The end of Outsourcing as we know it?

Section 197 of the Labour Relations Act (the Act) regulates the employment law consequences of a transfer of the whole or part of a business as a going concern.

The end of Outsourcing as we know it?

18 July 2005

Source: Jacques Van Wyk

Cliffe Dekker Inc

Section 197 of the Labour Relations Act (the Act) regulates the employment law consequences of a transfer of the whole or part of a business as a going concern.

For several years the South African courts have debated what constitutes the transfer of a “business as a going concern”. Until recently, it has been accepted practice to differentiate a transfer as a going concern from an outsourcing, on the basis that an outsourcing involves the handing over to a third party of only the function of providing services which were previously supplied by in-house personnel or departments.

Typical outsourcing scenarios involve what are referred to as non-core functions such as gardening, cleaning and security. The employees who formerly provided the in-house services which are outsourced are usually retrenched due to redundancy. Following a recent decision of the Labour Appeal Court in South African Municipal Workers’ Union & Others v Rand Airport Management Company (Pty) Ltd & Others this accepted practice requires review.

The Act defines “business” as including a “service”. What it means to transfer a service as a going concern has escaped judicial scrutiny for some time. It is not a concept that is easily reconcilable with that of a business being transferred as a going concern, which typically involves the transfer of goodwill, intellectual property, equipment, buildings, a client base, debtors, suppliers’ lists and related essential components of an economically self-sustaining entity. One would not expect to find a service with such attributes and it would therefore seem a service is not capable of being transferred “as a going concern”. Notwithstanding this, the Labour Appeal Court in South African Municipal Workers’ Union & Others v Rand Airport Management Company (Pty) Ltd & Others decided that the outsourcing of a service may constitute a transfer of a business “as a going concern”. The LAC noted that the definition of a business includes a “service”. It held that the gardening and security functions of Rand Airport fell within the definition of “services” and that such services could be transferred “as a going concern”.

The LAC held that an objective test is to be applied in determining whether a service had been transferred as a going concern. Factors to be taken into account include, what will happen to the goodwill of the service, its stock, the services’ premises, contracts with clients or customers, the employees, the assets, whether there has been an interruption of the operation of the service and whether the same or similar activities are continued after the transfer.

In view of this decision, it would appear that when an organization outsources certain of its functions it may well be hit by the provisions of section 197 even if that function is not a core-function of its business. This may well signal the end or at minimum, a serious curtailment of outsourcing.

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