LABOUR LAW IMPLICATIONS OF THE TRANSFER OF AN …

LABOUR LAW IMPLICATIONS OF THE TRANSFER OF AN UNDERTAKING

By

NICOLA SMIT

thesis submitted in compliance with the requirements for the degree of

DOCTOR LEGUM

in

LABOUR LAW

in the

FACULTY OF LAW

of the

Rand Afrikaans University

PROMOTOR: PROF MP OLIVIER

OCTOBER 2001

CONTENTS

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Table of contents

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TABLE OF CONTENTS

CHAPTER ONE: INTRODUCTION: THEORETICAL AND SOCIAL POLICY CONSIDERATIONS

Page 1.1 Introduction...................................................................................................1 1.2 The nature of the employment relationship .......................................................7 1.3 Corporate social responsibility........................................................................9 1.4 The Constitution of the Republic of South Africa 108 of 1996

and the Labour Relations Act 66 of 1995 .....................................................10 1.5 The principles of job security and freedom of contract within a constitutional framework..................................................................12 1.6 Social values in South African labour law ......................................................22 1.7 Concluding remarks .....................................................................................24 CHAPTER TWO: LABOUR IS NOT A COMMODITY: SOCIAL PERSPECTIVES ON COMPANY LAW 2.1 General........................................................................................................27 2.2 Labour is not a commodity...........................................................................28 2.3 Theories and models of companies ...............................................................30

2.3.1 The contractual theory of company law ........................................30 2.3.2 The concession theory ....................................................................31 2.3.3. The commutaire theory ..................................................................31 2.3.4 The contractual model ...................................................................31 2.3.5 The constituency model..................................................................35 2.3.6 The enterprise model......................................................................37 2.3.7 The associative model ....................................................................38 2.3.8 Evaluation ......................................................................................38

2.4 The employee and the company....................................................................39 2.5 The employee and corporate decision-making...............................................41 2.6 Insolvency of companies and the rescue of companies...................................42 2.7 The role of the employee in company law in South Africa ..............................44

2.7.1 Introduction....................................................................................44

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2.7.2 The King Report on Corporate Governance, 2001........................45 2.8 Concluding remarks .....................................................................................49 CHAPTER THREE: SUPRANATIONAL, INTERNATIONAL AND FOREIGN NATIONAL FRAMEWORK 3.1 General........................................................................................................52 3.2 The Acquired Rights Directive ......................................................................54

3.2.1 Obligatory nature and direct effect of the Directive......................54 3.2.2 Interpretation of the Directive .......................................................57 3.2.3 Amending Directive 98/50/EC .......................................................58 3.2.4 The safeguarding of employment...................................................59

3.2.4.1 Scope and definitions ...........................................................59 3.2.4.2 Safeguarding of employees’ rights

(individual and collective)......................................................61 3.3 The Insolvency Directive ..............................................................................65 3.4 ILO Convention on the Protection of Workers’ claims in the Event of

the Insolvency of their Employer...................................................................66 3.5 Germany - Article 613a Bürgerliches Gesetzbuch .......................................66 3.6 United Kingdom: Transfer of Undertakings (Protection of Employment)

Regulations 1981 (TUPE) ............................................................................71 3.7 Concluding remarks .....................................................................................74 CHAPTER FOUR: LABOUR LAW IMPLICATIONS OF THE TRANSFER OF AN UNDERTAKING IN SOUTH AFRICA: A COMMON LAW, STATUTORY AND JURISPRUDENTIAL EXPOSITION 4.1 General........................................................................................................77 4.2 Common law...............................................................................................79 4.3 The Industrial Court .....................................................................................81

4.3.1 Kebeni v Cementile Products Pty Ltd (1987)................................81 4.3.2 Ntuli & others v Hazelmore Group t/a

Musgrave Nursing Home (1988)....................................................83

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4.3.3 Hoogenoeg Andolusite (Pty) Ltd v National Union of Mineworkers & others (1) ...............................................87

4.3.4 Kellog SA (Pty) Ltd v FAWU & others..........................................88 4.4 Concluding remarks .....................................................................................89 CHAPTER FIVE: THE NOTION OF A TRANSFER 5.1 Introduction.................................................................................................91 5.2 Whose contracts are transferred? .................................................................92

5.2.1 Employees ......................................................................................92 5.2.2 Persons employed at the time of the transfer ................................95 5.2.3 Persons employed in the part transferred and persons choosing not to transfer....................................................98

5.3. The meaning of a relevant “transfer” of an undertaking (or part thereof) ...........................................................................................98 5.4 The Acquired Rights Directive ......................................................................99 5.5 Atypical transfers and atypical workers.......................................................103 5.6 A series of transactions...............................................................................104 5.7 The legal position in South Africa................................................................105 5.8 Concluding remarks ...................................................................................110 CHAPTER SIX: THE TRANSFER OF A BUSINESS, TRADE OR UNDERTAKING (OR PART THEREOF) AS A GOING CONCERN 6.1 General......................................................................................................113 6.2 The Acquired Rights Directive ....................................................................115

6.2.1 The t ransfer of an economic identity ...........................................115 6.2.2 The transfer of a part of an undertaking .....................................119 6.2.3 Contracting out/Outsourcing.......................................................122

6.2.3.1 Christel Schmidt.................................................................125 6.2.3.2 Ayse Süzen........................................................................129 6.2.3.3 Comparison of Schmidt and Süzen .....................................131 6.2.3.4 Commentary on Schmidt and

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Süzen and contracting out...................................................132 6.2.4 The transfer of functions involving public authority ...................136 6.2.5 The transfer of non-commercial undertakings/activities .............143 6.2.6 Atypical transfers .........................................................................144 6.2.7 Contracting in ..............................................................................145 6.2.8 Transfers within a group..............................................................146

6.3 The legal position in South Africa................................................................147 6.3.1 The transfer of a business, trade or undertaking

(or part thereof) as a going concern ............................................147 6.3.2 The jurisprudence of the Labour Court and

Labour Appeal Court ...................................................................149 6.3.3 Evaluation of South African case law on the

transfer of a business, trade or undertaking (or part thereof) as a going concern ............................................158

6.3.4 Contracting out/Outsourcing.......................................................162 6.3.4.1 Nehawu v UCT.................................................................162 6.3.4.2 Comment on Nehawu v UCT.............................................167

6.4 Concluding remarks ...................................................................................173 CHAPTER SEVEN: THE EFFECT OF TRANSFER PROVISIONS AND THE POWER TO OBJECT 7.1 General......................................................................................................175 7.2 A comparative perspective on the effect of transfer provisions .....................175 7.3 The legal effect of section 197 of the Labour Relations

Act 66 of 1995 ..........................................................................................179 7.3.1 Jurisprudence in favour of an automatic transfer

of employment contracts..............................................................180 7.3.2 Jurisprudence believing that the transfer of employment

contacts are conditional on agreement of the transferor and transferee to such transfer, in the absence of the agreement of the employees.........................................................182

7.3.3 Evaluation of the approach of the South African Labour Courts regarding the automatic transfer of employment contracts.......................................................................................185

7.4 The power to object...................................................................................190

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7.4.1 The existence of a right to object or a position where a worker is not prevented from refusing to transfer.......................190

7.4.2 Consequences of a decision not to transfer .................................193 7.4.3 The power to object in South Africa ............................................196

7.5 Concluding remarks ...................................................................................202 CHAPTER EIGHT: AMENDMENT OF EXISTING RIGHTS, OBLIGATIONS AND WAIVERS 8.1 General......................................................................................................206 8.2 What individual rights and obligations are transferred?.................................207

8.2.1 Restraints of trade........................................................................211 8.2.2 Share options, bonuses and profit sharing...................................212 8.2.3 Contributions to social security schemes, tax, etc.......................213 8.2.4 Pensions .......................................................................................214 8.2.5 Criminal liability ..........................................................................214 8.2.6 Delictual liability..........................................................................214

8.3 Prohibition of changes to contracts of employment due to a transfer .............215 8.3.1 A comparative perspective...........................................................215 8.3.2 Criticism against prohibition on changes of contracts due

to a transfer..................................................................................219 8.4 Changes to a contract of employment: a principled approach.......................220

8.4.1 Introduction..................................................................................220 8.4.2 Policy and legal considerations....................................................221

8.5 The legal position in South Africa................................................................225 8.6 Concluding remarks ...................................................................................229 CHAPTER NINE: TRANSFER OF COLLECTIVE RIGHTS AND OBLIGATIONS 9.1 General......................................................................................................232 9.2 The legal effect of collective agreements in South Africa..............................233 9.3 Other protective legislation.........................................................................235 9.4 Comparative perspective ............................................................................235 9.5 The legal position in South Africa................................................................240

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9.6 Concluding remarks ...................................................................................243 CHAPTER TEN: THE TRANSFER OF SOCIAL SECURITY RIGHTS AND OBLIGATIONS 10.1 General......................................................................................................245 10.2 Statutory occupational-based social insurance schemes...............................246

10.2.1 Unemployment .............................................................................246 10.2.2 Maternity benefits ........................................................................247 10.2.3 Survivors’ benefits.......................................................................248 10.2.4 Occupational injuries and diseases..............................................248 10.2.5 Illness............................................................................................249

10.3 Private occupational social insurance schemes.............................................250 10.3.1 Introduction..................................................................................250 10.3.2 Comparative perspective .............................................................253 10.3.3 Debates concerning article 3(4) of the Directive.........................255 10.3.4 Potential problems pertaining to the automatic transfer of

pension benefits............................................................................258 10.3.5 The legal position in South Africa................................................259

10.4 Concluding remarks....................................................................................263 CHAPTER ELEVEN: DISCLOSURE OF INFORMATION AND CONSULTATION 11.1 General......................................................................................................266 11.2 Comparative perspective ............................................................................267

11.2.1 General.........................................................................................267 11.2.2 A practical illustration – the case of Rover..................................273

11.3 The absence of a duty to disclose and to consult in South Africa..................276 11.3.1 Rationale for a duty to disclose and to consult ............................277 11.3.2 What information should be disclosed and what form

should consultations assume?......................................................279 11.3.3 At what stage should consultation and disclosure take

place? ...........................................................................................282 11.3.4 Who should the parties be? ..........................................................283

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11.3.5 What should the result of non-compliance be? ............................284 11.4 The legal position in South Africa................................................................285 11.5 Concluding remarks ...................................................................................286 CHAPTER TWELVE: DISMISSALS BY THE TRANSFEROR AND/OR TRANSFEREE IN CIRCUMSTANCES INVOLVING THE TRANSFER OF AN UNDERTAKING 12.1 General......................................................................................................288 12.2 The history of the law of unfair dismissal (including a constitutional

perspective)...............................................................................................289 12.3 Comparative perspective ............................................................................294 12.4 The legal position in South Africa................................................................299 12.5 Theoretical and policy issues.......................................................................306

