By Gary Watkins

Case law and legislation review

The first is a ruling by the constitutional Court in NEHAWU v University of Cape Town. The second is a judgment by the Labour Appeal Court in Fry’s Metals v NUMSA. The cases deal with very different issues, but both of them provide critical interpretations of key provisions of the Labour Relations Act.

# Outsourcing, and how to stay ‘legal’ when transferring a business is at issue

National Education Health & Allied Workers Union (NEHAWU) v University of Cape Town and others Constitutional Court - CCT2/02:

The UCT case concerned section 197 of the LRA. NEHAWU had applied to the Labour Court for a declarator to the effect that the employment of its members had been transferred to a number of service providers, on the same terms and conditions, when the University outsourced the gardening, maintenance and security functions. The union lost, primarily because the Court took the view that there had been no transfer of a part of the university’s business as a going concern.

When the Labour Appeal Court heard the matter, the only issue it decided was whether section 197 provided for an automatic and obligatory transfer of contracts of employment when the underlying transaction assumes the form of a transfer as a going concern, or whether the section was permissive in the sense that the transferor and transferee employees could agree that it should apply.

The majority of the Court effectively held that unless the employees were transferred, it could not be said that there was a transfer of a business as a going concern, and that the employers were free to elect whether or not the employment contracts were to be transferred.

The union applied to the Constitutional Court for leave to appeal. Leave was granted, and the Constitutional Court overruled the interpretation given to s197 by the Labour Appeal Court. A purposive approach to s197 required that considerations of work security be given primacy, and on this basis, the court held that section 197 had an automatic and obligatory effect. In other words, as soon as a commercial transaction assumes the form of the transfer of the whole or part of a business as a going concern, then the contracts of employment of the old employer’s employees transfer to the new employer, unless there is a contracting out of that consequence in terms of the section. The intentions of the two employers are irrelevant, the transfer takes place by operation of law.

This leaves open the question of what might comprise a transfer of a business as a going concern for the purposes of section 197. The Court stated that a number of factors should be taken into account (including the transfer of any tangible or intangible assets, whether or not customers are transferred) and a determination made on a case by case basis.

The importance of the UCT decision to outsourcing agreements is obvious. Equally obvious is the need for specialist advice to determine whether section 197 applies in each case. The complexity of this question is demonstrated by the recent decision by the Labour Court in SAMWU v Rand Airport, where the Court held that section 197 did not apply where nothing more than an activity is outsourced. In this case, which involved the outsourcing of gardening services, the Court held that the gardening services were not an entity- they had no management structure, assets, goodwill, goals or customers to speak of and were "merely and activity". Since section 197 applied only to businesses or parts of businesses transferred as a going concern, there was no transfer of the employment contracts to the new service provider.

# Retrenchment for refusal to comply in a matter of mutual interest

Fry’s Metals (pty) limited v National Union of Metal workers of South Africa and fifty five others lac ja9/01

Fry’s Metals had retrenched a number of employees after they refused to agree to a revised shift system, which the company argued were necessary for the continued viability of the business. The union argued that a retrenchment in this circumstance was not a legitimate option open to the employer, and that in any event, the dismissals were automatically unfair because they had been effected to compel the employees to agree to a demand in respect of a matter of mutual interest.

The Labour Appeal Court held that a dismissal that is final cannot serve the purpose of compelling a dismissed employee to accept a demand in respect of a matter of mutual interest. The dismissal terminates the employment relationship, and there is no value in the employer further seeking to compel the employee to agree to an employer demand.

The purpose of the automatically unfair reason for dismissal in the form of compelling an employee to agree to a demand in respect of a matter of mutual interest applied only in a collective context where the employer dismisses employees with the purpose of compelling them to accept a demand, usually a change to their conditions of employment. In this case, if the employees agree to the demand, the dismissal ceases because it has served its purpose.

If they refuse to agree, the employer can dismiss them "finally" and this is a dismissal for operational requirements, and not what the Court referred to as a "lock-out dismissal". The purpose of the operational requirement dismissal is to "get rid of employees who do not meet the business requirements of the employer so that new employees who will meet the business requirements of the employer can be employed".

The appeal against an order interdicting the employer from dismissing the affected employees succeeded.

This judgment should not be interpreted as carte blanche to retrench employees who refuse to accept changes to terms and conditions of employment. The new provisions regulating retrenchment introduced on 1 August are untested, and the judgment must be seen in its context- an appeal against an interdict granted after an urgent application. What is important about the judgment is the limits it places on the scope of the automatically unfair reason for dismissal in the form of a refusal by an employee to agree to a demand made by the employer in respect of a matter of mutual interest.

The judgment clearly limits the ambit of this provision to what those old enough to recall the pre-1995 legislation called the "lock-out dismissal". If the judgment is correct, employers wanting to enforce changes to conditions of employment may be less inclined to lock out and more inclined to effect a final dismissal in the form of a retrenchment. Even with the obligation to pay severance pay, it may be a cheaper option at the price.