legislative intervention?

Discussion: practical problems

• Is the section too rigid?

• Consider using:– s197(6)– s197(3)– s189

Finally . . .

• What of the temporary service provider in SAA?

• Was there possibly a s197 transfer from LGM SA to that entity and then another to someone else?

• Or was there only one transfer, in two stages, from LGM SA to the ultimate service provider?