12.5.1 The status of a dismissal because of a transfer............................306 12.5.1.1 Pre-transfer dismissals ...................................................306 12.5.1.2 Post-transfer dismissals .................................................311 12.5.1.3 Possible solutions to the Berriman problem.....................314

12.5.2 Remedies in the event of a dismissal due to a transfer ................317 12.5.2.1 General .........................................................................317 12.5.2.2 Partnerships as employers: principles affecting

severance pay................................................................320 12.5.3 Dispute route and procedure........................................................324

12.6 Dismissals and transfers in insolvent circumstances......................................325 12.7 Concluding remarks ...................................................................................329 CHAPTER THIRTEEN: TRANSFERS, INSOLVENT UNDERTAKINGS AND RESCUE PROCEEDINGS 13.1 General......................................................................................................332 13.2 Comparative perspective ............................................................................333

13.2.1 Directive 2001/23/EC...................................................................333 13.2.2 Directive 80/987/EEC ..................................................................335 13.2.3 Case law of the European Court of Justice .................................338

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13.2.4 Application in the United Kingdom and Germany ......................341 13.2.4.1 The United Kingdom.......................................................341 13.2.4.2 Germany.........................................................................346 13.2.4.3 Evaluation.......................................................................348

13.3 The South African position.........................................................................350 13.3.1 Winding-up ...................................................................................350 13.3.2 Trading in insolvent circumstances..............................................352 13.3.3 Rescue proceedings ......................................................................352 13.3.4 Interplay between labour and insolvency principles ....................356 13.3.5 Evaluation of the future position of employees in South

African insolvency proceedings in circumstances of a transfer/potential transfer............................................................359

13.4 Concluding remarks ...................................................................................367 CHAPTER FOURTEEN: PROPOSED LEGISLATION 14.1 General......................................................................................................370 14.2 Labour Relations Amendment Bills of 2000 and 2001.................................371

14.2.1 General dismissal provisions........................................................378 14.2.2 Transfer of employment contracts...............................................382 14.2.3 Transfers in insolvent circumstances ...........................................391

14.3 Summary of the shortcomings of proposed legislation..................................393 14.4 Draft model of a provision providing for the transfer of employment

contracts in South Africa ............................................................................394 14.4.1 Transfer of undertakings in solvent circumstances .....................394 14.4.2 Transfer of undertakings in insolvent circumstances ..................398 14.4.3 Other general provisions in the Labour Relations Act .................399

14.5 Concluding remarks ...................................................................................401 CHAPTER FIFTEEN: REFLECTIONS AND CONCLUSIONS 15.1 General......................................................................................................404

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15.2 Guidelines in the European regulation of transfers of undertakings that appear to be of importance for South Africa ...............................................407 15.2.1 The automatic transfer of contracts of employment and the

power to object ............................................................................407 15.2.2 The notion of a transfer.................................................................408 15.2.3 The transfer of a business, trade or undertaking as a going

concern..........................................................................................409 15.2.4 Transfer of collective rights and obligations and the right

to disclosure of information and to consult .................................410 15.2.5 Dismissals because of the transfer of an undertaking .................411

15.3 Particular aspects that need further consideration in the South African context of the transfer of undertakings.........................................................413 15.3.1 The concept of employee..............................................................413 15.3.2 Transfer by one employer to another employer ...........................414 15.3.3 Outsourcing..................................................................................414 15.3.4 Pensions, health provision, etc.....................................................415 15.3.5 Joint and several liability .............................................................415 15.3.6 Transfers in circumstances of insolvency.....................................416 15.3.7 Employee representation..............................................................417 15.3.8 Disclosure of information and consultation.................................417 15.3.9 Amendments and waivers ............................................................417 15.3.10 Sanctions .....................................................................................418

15.4 Concluding remarks ...................................................................................418 BILBLIOGRAPHY.............................................................................................419 ANNEXURE A....................................................................................................435

Insolvency and rescue proceedings

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CHAPTER ONE

INTRODUCTION: THEORETICAL AND SOCIAL POLICY CONSIDERATIONS

1.1 Introduction The laws that regulate the transfer of undertakings today are indispensable for the attainment of social justice. The legal pitfalls in this area of law are, however, myriad. At common law, a contract of employment was a personal contract between the employer and employee and when that relationship ceased the contract of employment also came to an end.1 Furthermore, an employee’s rights could not be transferred by way of a cession without the employee’s consent. The reason for this was that any right that arises from contracts “so personal in their character that it can make any reasonable or substantial difference to the other party whether the cedent or cessionary is entitled to enforce it” was rendered non-transferable, unless the debtor consented to the transfer.2 An employer’s right to demand service from an employee falls under a contract of such a personal nature. The mere cession of an employment contract was also insufficient - a combined cession and delegation was required. The consent of the old employer, new employer and employee had to be given for this to occur. If this could not be achieved, the old employer would have had to terminate the contracts of employment lawfully and fairly (which would have involved procedural obligations, severance payments, etc). The rationale for this provision was clearly the protection of the employee’s freedom to choose whom he/she wants to serve.3 The Courts, lawyers, academic writers and roleplayers in the labour market have not always accepted that it does indeed matter whom an employee serves. The arguments

1 Nokes v Doncaster Amalgamated Collieries 1940 AC 1014 CA. Special rules apply to the

locatio conduction operarum, which are found in labour law rather than the law of contract. See De Wet JC, Van Wyk AH & Yeats J De Wet en Yeats Kontraktereg en Handelsreg (Butterworths 1995) 384 where it is stated that: “[d]ie gewone dienskontrak is vandag tot baie groot hoogte maar net die grondslag waarop ingewikkelde verhoudings opgebou is. Uit die dienskontrak het al byna, miskien selfs volkome, ’n nuwe afdeling van die reg ontwikkel, en wel ‘arbeidsreg’”.

2 See chapters 7 & 12 infra; East Rand Exploration Co v Nel & others 1903 TS 42. 3 The rule against forced labour is firmly entrenched in South Africa. See s 13 of the

Constitution of the Republic of South Africa 108 of 1996 and s 48 of the Basic Conditions of Employment Act (BCEA) 75 of 1997. In Iversen v Norway (1468/62 CD 1280), the European Commission on Human Rights employed a holistic approach in interpreting the terms of “servitude” and “forced labour”. It held that these concepts encompass work performed against the workers’ free will and which are “unjust, oppressive, or involve unavoidable hardship”. See chapter 7 infra.

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proposing that it does not matter to whom an employee pledges his/her loyalty, good faith and services negated the personal character of the contract of employment and equated labour potential with a commodity. Nokes v Doncaster Amalgamated Collieries4 therefore served as an important addition to the jurisprudence regarding the inherent status of the employment relationship and was later cited with approval by the Industrial Court in South Africa:5

It is said that one company does not differ from another: and why should not a benevolent judge of the Chancery Division transfer the services of a workman to another admirable employer as good and perhaps better. The answer is two-fold. The first is that however excellent the new master may be it is hitherto the servant who has the choosing of him, and not the judge. The second is that it is a complete mistake in my experience to suppose that people, whether they are servants or landlords or authors do not attach importance to the identity of the particular company with which they deal. It would possibly hurt the feelings of financial gentlemen with large organising powers to know how strongly some people feel about big combinations, and especially amalgamations of small trading concerns. But it is said how unreasonable this is: for the big company can buy the majority of shares in the old company: replace the directors and managers: change the policy and produce the same result. Be it so: but the result is not the same: the identity of the company is preserved: and in any case the individual concerned, while he must be prepared to run the one risk, is entitled to say that he is not obliged to run the other.

According to this case, it can thus be proposed that an employee’s right to choose his/her employer constitutes “the main difference between a servant and a serf.”6 This position has not altered. Rather, additional rights have since been acknowledged and protected in the workplace. Expressed in simple terms it can be said that the aim of provisions safeguarding employees’ rights in the event of the transfer of an undertaking

4 1940 AC 1014 CA. 5 Ntuli v Hazelmore t/a Musgrave Homes 1988 9 ILJ 709 (IC); NUMSA v Metkor Industries

1990 11 ILJ 1116 (IC). 6 Nokes v Doncaster Amalgamated Collieries 1026.


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as a going concern7 is to neutralise, as far as possible, the effects of a change in the legal employer on the employment relationship and the employment conditions and wages. Several legitimate interests are discernible in these instances. It is clear that an employee has an interest in the person for whom he/she is working and that the employee also has an interest in preserving his/her employment. It should be evident that the original protection afforded to employees (having to consent to the identity of their employer) is, in present times, not the only or even principal protection warranted. It is perhaps even more vital today that a worker be able to rely on job security in a market in which there is generally an over-supply for the demand. (The employee must, of course, also be free to refuse such protection since such protection is meant to benefit the employee.)8 Furthermore, a transferee will usually be reluctant to comply with obligations that originate from the former employment relationship. A transferee would prefer to make unfettered choices regarding the running of the undertaking (including who to employ or not). Finally, the transferor does not want anything to diminish his/her chances of transferring the undertaking. Any burdens that will transfer to the transferee will most likely influence the purchase price of the undertaking and are, therefore, also not in the interests of the transferor. (It must be remembered that if the employment contracts are to be terminated, the transferor will have to comply with statutory notice pay and severance benefits, which the transferor would no doubt reflect in his/her selling price.) Apart from the continuation of an employment contract with a transferee in the event of the transfer of an undertaking, there is another example of the transfer of a contract by operation of law in South Africa. In this instance, a common law rule applies: huur gaat voor koopt.9 Here the lease contract will automatically continue between the tenant and the buyer of a property so that the buyer/third party will automatically become a partner to the contract, irrespective of whether this person agrees to it and without him/her even having been aware of such a lease existing (in which case his/her remedy will lie against the seller). The purpose of this rule is to protect the tenant

7 For example, s 197 of the Labour Relations Act (LRA) 66 of 1995 as well as the Council

Directive 2001/23/EC (the Acquired Rights Directive). This Directive replaced Directive 77/187/EEC, as amended by Directive 98/50/EEC, on 12 March 2001.

8 Merckx and Neuhuys v Ford Motor Co Belgium SA 1996 IRLR 467 (ECJ), 1996 ECR 1253 (ECJ). See chapter 7 infra.

9 See Genna-Wae Properties (Pty) Ltd v Medio-Tronics (Natal) (Pty) Ltd 1995 s SA 926 (A) where the Appellate Division confirmed that in terms of South African law the alienation of leased property consisting of land or buildings in pursuance of a contract of sale does not bring the lease to an end. It was confirmed that the purchaser is substituted ex lege for the original lessor. The lessee, in turn, is also bound by the lease and, provided that the new owner recognises his/her rights, does not have any option, or right of election, to resile from the contract (939A-C/D). See also Mignoel Properties (Pty) Ltd v Kneebone 1989 4 SA 1042 (A) where the huur gaat voor koop rule was acknowledged and it was held that the puchaser is substituted as lessor without any necessity for cession of rights or assignment of obligations.

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against any actions by the lessor, even though such actions might be completely lawful. Hence, the buyer’s right to property10 is limited.11 The transfer of an undertaking as a going concern involves several labour law implications. Included are the employer’s interest in the economic efficiency of the undertaking, the employee’s interest in job security, the employer’s right to safeguard sensitive information and the employee’s right to be informed about possible changes in the undertaking at the earliest possible opportunity.12 The employer is intimately concerned with the maximisation of profit, whereas the employee wishes to improve or at least maintain both the material and physical conditions of employment.13 These implications are an inherent part of the change in situation, but several of the labour law implications that occur are brought about by way of legislation and other instruments of law.14 In some jurisdictions, these implications or consequences have been regulated for nearly a century (for example in Italy).15 Since 1928, French law has required that if there is a change in the juridical situation of an employer, notably as a result of succession, sale, fusion, transformation of funds and incorporation, all the contracts of employment existing on the date of the transfer will continue between the new employer and the employees of the enterprise.16 Employers wanted to ensure that, on the date of the transfer, both the assets of the business and the workforce (who had the necessary skills and knowledge to operate the equipment/business) were transferred. By contrast, in other countries, most notably the United Kingdom, the employment contract was considered to be a personal contract and so, it was reasoned, it could not be transferred to another employer.17 It is important to consider the manifestation and regulation of this aspect in other jurisdictions as well. In this regard it has been proposed that:

In every country, North and South, workers, employers and governments have both common and divergent interests, short term and long term. The divergent interests must be

10 S 25 of the Constitution of the Republic of South Africa. 11 Regarding the right to work as a possible property right, refer to chapter 12, par 12.2 infra. 12 See Jordaan B “Transfer, closure and insolvency of undertakings” 1991 ILJ 935-964. 13 Ibid. 14 E.g. s 197 of the LRA. See Schutte & others v Powerplus Performance (Pty) Ltd & another

1999 ILJ 655 (LC) where the Labour Court (LC) remarked as follows: “Given the fundamental conflict of interests addressed by section 197 it is regrettable that its provisions are so terse. Perhaps this is inevitable since the section strikes at the very heart of that conflict and the Act, in its final form, is a product of a negotiated agreement between organised labour and capital, the representatives of the conflicting interests” (par 31).

15 The protection seems to date back to 13 November 1924 (the time of Mussolini’s reign). 16 L122-12 al 2 Code du Travail from 18 July 1928. See Couturier Droit du Travavail, I/Les

relations Individuelles de travail (PUF 1993) 373. 17 This has been the common-law position in South Africa as well.


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accommodated and reconciled. … The way in which such interests are expressed and reconciled is the subject of industrial relations. It will of necessity vary from country to country. International comparison must bring out and explain the differences and similarities of national industrial relations systems.18

The safeguarding of employees’ rights in the event of the transfer of an undertaking as a going concern is of equal importance to all free market systems. This is an aspect that has to be accommodated as best as possible in each particular national system. This thesis will therefore attempt to draw comparisons between different national systems.19 Legislation regarding the transfer of employees’ rights in the event of the transfer of an undertaking (or part thereof) as a going concern, acknowledges a need to safeguard employees’ rights. This is true also of statutory regulation in Europe, perhaps not so much because the roleplayers felt an urgent desire to add a social component to free trade, but rather (and certainly at first) to try to fix a certain minimum standard of workers’ rights all over Europe to make sure that no country would obtain competitive advantages by providing for weaker protection of its employees.20 However, more emphasis was later placed on the social component of these provisions by the European Court of Justice. In South Africa, the principle contained in section 197 of the Labour Relations Act formally imports a new value into South African labour law (the safeguarding of employees’ rights in the event of a change in the legal personality of their employer, hence better protection of the ideal of job security). The acceptance of this is of the utmost importance since the recognition thereof will lead to important considerations when, for example, interpreting the Act in relation to other principles of law.21 Furthermore, the rationale for this new value should be investigated and evaluated. If it is found to be a value that is worthy of protection (i.e. employees do have an interest in whom they work for and in continued employment with retention of

18 Schregle J “Comparative industrial relations: pitfalls and potential” 1981 International

Labour Review 27. 19 See Kahn-Freund O “On uses and misuses of comparative law” 1974 The Modern Law

Review 27 where he expresses the view that: “The use of the comparative method requires a knowledge not only of the foreign law, but also of its social, and above all its political context. The use of comparative law for practical purposes becomes an abuse only if it is informed by a legalistic spirit, which ignores this context of the law.”

20 Waas B Transfer of undertakings LLM lecture (RAU 1997) 7. Directive 77/187/EEC (now replaced by Directive 2001/23/EC) was, however, a product of the Social Programme adopted by the Council of Ministers in 1974.

21 S 210 of the LRA provides that the Act enjoys preference above all other Acts, save the Constitution or an Act that expressly amends the LRA. S 197 and s 38 of the Insolvency Act 24 of 1936 are inconsistent, since s 38 provides for the automatic termination of all employment contracts in the event of the insolvency of an employer. See chapter 10 infra regarding the working and interpretation of s 210. See also Imatu & others v Greater Johannesburg Metropolitan Council & others 2000 21 ILJ 2037 (LC).

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the same rights and duties when there is a change in the legal personality of their employer), means must be found to give effect to this recognised value. Even though section 197 is of great importance to the South African position regarding the transfer of undertakings, this thesis investigates a general framework within which the interests of job security and legal certainty can best be attained. The existence of protective labour legislation in almost every nation in the world is in itself recognition that the employment relationship is an unequal one. There have been many perceptions regarding the true nature of the contract of employment and the nature of the employment relationship.22 In the final analysis it has been suggested that the main function of labour law must always be to counteract the inequality of bargaining power that is inherent in the employment relationship.23 Law is a technique, it is said, for the regulation of social power (which is necessarily unevenly distributed in all societies) and protective legislation must be seen in this context; the power to command and the duty to obey can at least be regulated and so, too, the power of the employer and the absolute dependency of the employee as “wage-slave”.24 In South Africa, this principle is well established and has been expounded in Administrator Transvaal v Traub, where the Court held that: “… when the facts cry out for a legal remedy then the law should be made to reach out and come to the aid of persons prejudicially affected.”25 However, one must realise the limitations of labour law. It might provide the legal basis for the large majority of people to earn their living, but it certainly does not constitute the primary influence on societal welfare. History has shown that the law can be changed and often is changed with reference to labour productivity, the forces of the labour market and the effective organisation of workers in trade unions.26 These factors will also determine to what extent provisions such as those contained in section 197 of the Labour Relations Act will survive or not. Debates revolving around flexibility in the labour market, unemployment, integration into the world economy and the costs of employment in South Africa are certain to play a role in the success or failure of provisions aimed at safeguarding employees’ rights in the event of transfers of undertakings. Organised business often calls for “flexibility” in the market. Under “flexibility” it is then assumed that deregulation should take place. However, “flexibility” does not necessarily imply deregulation.27 In addition, the principle of “vested rights” 22 E.g. see Brassey M “The nature of employment” 1990 ILJ 889. 23 Davies P and Freedland M Kahn-Freund’s Labour and the Law (Stevens 1983) 14-26. 24 Davies and Freedland Labour and the Law 14. See also chapter 2, par 2.2 infra. 25 1989 10 ILJ 823 (A). 26 Davies and Freedland Labour and the Law 13. 27 See Olivier MP “The regulation of labour flexibility and the employment relationship:

paradigm shifts on the horizon?” 1998 TSAR 536.


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will now also be applicable to debates focussing on the desirability of protecting employees’ interests in continued employment. This is because employees in South Africa do have a statutory right to continued employment since 11 November 1996, albeit a quite vague and unconvincingly demarcated right.

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1.2 The nature of the employment relationship In an employment relationship, as in all societies, conflict of interests is inevitable. Any judicial intervention in any conflict of interest in the said relationship must be evaluated according to a specific reviewer’s perception of justice. Every person has a value system and can thus be characterised by others as representing a particular frame of reference (based on our political, social, economic and legal attitudes).28 The presence of an “objective” and “fair-minded” analysis must be distinguished from the notion of a pretence of objectivity. The way in which analysts view the employment relationship will eventually play an important role in the way that they will evaluate the measures safeguarding an employee’s position in the event of the transfer of an undertaking. It is therefore necessary to identify the most common influences or models that are relevant in this regard. Firstly, there is the traditional contractual model which understands employment contracts to be private transactions resulting from free agreement between the parties concerned. This model is based on the assumption that both parties enter the agreement on equal footing and are thus equal partners. Consequently, judicial intervention should be limited to preserving and enforcing the contractual agreement between the parties. This model has been the subject of much criticism, the most common being that it takes “freedom of contract” as a social fact, rather than a verbal symbol.29 There would be no room for provisions such as those contained in section 197 of the Labour Relations Act within this model of the employment relationship. Secondly, there is the view that parties should be free to conclude employment contracts but that, in the public interest, the interests of the weaker party require attention and are worthy of protection. The state thus has a role in ensuring that a disparity in bargaining power is addressed. This is done by establishing a so-called “floor of rights”.30 This model could also be explained as accepting the existence of moral claims to fair labour practices, as with human rights generally. In this case the role of the state should accordingly be to enforce those moral rights. Both are found in South Africa: a “floor of rights” as well as a fundamental right to fair labour practices.31

28 Rees B in Wedderburn and Murphy Labour Law and the Community (IALS 1982) 129. 29 Davies and Freedland Labour and the Law 25. Clearly, it is necessary that the law sees the

relationship as one based on a freely concluded contract, therefore upholding the tradition that compulsory labour is disallowed. However, as the authors so aptly explain, it is not true freedom but rather the use of words as symbols “expressing a policy, an aspiration, a tradition, and not as symbols denoting a reality”.

30 E.g. the BCEA. 31 S 23 of the Constitution of the Republic of South Africa.


9

Thirdly, there is the view that employment contracts are not merely an exchange, as is the case with commercial contracts. Hence, many contractual principles that have been developed for commercial contracts are inappropriate. Here an emphasis is placed on good faith performance. Each party can advance its own interests but only to the extent that those interests are compatible with the other’s. They should therefore also have a genuine concern for promoting the interests of the other party. Finally, there is the model that does not view the employment contract as a private transaction, but as one that ultimately concerns the wealth and welfare of society as a whole. Where the needs of society conflict with an individual need, the former must prevail. It is clear that managerial power might not always be a factor outweighing wider societal needs. For example, where managerial prerogative might have an interest in keeping certain records pertaining to the employment relationship confidential, society requires transparency and the disclosure of information, unless an acceptable justification for non-disclosure is shown to exist.32 It is submitted that inconvenience and pure economic costs would not add enough weight to the notion that the individual need of an employer should prevail over the welfare of society as a whole. The debate regarding the true nature of the employment relationship must be considered together with the issues of corporate social responsibility and industrial democracy, as well as the ensuing presumptions that flow from such issues. This is because protective labour law provisions require the impetus of an essentially political choice. Depending on one’s point of reference in this regard, all legal principles can be interpreted and emphasised in quite dissimilar ways. This thesis is based on the contention that the employment relationship should be acknowledged to be unequal. It is therefore submitted that the second model of the nature of the employment relationship, outlined supra, should be endorsed when interpreting and evaluating transfer provisions. It is argued that the right to fair labour practices requires employee protection in the wide sense, since the employment relationship is a much wider notion than that of the employment contract.33 It is submitted that when considering the position of employees and employers respectively, all rights and obligations originating from the employment relationship must be considered. Relevant statutory and collective rights and obligations must, therefore, also be considered and not only rights and obligations in terms of the contract. The de facto position that employees find themselves in should thus be viewed as a whole.

32 E.g., see s 16 of the LRA. 33 NAAWU v Borg Warner SA (Pty) Ltd 1994 15 ILJ 509 (A).

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In addition, as will be shown infra,34 this thesis contends that both the role that employees play in any undertaking and the interests of such employees in the modern company are greatly underestimated. This thesis also contends that the welfare of employees ultimately depends on the substantive provisions of labour law and that their welfare cannot be left to be catered for by the market or other branches of the law, including company law and the law of insolvency. 1.3 Corporate social responsibility It is a long-established principle that directors owe their duties to the company and not to the shareholders. This leaves employees in a rather precarious position, as they are frequently seen as mere workers and therefore outsiders, rather than stakeholders (if not shareholders) in the company. The question “for whom are corporate managers trustees?”, as debated by Berle, Means and Dodd,35 remains central to the role of employees and society in relation to the company. Many commentators have proposed the idea that corporate trusteeship should be redefined.36 This has led to deliberations relating to the concepts of “industrial democracy” and “powers in trust”. An important aspect of the safeguarding of employees’ rights in the event of transfers is the question of what role the employees or their representatives should play in the decision-making process that leads to the transfer.37 It seems that employees should at least be able to influence the decision to transfer as well as its implementation, but should not be able to veto it. The reason for this is based on the significance of certain commercial decisions relating to their interests as employees. This therefore “has more to do with industrial democracy than with acquired rights as such”.38 However, company law today remains largely unconcerned with employees, whose association with the company is the closest, and whose survival and dependency are largely determined by the management and the prosperity of the company where they spend the majority of their productive time.39 In South Africa, the Companies Act40 is

34 See par 1.3 & chapter 2 infra. 35 As discussed by Lord Wedderburn in “The social responsibility of companies” 1985

Melbourne University Law Review 4. 36 E.g., see Wedderburn “Trust, corporation and the worker” 1985 Osgoode Hall Law Journal

232. 37 As identified in Davies PL “Acquired rights, creditor’s rights, freedom of contract, and

industrial democracy” 1989 Yearbook of European Law 21 23. 38 See Davies in 1989 YEL 21-53. 39 Refer to chapter 2 infra for a comparative perspective on this issue.


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silent on the position of employees. Section 38 of the Insolvency Act41 provides for the termination of employment contracts in the event of the liquidation of an employer company (or the sequestration of the estate of an employer) and does not give much attention to their fate, except for confirming the right to claim compensation. In addition, provision is made only for very limited preferential claims.42 1.4 The Constitution of the Republic of South Africa 108 of 1996 and the

Labour Relations Act 66 of 1995 Every person has a fundamental right to fair labour practices43 and the Labour Relations Act gives expression to this right in a number of provisions. Of relevance here is section 197 of the Labour Relations Act. Section 197 must be interpreted in a way that complies with the Constitution and gives effect to the primary objects of the Act. Section 1 states that the purpose of the Act is to advance economic development, social justice, labour peace and the democratisation of the workplace by fulfilling the primary objects of the Act.44 The Explanatory Memorandum that accompanied the Draft Labour Relations Bill, provides for another purpose of section 197's provisions:

The Draft Bill explicitly deals with the employer's rights and obligations in the event of a transfer of an undertaking. This resolves the common law requirement that existing contracts must be terminated and new ones entered into, which leads to the retrenching of employees, the paying of severance benefits etc and escalates costs in a way that inhibits these commercial transactions. Provision is made ... for the automatic transfer of contracts of employment to the transferee provided that the employees consent to the transfer. All rights and obligations arising from the contract of employment are transferred. In the case of insolvency however the transferee does not take over the accrued entitlements of the employees and the transferor will be

40 61 of 1973. See Havenga MK Fiduciary Duties of Company Directors with Specific Regard

to Corporate Opportunities (UOFS 1998) chapter 9 regarding South African company law. 41 24 of 1936. 42 Refer to chapter 13 infra regarding transfers and insolvent undertakings. 43 S 23(1)(a) of the Constitution of the Republic of South Africa. 44 Which are: to give effect to and regulate the fundamental rights conferred by s 23 of the

Constitution; to give effect to obligations incurred as a member state of the International Labour Organisation (ILO); to provide a framework within which employees, unions, employers and employers’ organisations can bargain collectively; and to promote orderly collective bargaining at sectoral level, employee participation in decision-making in the workplace and effective resolution of labour disputes.

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responsible for settling claims arising from the employment contracts up until the date of the transfer. The transferee takes over the contracts of employment, but is only responsible for wages and claims arising from date of transfer. The purpose of this proviso is to avoid what might otherwise be an adverse effect of the liquidator’s ability to dispose of the undertaking.

In one of the most important judgements on this issue to date, the Labour Court stated that this is an area of legal regulation where the tensions between commercial interests and social policy for employees are at their highest.45 This underlines the brevity of the provisions of section 197 all the more. The section is the first of its kind in South African law and alters the common-law prohibition on transferring a contract of employment from one employer to another without the employee’s consent quite considerably, even though the section commences by giving legislative effect to this very principle. Several important labour law implications that are unavoidable in such a situation of restructuring are not dealt with at all in section 197 (for example dismissals, existing collective rights and duties, disclosure of information, the concept of a “going concern”, etc). It must, however, be remembered that the Act is largely the outcome of negotiations at Nedlac and could thus be described as a negotiated compromise. The whole legislative history must be taken into account when considering contentious provisions such as section 197, disclosure of information,46 closed shop agreements47 and many others. However, this still does not make the task of the Labour Courts (or for that matter of commentators) any easier. Employers and employees will have to map out a path for themselves from judgements (foreign and national), opinions and awards in order to avoid liability or to achieve the desired level of protection. The Labour Appeal Court, in Foodgro v Keil,48 had the following to say about the proper interpretation of these provisions:

The ease or otherwise with which businesses, trades or undertakings may be transferred, and the consequences flowing from these transfers for employers and employees alike, may be very important for the economic well-being of a country. There may indeed be very good economic reasons why the free and unrestricted transfers of businesses, trades and undertakings will promote commercial efficiency and thus ultimately promote

45 Schutte v Powerplus Performance (Pty) Ltd and Super Group Trading (Pty) Ltd 1999 BLLR

169 (LC). 46 S 16. 47 S 26. 48 1999 20 ILJ 2521 (LAC) 2524F-I.


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economic development. … The pursuit of economic development by means of a particular interpretation and application of the Act is, however, qualified by the injunction that it must be done in conjunction with other goals, namely those of social justice, labour peace and the democratisation of the workplace.

It is important to analyse and evaluate the provisions of section 197 in view of the conclusion that employees do have an interest in whom they work for and in continued employment in the event of a change in the identity of their employer, in order to establish whether this interest is satisfactorily protected or not. (It is once again submitted that this can only be done by also referring to other jurisdictions and their attempts at safeguarding the same.) South African labour law has seen some drastic changes since 1994 and the Labour Relations Act, Basic Conditions of Employment Act,49 as well as the Employment Equity Act50 represent three very progressive pieces of legislation. However, the law can only do so much. Ultimately the effectiveness of laws depends to a large degree on its acceptance by the public, knowledge thereof amongst the public as well as a willingness to use and embrace the law. The decision to include section 197 in the final Act was a policy decision, taken with due regard to general socio-economic as well as economic factors. Relatively few cases have been brought under section 197 to date and one will have to wait and see whether this position will continue, given that it certainly does not seem to reflect the actual state of affairs regarding the occurrence of problems surrounding the transfer of undertakings in practice.51 A very important consequence of a fundamental right to fair labour practices52 is that a purposive interpretation of labour legislation must be followed.53 The fundamental right to fair labour practices also obliges the legislator to have regard to the socio-economic interests of workers. Job security and employee protection in the wide sense would certainly qualify as such interests. The provisions of section 197 will be referred to throughout the remainder of this thesis. The main focus of this thesis will, however, not

49 75 of 1997. 50 55 of 1998. 51 See Emil Kanstinger v Doornbosch Restaurant CC (Case no. C295/98 (LC)) and Purefresh

Foods (PTY) Ltd v Advocate Dayal & Mervyn Roscher 1999 5 BLLR 518 (LC) for cases where s 197 was not invoked. See also Mdluli & others v Tillmore (Pty) Ltd 1999 20 ILJ 2626 (LC) for an example in which s 197 was unsuccessfully invoked.

52 S 23 of the Bill of Rights. 53 See also s 3 of the LRA regarding interpretation of that Act. Refer to Devenish GE A

Commentary on the South African Bill of Rights (Butterworths 1999) chapter 31 regarding Constitutional Interpretation .

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be on section 197 as such but rather to propose a general framework within which the interests of job security and legal certainty could best be attained. 1.5 The principles of job security and freedom of contract within a

constitutional framework It has often been stated that industrialised societies produce a special form of economic insecurity. This economic insecurity relates to the risk to an employee inherent in loss of income. There are two typical causes for such a loss: The loss of the possibility of work (unemployment) and the loss of the ability to work as a result of illness, injury, invalidity or old age.54 It thus becomes clear that the concept of work and the possibility of working and earning are central integrating factors for the individual in modern society. Where there is the risk of losing the ability to earn, there is also the danger of social exclusion. This, in turn, might not only affect the individual but could also lead to his/her family’s exclusion. Where possible, the occurrence of this risk should be prevented. If the risk should indeed occur, the need arises to restore (wherever possible) the status quo ante of the individual (helping him/her to return to work); or to provide for full or partial replacement of the individual’s previous income. Social insurance has thus been described in sociology as “a continuous process of social inclusion and, therefore the very opposite of exclusion.” This is because social security can replace some of the loss of income that takes place because the risk of losing the ability to earn materialises.55 At present, it can be extremely difficult for an employee to return to the market once he/she has lost his/her employed status, since competition is fierce and numerous arbitrary factors will play a role. The importance of provisions aimed at safeguarding continued employment on the same conditions and terms for individual workers cannot, therefore, be emphasised enough. When employees are faced with the termination of their services due to the transfer of an undertaking, they traditionally have to enter into negotiations for a new contract with the transferee. However, it should be clear that the more desirable position would be for employees to continue making their labour potential available to their employer, albeit a new or different employer. Even though this position firstly serves a social purpose, it is submitted that it also holds important economic advantages. These include a greater sense of loyalty to the undertaking, ensuring that on the date of the transfer

54 Greiner D, Urbani R, De Pauw R et al Autonomous and self-administered insurance against

employment accidents and occupational diseases: an expanded and integrated model of social protection (The Bureau of the Permanent Committee on Insurance Against Employment Accidents and Occupational Diseases) 1.

55 Greiner et al ibid 2.


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both the assets of the business and the workforce (who have the necessary skills and knowledge to operate the equipment/business) are transferred and preventing the “race to the bottom” phenomenon, which could only lead to long-term instability and unproductivity. It is a well-established principle that employees should enjoy a degree of job security. The law of unfair dismissal is thus farreaching and overrides the common law principle that the contract of employment may be terminated by giving reasonable notice.56 There are thus, in almost all national systems, general substantive restrictions on an employer’s power of dismissal and the termination of a contract of employment.57 Other important restrictions on “managerial prerogative” also commonly exist.58 This is often necessary in order to bring common-law principles within the framework of constitutional requirements. In the field of labour law, this need is especially important. Judicial intervention should be seen in view of the unsatisfactory and inherently unequal protection available in common law between a bearer of power and one who is subordinated due to that power.59 The following truism cannot be formulated in a clearer or more persuasive way:

… the common law knows nothing of a balance of collective forces. It is (and this is its strength and its weakness) inspired by the belief in the equality (real or fictitious) of individuals; it operates between individuals and not otherwise. 60

In a constitutional state, when the right to fair labour practices, the right to engage freely in economic activities (including freedom of contract) or the right to equality are involved in a scenario, these rights have to be analysed in order to identify their core value. Any limitation of a fundamental right must comply with the requirements of the limitation

56 See chapter VIII of the LRA. 57 The Englis h Courts recently began to highlight the latent potential of the contract of

employment as a means of protecting job security in the absence of statutory protection. Three examples are given by Ewing KD (“Job security and the contract of employment” 1989 ILJ (United Kingdom) 217), namely: a clause, however expressed, which provides a guarantee of no compulsory redundancies; a clause which provides that the employee shall be dismissed only for specific reasons and only in a prescribed manner; and a clause which provides than an employee has a contractual right not to be unfairly dismissed. The latter position is now also a feature of Australian labour law. See R. v Coldham ex parte Australian Social Welfare Union 1983 27 A.L.R. 263, Slonim v Fellows 1984 54 A.L.R. 673 and Re Ranger Uranium Mines Pty Ltd 1987 72 A.L.R. 1 (all decisions of the High Court of Australia).

58 E.g., see the far-reaching rights to consultation and joint decision-making that a statutory workplace forum enjoys in terms of ss 84 and 86 of the LRA 66 of 1995.

59 See the discussion supra in par 1.2 regarding the nature of the employment relationship. 60 Davies and Freedland Labour and the Law 12.

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clause in section 36 of the Constitution.61 When following a formal approach to equality, it might be accepted that freedom of contract exists and judicial intervention should therefore only be to ensure that pacta sunt servanda. However, when a substantive approach to equality is accepted, a conceptual notion of freedom must be considered. There are thus two possibilities: Firstly, it could be argued that there is no real freedom of contract (equality) in an employment relationship and that it is therefore impossible for this principle to be infringed by protective legislation. Secondly, it could be argued that, although freedom of contract (equality) between parties to the employment contract is severely curtailed (for example a person under 15 years cannot conclude a valid employment contract; an employee cannot validly promise to work 50 hours per week; and an employee cannot generally demand specific terms), such conceptual freedom does exist. Any limitation of this principle should therefore be contained in a law of general application and should be reasonable and justifiable in a society that is based on equality, human dignity and freedom. Under the first scenario mentioned above, transfer provisions will not infringe the substantive core of any fundamental right such as equality, and it will thus not be necessary to show the justifiability of the “limitation”. Under the second scenario, it might be necessary to limit symbolic freedom in a given case, in order to give effect to other valid moral rights. The contract of employment can be regarded as a sui generis contract that encompasses a qualified concept of equality. Here, provisions regarding the automatic transfer of contracts of employment may be required to be subjected to the limitation test in section 36 of the Constitution.62 Section 36 provides for the limitation of rights in the Bill of Rights, in terms of law of general application, provided that the limitation is reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom taking into account all the relevant factors, including:63 • the nature of the right; • the importance of the purpose of the limitation; 61 See Davis D “Constitutionalization of labour rights” in Van Wyk D, Dugard J, de Villiers B

and Davis D Rights and Constitutionalism: The New South African Legal Order (Butterworths 1996) 439; Olivier MP “A charter for fundamental rights for South Africa: Implications for labour law and industrial relations” 1993 TSAR 651; and Kahn-Freund O “The impact of constitutions on labour law” 1976 Cambridge Law Journal 240.

62 This approach would imply that recognition is given to the fact that freedom of contract does exist. It is submitted that this cannot be faulted as long as it is remembered that wh at really exists is the concept of freedom and not the reality/actual fact of freedom.

63 In the German and Canadian systems, it is generally accepted that criteria such as the following should be considered when justification for the infringement is at is sue, namely: (a) Does the limitation serve a legitimate purpose of sufficient importance? (b) Is there a sufficient relationship between the limitation and the purpose, in other words, does the limitation not restrict the right in question more than is necessary? (c) Is there no other reasonable alternative through which the objective can be attained? See in this regard Ferreira v Levin NO; Vryenhoek v Powell NO 1996 (1) BCLR 1 (CC); 1996 (1) SA 984 (CC).


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• the nature and extent of the limitation; • the relation between the limitation and its purpose; and • less restrictive means to achieve the purpose.64 It is important to note that a two-stage process is still apposite under the final Constitution.65 The first stage involves asking the question: has there been an infringement of a right protected by the Bill of Rights?66 Only when a relevant fundamental right has been infringed does the second stage become operative. This stage involves asking, first, whether the policy underlying the act or omission that caused the infringement is reasonable and justifiable,67 and secondly, whether an acceptable method has been used for its implementation.68 The fundamental rights involved in casu are the right to equality, the right to participate freely in economic activities and the right to fair labour practices.69 The first stage of the enquiry necessitates that, before one considers the goal of transfer provisions and the means implemented to attain that goal, one must first consider the exact nature and content of the fundamental rights that are applicable. The right to equality The right to equality before the law does not require that all persons must be treated identically in all circumstances.70 It has been held that it is just as important that those who are different should be treated as such, and that those who are alike should be treated in like manner.71 Different classes, individuals and groups may thus be treated

64 See Devenish A Commentary on the South African Bill of Rights 542. Devenish states (542

fn 14) that the formulation of these five considerations was taken from the judgment of Chaskalson P in S v Makwanyane 1995 3 SA 391 (CC) at par 104. See also Moonsammy v The Mailhouse (1999) ILJ 464 (CCMA). In S v Makwanyane, the President of the Court, President Chaskalson, held in this regard: “In the balancing process, the relevant considerations will include the nature of the right that is limited, and its importance to an open and democratic society based on freedom and equality; the purpose for which the right is limited and the importance of that purpose in such a society; the extent of such limitation, its efficiency, and ... whether the desired ends could reasonably be achieved through other means less damaging to the right in question” (par 104).

65 Devenish Commentary 543. 66 Devenish Commentary 544. 67 See R v Oakes 26 DLR (4th) 200; R v Bryant 10 DLR (4th) 321. See also Cachalia A et al

Fundamental Rights in the New Constitution (Juta 1994) 106–110. 68 Devenish Commentary 545. 69 The right to freedom of association could perhaps also impact to a degree. However, it is

submitted that these other fundamental rights are more to the point. 70 See Devenish Commentary 43-45 regarding the right to equality in a substantive sense. 71 See Devenish 43 and Prinsloo v Van der Linde 1997 6 BCLR 759 (CC).

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differently.72 What is important is that these classes should not be treated differently in a capricious or arbitrary way. In this regard, it has been held that the principle of equality before the law also has relevance to legislation. Legislation is therefore not precluded from distinguishing between various groups of persons for certain purposes. However, the classification must be founded on intelligent differentia as the basis for the distinction, and such differentia must have a rational relation to the objective that the legislation seeks to achieve.73 The right to equality will also be important where one finds, on the one hand, that freedom of trade and occupation are sanctioned, but on the other hand, that the right to fair labour practices is guaranteed. There is, however, another issue that must be addressed: whether the right to equality is limited by affording the employee a right to object to the transfer of his/her contract of employment,74 while not granting the concomitant right to the new employer. If so, the issue then is whether it is a valid limitation. Every person has a right to equality and to equal protection under the law.75 For the fundamental right to equality to be limited, the limitation must comply with the general requirements for limitations of fundamental rights in section 36 of the Constitution. Before this test becomes relevant, however, it must be certain whether a right is actually being infringed or whether infringement is imminent. Firstly, it is submitted that the employer’s right to equality could only be said to be infringed if a formal approach to equality is followed. In terms of this approach, both parties to the relationship are viewed as equals, with equal bargaining power. It is evident that this view of the employment relationship cannot be accepted.76 Secondly, even if it is accepted that the right to equality is being infringed, there does not seem to be any other reasonable alternative to achieving the said goal of greater protection of job security.77 If the transferee is granted a choice as to whether or not to take over the employees and it is only required that he/she take over the employees with the continuation of prior existing rights and duties if he/she chooses to take them over, this

72 Granting an employee a power to object to the transfer of his/her contract but not granting a

similar power to a transferee to refuse to take over some or all of the transferred employees, is an example of differential treatment of differently situated parties.

73 Devenish (Commentary 44) where reference is made to Mfolo v Minister of Education, Bophutatswana 1994 1 BCLR 136 (B). Regarding constitutional review, the Canadian case of R v Oakes involves a judicious weighing-up of competing jurisprudential and other relevant issues, using the principle of proportionality. Law must thus be geared to the objective it seeks to achieve, and must consequently form part of the quantifiable causal relationship between the means and the end aimed at achieving a desired result (Devenish 545).

74 Assuming for this moment that such a right does exist in South Africa. See chapter 7 infra . 75 S 8 of the Constitution of the Republic of South Africa. 76 See Devenish (Commentary 39) where he refers to “[t]he myth of equality before the law”.

It is stated that s 9, from its wording, requires “a broad judicial examination of equality relating to both formal and substantive issues”.

77 See the discussion infra under the heading Is the policy underlying the act or omission that caused the infringement reasonable and justifiable, and has an acceptable method been used for its implementation?


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will result in these protective measures being voluntary, which is clearly not useful. In fact, such regulation would probably dissuade a potential transferee from taking over any employees at all from the undertaking that is being transferred. The right to freedom of trade, occupation and profession The right to freedom of trade, occupation and profession in section 22 of the Bill of Rights only protects natural persons and not juristic persons.78 Devenish states the following in this regard: 79

[T]he presence of economic freedom does not mean that there are no constraints on the exercise of economic activity, since such freedoms are not absolute. The right to engage in economic activity most certainly does not mean that the public must be subjected to unconscionable exploitation by entrepreneurs determined to extract maximum profits.

It might be said that even though all of the above is true, the fundamental principle of freedom of contract, which is the basis of all contractual relationships (not only the employment relationship) should still be considered further. It is quite clear that measures safeguarding employees’ rights in the event of a transfer must necessarily infringe upon this principle in some way. Does the employee not have a right to choose his/her own employer? Does the employer not have the right to choose his/her own employees? It is submitted that the answer to this problem depends largely on what one’s notion of “freedom” is.80 Since the principle of freedom of contract in modern society tends to operate to the advantage of the stronger party, it is the employer who benefits from this notion. The answer that has arisen to this state of affairs is the counter-claim of a so-called “right to work”.81 To be “free” to employ whomever you want on whatever terms you want, is thus symbolic rather than realistic. It is a freedom that exists within certain constraints that are generally in place for the good of society as

78 See S v Lawrence 1997 4 SA 1176 (CC) with regard to determining the ambit of s 22. 79 Commentary 307. 80 In South Africa, other measures exist that might prima facie seem in conflict with the

principle of freedom of contract as well (e.g. job applicants are protected from unfair discrimination by the provisions of chapter 2 of the Employment Equity Act 55 of 1998 (EEA)). However, one has to take all relevant circumstances into consideration, including the purpose of such measures, as discussed infra.

81 See chapter 12 infra.

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a whole. It could thus be argued that freedom only exists in so far as it is not in conflict with other moral rights that exist in society.82 The right to fair labour practices Section 23 of the Bill of Rights states that everyone has the right to fair labour practices. The unfair labour practice jurisdiction of the old Industrial Court, which was essentially discretionary, is thus replaced by this provision. The right to work is not included in section 23.83 Although the rights in section 23 are not absolute, they should be interpreted “generously and in a values-based manner”.84 Has there been an infringement of a right protected by the Bill of Rights? When considering these fundamental rights it is not certain whether an infringement of such rights can be said to exist, owing to the provision of continued employment in the face of a change in the legal identity of one’s employer.85 However, even if it were to be found that an infringement does exist, it is submitted that a consideration of the factors listed in section 36 will justify any such limitation. Is the policy underlying the act or omission that caused the infringement reasonable and justifiable, and has an acceptable method been used for its implementation? When considering the purpose and importance of the limitation, it appears that the goal of provisions for the automatic transfer of employment contracts is to put employees in a better position than they would have occupied according to the common law in similar circumstances. The aim is therefore to avoid the automatic termination of their contracts and to provide for the continuation of their existing rights and duties against the new employer. (It should be kept in mind in this regard that there is a right to dismiss on the basis of an employer’s operational requirements. However, the sole fact of a transfer should not be sufficient to constitute such operational requirements. 82 Refer to par 1.2 supra regarding the second model of the employment relationship that takes

into consideration the interests of other parties and of society, as well as those of the employee and employer.

83 See chapter 12 infra. Devenish (Commentary 322) states that such a right cannot conceivably be guaranteed in an essentially free enterprise economic system.

84 See Devenish (Commentary 321) where he also states that these rights must be interpreted purposively. The author states that effect must be given to the intent ion that underlies the rights, but this must be done holistically, in the light of the Bill of Rights as a whole and in accordance with its ethos and spirit.

85 Based on the acceptance of the notion of substantive equality rather than formal equality. In addition, see the comments made regarding a conceptual notion of freedom of choice and the sui generis nature of the contract of employment.


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Should the new employer, however, experience real technological, structural or organisational changes, he/she would of course not be prevented from treating the transferred employees in the same manner as he/she would be able to treat his/her own employees.) It follows that the policy that underlies these measures is that of job security. This involves a recognition, as shown above, that employees have other worthwhile interests in their employment than merely economic ones. That the provisions of section 197 of the Act are primarily aimed at the further protection of employees, was quite apparent to the Labour Appeal Court in the case of Foodgro, A Division of Leisurenet Ltd v Keil.86 The Court stated, per Froneman DJP that:87 • If the purpose was to make it as easy as possible for purchasers to acquire a

business from another without incurring obligations to existing employees, the introduction of section 197 would have been unnecessary. The common law would have catered adequately for that situation;

• The provisions relating to automatic transfers of contracts of employment (section 197(1) and (2)) and the non-interruption of an employee’s “continuity of employment” (section 197(4)) secure advantages not previously enjoyed by employees;

• Even after automatic transfer of contracts of employment under section 197, employees may still unilaterally resign from employment without attracting additional sanction under the Act. An employer only has the ordinary contractual remedies against such employees;88

• New employers, however, become subject to the additional sanctions or remedies under the Act upon transfer of the employment contract.

Thus, the employment contract cannot be seen as a purely commercial contract. Other models construing this relationship must rather prevail. This results in an acceptance of the inequality that exists in all employment relationships. It is consequently submitted that the goal of transfer provisions is a legitimate and important one. In the case of insolvent companies (or in the event of a scheme of arrangement or a compromise),89 the obvious aim is to preserve employment, but not necessarily the rights and obligations flowing from such employment. At common law the insolvency of the employer constitutes breach of contract, entitling the employee to claim damages.90 It is often argued that measures regulating the transfer of contracts are contra- 86 1999 20 ILJ 2521 (LAC). 87 2525D-G. 88 See chapter 7 infra regarding criticism of the interpretation that employees can be

transferred in the absence of consent thereto. Such an interpretation certainly does not seem consistent with the purpose of employee protection.

89 S 197(1)(b) of the LRA. 90 Clark v Denny 1884 EDC 300 302. See also s 38 of the Insolvency Act.

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productive and that these will actually discourage the salvaging of insolvent undertakings. Be this as it may, in South Africa at least, there could also be an argument that this is a risk worthwhile taking, considering the predicament that employees of an insolvent undertaking face (for example, there is no system of guaranteed payments). (This is strengthened by the fact that there is no factual basis for this claim about a negative impact on rescues of insolvent undertakings.91) One could argue, that at least in those instances where the undertaking is transferred as a going concern (even if there are only a few such transfers), the employees would enjoy the right to continued employment. A supporting view would hold that even a small number of employees in a relatively more advantageous position is necessarily preferable to the possibility of more jobs being rescued because of the possibility of salvaging more undertakings. The position of insolvent undertakings and rescue proceedings will be discussed in a separate chapter of this thesis.92 It might, however, be pertinent to refer to another argument here (which would also be relevant to the equality debate). When the law of insolvency comes into play there is a clash between the acquired rights93 of the employees in transfer-cases and the property rights of the other creditors.94 There is thus a disturbance of the creditorum concursus, as well as the amount of money available to be distributed.95 But this is not a totally unique situation, since it is already the case due to the preferential claims (although these may be limited) of employees in insolvency situations. If one turns to the factors of the relation between the limitation and the goal (is the limitation reasonably connected to the goal it seeks to attain?) and whether there are not less restrictive means to achieve the objective, it is very difficult to foresee any other way of ensuring continuation of employment on the same terms and conditions after a change in the legal identity of the employer, if this is not done through judicial intervention. This is because of economic circumstances and the lack of protection that exists in terms of the common law. The transfer of employment contracts must therefore be provided for through statutory intervention. It will not be sufficient to give a transferee the option of whether or not to take over existing employees and to make section 197’s applicability a condition of such choice, since such regulation would mean

91 The author has not been able to find any materials with statistics to back the claims made in

this regard. It seems that no empirical data exist in this regard. See also chapter 13 infra . 92 See chapter 13 infra. 93 I.e. rights and obligations originating prior to the transfer of the insolvent undertaking that

is transferred to the transferee. 94 See Davies 1989 YEL 21-53. 95 See chapter 13 infra.


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that the effect of the said section is absolutely superfluous.96 It is proposed that no transferee will take over employees in the absence of a statutory duty to do so, knowing full well that such an action would result in the protective measures of section 197 coming into effect on the interpretation outlined supra. There should thus be an automatic transfer of contracts. The interpretation that South African Labour Courts have endorsed on occasion (namely that section 197 only applies where the transferee freely takes over employees and that the section then ensures that, where an employee is transferred without his/her consent, the protection in section 197(2) and (4) applies) is not acceptable. It also seems as if fairness and legal certainty dictate that the protection in section 197 should be available to all existing employees, and not only to a few employees who have been handpicked by the transferor and transferee.97 In the case of insolvent undertakings it could be argued that the legislator could make the option of rescuing such entities more attractive, thus ensuring that job opportunities are preserved. However, it has been shown internationally that rescue proceedings usually entail massive job cuts. It is therefore submitted that the encouragement of rescues would thus not be a solution on its own. Employees need further protection in the event of the transfer of an undertaking in the course of such rescue proceedings. This thesis will continue on the assumption that there is a rational and justifiable relation between any limitation contained in section 197 of the Labour Relations Act and the goal of job security.98 The arguments advanced regarding the question of whether employees do have an interest in the continuation of their employment that is worthy of legal protection, are also relevant in this regard. 1.6 Social values in South African labour law As stated above, South Africa has seen some progressive legislation in the labour law field recently and provisions emphasising socio-economic rights of workers have contributed to this.99 Apart from the said legislation, the major roleplayers in South African labour law have also shown a commitment to the same.

96 See the discussion infra in chapter 7 regarding the effect of s 197 and whether it results in

the automatic transfer of all existing contracts of employment when a going concern is transferred or not.

97 Regarding selective treatment of employees, see also s 186(d) LRA. 98 If it was found that there is indeed an infringement or an impending infringement of a

fundamental right, which is highly unlikely, having regard to the above discussion. 99 There are numerous examples, including: the right to protest action in advancement of socio-

economic rights (s 77 LRA); transfer of undertakings (s 197 LRA); reduced hours of work (s 9 BCEA); stringent requirements regarding night work (s 17 BCEA); the introduction of family responsibility leave (s 26 BCEA), etc.

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The Trade and Industry Chamber of Nedlac has been deliberating the issue of a link between labour standards and trade since June 1995. This followed commitment by the social partners (government, labour and business) in what was then the National Economic Forum to explore the social clause in the context of trade liberalisation in South Africa and the General Agreement on Tariffs and Trade (GATT) Uruguay Round trade negotiations. Deliberations on the issue have focused mainly on the proposal by labour, supported by business, that a social clause linking market access to respect for labour standards be included in all South Africa’s bilateral and multilateral trade agreements, including agreements with countries in Southern Africa and with the World Trade Organisation (WTO). The social partners in Nedlac have reaffirmed their unequivocal commitment to human rights and workers’ rights, both within South Africa and internationally. This is consistent with the history of the struggle for human rights in South Africa and is the cornerstone of South Africa’s new democracy. The social partners further reaffirmed the principle that economic growth and development must be underpinned by a commitment to social justice, including respect for universally recognised labour standards. The social partners affirmed that trade and investment liberalisation and the integration of the South African economy into the global economy must promote economic and social progress and not undermine social protection. To this end, they commit themselves to working together within the tripartite framework of Nedlac to ensure the ratification and observance in South Africa of the core ILO conventions embodying universally recognised labour standards.100 South Africa has, inter alia, ratified conventions 87, 98 and 111. It is recognised that, in the relationship between trade and worker rights, increased liberalisation of trade should be accompanied by the harmonisation of labour standards and the observance of core ILO conventions. This will allow a process of greater integration, thus improving rights and conditions of workers to a higher level, rather than lowering them to the lowest prevailing standards. Several provisions in the Labour Relations Act are consistent with this approach, including section 197. Protocol 14 of the European Community Treaty on Social Policy, the Agreement on Social Policy and the Amsterdam Treaty101 signify the importance of social rights in labour law. Section II of the Amsterdam Treaty, entitled “The Union and the Citizen”, contains an amended

100 These conventions are: Number 29 on forced labour (1930); Number 87 on freedom of

association and the protection of the right to organise (1948); Number 98 on the right to collective bargaining (1949); Number 100 on equal remuneration (1951); Number 105 on the abolition of forced labour (1957); Number 111 on discrimination (1958); and Number 138 on minimum age (1973).

101 CONF/4001/97, 19 June 1997.


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chapter on social policy. In essence, the Social Policy Agreement of the Maastricht Treaty will constitute the new Social Chapter of the European Community Treaty. It is clear that the employment chapter does not envisage deregulation as a means of realising full employment. Article 2 talks of “a high level of employment and social protection”: it could therefore be concluded that the reference to a “high degree of competitiveness” does not suggest competition at all costs but competition based on a skilled, flexible and productive workforce. According to some academics abroad,102 this is consistent with the view expressed by the European Community Commission103 that social protection is a productive factor, and that labour standards are seen as an input into the process of enhancing economic competitiveness, rather than simply as a cost of production. It is submitted that it is impossible to expose and understand the policies of government that underlie a system of law. However, it is suggested that South African labour law has indeed come a long way (at least since the true function of our labour law was defined in 1980 as “the preservation of the social and economic structures prevailing in society at any given moment by the confinement and containment of the basic conflict of interests inherent in the relationship between employer and employee”).104 The legislator should at least be applauded for including provisions concerning job security, in addition to the law on unfair dismissal, in our Labour Relations Act.

102 Barnard C “The United Kingdom, the ‘Social Chapter’ and the Amsterdam Treaty” 1997 ILJ

(United Kingdom) 275 281-282. She also refers to Deakin and Wilson “Rights v Efficiency? The economic case for transnational labour standards.” 1994 ILJ (United Kingdom) 289.

103 E.g. COM (97) 102. 104 Davis D “The functions of labour law” 1980 CILSA 212 216.

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1.7 Concluding remarks

The locatio conductio operarum is a personal contract between employer and employee. The employment relationship that ensues from this contract is an unequal one resulting in the need for protective labour legislation.105 Provisions for the automatic transfer of employment contracts in the event of the transfer of an undertaking, trade or business as a going concern are aimed at safeguarding the position of employees in order to ensure that the mere change in the legal identity of the employer for whom they work does not per se result in their services either being terminated or being continued on lesser terms and conditions. This is necessitated by the common-law position in terms of which a transferee would have no legal obligation to engage employees, to do so on any prearranged terms and conditions, and, furthermore, to respect seniority, continuity of employment and so forth. Subject to anti-discrimination laws, the transferee could be entirely selective about whom to re-engage on whichever terms and conditions he/she/it prefers.106 It is submitted that this protection is not restricted to rights and obligations originating from the contract of employment as such,107 but rather that it should be viewed as employee protection in the wide sense. This would encompass statutory rights and obligations,108 aspects relating to social security109 and aspects pertaining to employees’ collective rights, including those of their representatives.110 It is submitted that the employment relationship, although based on a contract, is a relationship based on a sui generis contract where both parties are protected but where the interests of the weaker party (the worker) deserve special protection. In this chapter attention was also drawn to the fact that the role of employees in company law and insolvency law has been greatly neglected and that these branches of the law will have to bestow greater attention on the individuals who contribute greatly to companies’ profit and who are dependant for their livelihood upon their employers’ continued existence and economic well-being.111 This statutory protection differs significantly from the common-law position112 where all the parties involved would have had to consent to the transfer of contracts and where all the parties were deemed to be equals. Convincing arguments have been put forward

105 In this regard, see the remarks of Marais J in Martin v Murray 1995 16 ILJ 589 (IC) at 610C-F

regarding the deficiencies of the common-law contract of employment. See also Grogan J Workplace Law (Juta 2001) 4-6.

106 See McMullen J Business Transfers and Employee Rights (Butterworths 1998) Intro/4. 107 E.g. see s 197(2) that refers to “all the rights and obligations between the old employer and

each employee”. 108 See chapter 8 infra. 109 See chapter 10 infra. 110 See chapters 9 & 11 infra. 111 See chapter 2 infra. 112 See chapter 4 infra.


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that this approach is no longer tenable, since the principle of substantive equality involves treating differently situated parties differently. However, since employees are not cattle to be bought and sold with an undertaking, transfer provisions must provide employees with the power to object if they do not wish to make use of the protection that is available.113 Even though a transferee does not have a similar right to refuse the transfer of contracts, it has been submitted that this is for good reasons. It is argued that constitutional principles require a wide and purposive interpretation of statutory provisions contained in all labour laws in order to give effect to the fundamental right to fair labour practices.114 It is also proposed that economic and commercial efficiency cannot be pursued for without taking into account socio-economic and other factors in South Africa. This is because the values of social justice, labour peace and the democratisation of the workplace have an important role to play in all workplaces in South Africa.115 The importance of social inclusion of individuals in our society and the terrible consequences of the loss of the ability to earn are highlighted in order to emphasise the importance of job security in all free market economies, including that of South Africa. Finally, an attempt was made in this chapter, to illustrate that provisions for the automatic transfer of employment contracts, with the retention of rights and obligations that existed prior to a relevant transfer, are not unconstitutional in any way, having regard to equality arguments and the principle of freedom of contract. It is submitted that, even if it could be argued that some limitation of one or more fundamental rights is involved (which is highly debatable), such limitation will be justifiable in view of the limitations clause contained in the Constitution.116 Statutory provisions of this kind bring about several labour law implications. These have been dealt with in diverse ways in different countries. One dynamic that can be identified, and which is common to most countries, is that although transfer provisions have certain economic advantages, this principle has an important social component in most instances. The Labour Court and Labour Appeal Court have recognised that this is also the case in South Africa.117 It is submitted that transfer provisions formally import a new social value into South African labour law, one that is on par with international trends in this regard. What is more, it is strongly advocated that there is indeed a crying need for such transfer provisions and that their enactment was long overdue.

113 See chapter 7 infra. 114 S 23 of the Constitution. 115 In this regard, see the judgement of the Constitutional Court in Hoffmann v SAA 2000 12

BLLR 1365 (CC). 116 S 36. 117 See Foodgro, A Division of Leisurenet v Carol Keil (supra).

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This thesis thus endeavours to draw attention to the importance of transfer provisions for all workers and to the various labour law implications that result from statutory interventions of this kind. To this end the rest of this thesis considers the different conceptual notions that are applicable before the transfer of a business, trade or undertaking, or part thereof, can be said to have occurred (as a going concern). The thesis also examines the legal and social consequences that are applicable where the same has occurred. Finally, a draft statutory provision is provided that is believed to incorporate the principles that have crystallised in the research undertaken culminating in this thesis.


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CHAPTER TWO

LABOUR IS NOT A COMMODITY: SOCIAL PERSPECTIVES ON COMPANY LAW

2.1 General There are some cross-cutting issues covering company law and labour law as far as transfers of undertakings are concerned. Prescriptions relating to the automatic transfer of rights and duties and employment contracts have an impact on the prerogative of management. It should also be noted that there are generally limitations to the scope of transfer provisions and employee protection derived therefrom. For example, these provisions only apply to a transfer from “one person to another”. Take-overs of companies by way of the acquisition of share capital are thus not covered. In this regard it is argued that if a company is taken over by way of the acquisition of share capital, no changes in the identity of the employer take place and ipso facto, no breach occurs in the contract as the parties thereto remain the same.118 This chapter does not even attempt to cover this stimulating field extensively; instead, some general observations are included in order to focus at least some small measure of attention on the relevance of these issues to labour law strategies and principles in general and to the transfer of an undertaking in particular. A company is an association of a number of persons for a common object, normally the economic gain of its members.119 However, many non-profit bodies have also set themselves up as companies today. Trading concerns and profit-making are thus no longer requirements for being a company. Social reformers often describe the responsibility of business in broad and sweeping terms, generally extending this responsibility, unlike traditional notions, to include social responsibility. For such commentators, modern business entities not only have the status of legal persons before the law, but have also come to take their place alongside natural persons as the basic actors of which society is composed.120 This elevated position in which they find

118 See chapters 5 & 6 infra . 119 Havenga MK Fiduciary Duties of Company Directors with Specific Regard to Corporate

Opportunities (UOFS 1998) 1 states that “[a] company is a legal entity or juristic person which exists separately from its management and shareholders. The functions and responsibilities of corporate directors arise by virtue of this nature of a company”.

120 See Botha D “The changing business of business in South Africa: some comments on developments in the scope and control of the social responsibility of business in South Africa” 1994 SA Merc LJ 90 91.

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themselves is far removed from the traditional free-market notion that the only responsibility of a company is profit maximisation for the shareholders. Company law regulates the actions of companies in the market. Unfortunately, very little attention is bestowed on the interests of employees in company law, either nationally or internationally. As far as insolvency law is concerned, the position is not much different. There would thus seem to be a vacuum in research in this field, since it certainly cannot be argued that employees are not closely connected to the companies they work for and on which their livelihoods depend. Employees deserve to have more attention paid to their often precarious position. As it has been stated: “[I]t is only proper that a man who has devoted his working life to a company, and so has put capital into it, just as much as any investor, has the assurance that his interests are being taken into account.”121 Even though little of this is apparent in South African company law, various avenues have been pursued to enhance the position of the employee within the field of corporate law. Generally, these avenues can be divided into two types: The first seeks to ensure that corporations pay attention to the interests of their employees, communicate with them (particularly on day-to-day issues that concern them) and act in ways that sustain and enhance their reasonable expectations. The second attempts to provide employees with positions of influence in terms of the corporate decisions that affect them and thus accords them a role in corporate decision-making. It is submitted that greater interdisciplinary research and cognisance of differing interests and stakeholders are needed when considering issues that may have a profound impact on both the economy of a country and the wellbeing of employees. In South Africa, section 210 of the Labour Relations Act provides that this Act (the Labour Relations Act) enjoys preference over all other Acts save the Constitution and any Act that expressly amends the provisions of the Labour Relations Act. Only when the whole framework of a statutory system is considered can informed policy decisions be made regarding whether or not and how to implement legislation that alters the common law. 2.2 Labour is not a commodity The principle that “labour is not a commodity” is one of the fundamental principles of international labour law. This is because of the Philadelphia Declaration of 1944 in which the revised Constitution of the International Labour Organisation (ILO) used this 121 Mackenzie AL “The employee and the company director” 1982 New Law Journal 688.


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phrase as the first of the principles on which the organisation is based. This principle has been widely acknowledged. For example, article 23 paragraph 3 of the United Nations Universal Declaration of Human Rights proclaims that every worker has the right to just and favourable remuneration, ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.122 This principle can perhaps best be described as being made up of three interrelated elements.123 As applied by Dr. John Kells Ingram,124 it firstly means that the pricing of labour cannot be left solely to the operation of the labour market. Thus, the level of wages should be such as to provide a reasonable standard of living for a worker and his/her family. Secondly, as applied in Nokes v Doncaster Collieries,125 the principle also means that a worker cannot be transferred from one employer to another without the worker’s consent. An example is the case of Katsikas v Konstantinidis,126 where the European Court of Justice had to decide whether, under the Acquired Rights Directive, an employee in a business that was being transferred as a going concern had the right to refuse to enter the employment of the transferee. The Court held that such an obligation to transfer would undermine the fundamental rights of the employee who must be free to choose his/her employer and cannot be obliged to work for an employer that he/she has not freely chosen. As applied by the ILO, the principle means, thirdly, that illegal trafficking in migrant labour and fee-charging employment agencies should be outlawed.127 Some authors have argued that, given the economic benefit in terms of productivity and improved labour-management relations, together with increased labour awareness, the opposition to employee participation and the consideration of employees’ interests might be a question of power and control, rather than one of economics.128 In other words, it is perhaps a political and a social issue rather than an economic one. At the heart of this debate is the question of an absolute free market-system versus a market

122 See also art 4 of the Council of Europe’s Social Charter of 1961 and the Community Charter

of Fundamental Social Rights for Workers, art 5. 123 See O’ Higgins P “Labour is not a commodity – an Irish contribution to international labour

law” 1997 ILJ (United Kingdom) 225 230-231. See also Olivier MP “Die belang van status en kontrak vir die diensverhouding” 1993 TSAR 17.

124 Work and the Workman (Dublin 1928). First edition in pamphlet form in Dublin in 1880. 125 1940 AC 1014. 126 1993 1 CMLR 845 (ECJ), 1993 IRLR 179 (ECJ). 127 Convention No. 34 on Fee-Charging Employment Agencies of 1933; Convention No. 88 of

1948 on Employment Service and Convention No. 96 of 1949 (Revised) on Fee-Charging Employment Agencies. See also Convention No. 143 of 1975 on Migrant Workers (Supplementary Provisions).

128 E.g. Axworthy CS “Corporation law as if some people mattered” 1986 University of Toronto Law Journal 392 395-396.

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within which certain values (for example, “labour is not a commodity”) are upheld. This debate should now take place in the context of company law, labour law, free trade and globalisation. Perhaps the capital-labour relationship is of necessity an unequal relationship. However, it can and should be less unequal than it has traditionally been, having regard to the increasing awareness that workers constitute by far the most important resource in an organisation.129 As stated by an eminent scholar, the issues involved span not only pure law but also economics, politics, sociology, philosophy and ethics.130 In this regard, Tannenbaum made the following statement as far back as 1951:

We have become a nation of employees. We are dependent upon others for our means of livelihood, and most of our people have become dependent upon wages. If they lose their jobs they lose every resource, except for the relief supplied by the various forms of social security. Such dependence of the mass of the people upon others for all their income is something new in the world. For our generation, the substance of life is in another man’s hands.131

2.3 Theories and models of companies132 It is important to consider the purpose and goals of the phenomenon of a company. Such purpose and goals form the foundation of the company and are vital if the company is to have any direction at all. A company model should be identified that allows for governance that takes diverging parties’ interests into account, while making commercial decisions that reward the commercial endeavours of the company.

129 See Xuereb PG “The juridification of industrial relations through company law reform” 1988

Modern Law Review 156 159. See also Olivier MP 1993 TSAR 17. Olivier (1993 TSAR 22) argues that a pure contract model of the employment relationship is inappropriate. He argues convincingly: “’n Ondersoek na die grondslag van die dienskontrak wat bloot juridiese gegewens in ag neem, sal uit die aard van die saak ’n gebrekkige beeld van die volle waarheid bied. Daar is ook ander feite en realiteite van die daaglikse werklikheid wat ’n belangrike rol speel.” The following factors are highlighted by Olivier: the existence of an unequal relationship, the control and authority that an employer possesses by necessity, the nature of rights and obligations originating from common law, the inflexible and individualistic nature of our common law, and the role of legislation, collective bargaining and case law.

130 Hodes L “The social responsibility of a company” 1983 SALJ 468 485. 131 See Olivier 1993 TSAR 25 where he quotes from A Philosophy of Labor (1951) 9. See also

Drake CD “Wage-slave or entrepreneur?” 1968 The Modern Law Review 408. 132 This discussion draws heavily from a paper presented by Janet Dine at the Law Faculty of

the Rand Afrikaans University Recent Company Law Developments in the United Kingdom (1997). See also Dine J “Company law developments in the European Union and the United Kingdom: confronting diversity” 1998 TSAR 245.


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Numerous models of the company are discussed below: 2.3.1 The contractual theory of company law In terms of the contractual theory, two or more parties come together and agree to carry on certain commercial activities. The company is thus established or born and the “interests of the company” are limited to the interests of the contracting parties. Consequently, the social responsibility of the company is limited because the right to contractual freedom and the right to free trade are considered to be supreme. 2.3.2 The concession theory In the concession theory, the company may firstly be seen as a concession by the State which grants the ability to trade using the company as a corporate tool with limited liability. This theory considers other interests besides those of the founders. It also allows for greater State interference/regulation. Secondly, it is sometimes proposed that the company, although founded by the contractors, is a separate entity, distinct from the founders and with its own interests. This theory leaves room for a constituency model. This is because the interests of the company are no longer limited to those of the contracting parties, as other parties (for example employees, creditors and customers) can now be included. However, this theory does not satisfactorily explain how the different constituencies’ interests (that might be conflicting or competing at a particular time) should be balanced to arrive at the interests of the company as a whole. This theory might be used as the starting point for investigating the most suitable theory on companies. 2.3.3 The commutaire theory The commutaire theory provides that the very existence of a company is an example of an instrument of the State itself. This theory is based on a particular political theory rather than an economic one. The result is that the company does not have a strong commercial identity, even though it might have a strong social responsibility. 2.3.4 The contractual model

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The case of Parke v Daily News Ltd133 is perhaps the locus classicus for the contractual model. In this model, the shareholders’ interests are deemed to be the only consideration on which the company should act. Management is thus obliged to act “in the best interests of the shareholders”.134 In the Parke case, the defendant company wholly owned two subsidiary companies in which the copyright and goodwill of the “News Chronicle” and the “Star” newspapers were vested. Its board of directors was responsible for the group’s policy. The company also had some other publishing interests and investments. They were, however, of less importance than the newspapers mentioned. In view of losses incurred by the two newspapers, the board decided (in 1960) that it would be in the interest of the company to dispose of the newspapers by selling them to another company. Formal contracts were exchanged on 6 October 1960. The purchaser did not undertake liability for pensions or compensation to employees in these contracts, but agreed to employ as many of the staff of the defendant company as was practical. The transaction was finalised on 17 October. The newspapers ceased publication and the employment of a large number of the company’s employees was terminated. Announcements authorised by the board of the defendant company (communicated to the representatives of the employees and released to the press) showed an intention to devote the balance of the purchase price (after meeting inevitable costs arising from the cessation of separate publication) to the defending company’s staff and pensioners. This would be used to provide compensation or pension benefits, as well as the notice money that every employee would receive. Notice was given of a meeting of the shareholders of the defendant company (to be convened in February 1961) to approve that the defendant company should continue in business and should make the proposed payments. Before the date of the meeting, the plaintiff issued a writ claiming that the proposed payments would be ultra vires and calling for an injunction against the company and its directors. The Court agreed that the decision to make the abovementioned payments was not in the interests of the shareholders, but was reached due to other motives, the predominant one of which was a desire to treat employees generously, beyond all entitlement (according to the Court). The proposal was actually to make a gift of a large part of the company’s funds in order to benefit its former employees. This was a proposal which was ultra vires, resulting in a position that the majority of the shareholders could not ratify. The well-known case of Hutton v West Cork Ry Co135 dealt with a situation in which a company had transferred its undertaking to another company and was in the process 133 1962 Ch 927. Now see s 719 of the Companies Act 1985, United Kingdom. 134 This is not as simplistic as it seems, since shareholders are not an amorphous body and the

interests of different groups of shareholders can differ from time to time. 135 1883, 23 Ch.D 654.


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of being wound up. After completion of the transfer, a general meeting of the transferor company was held at which a resolution was passed to apply, inter alia, a sum of one thousand guineas in compensating certain paid officials of the company for their loss of employment, although they had no legal claim to compensation. It was held by the Court of Appeal that the resolution was invalid, as the company was no longer a going concern and only existed for purposes of winding-up. The case therefore differed from the Parke case. In his well-known judgement, Bowen LJ said:136

Compensation, and gratuity for past services generally, without reference to such services as were rendered during the winding-up, can no longer be charges or expenditure reasonably incident to the carrying on, … [of] the business of the company. … That being so, I think the resolution as to compensation is clearly wrong. The directors have no right to give it. It might in some instances be worth the while of a company to compensate a meritorious, but dismissed officer, but that kind of justification cannot exist in the case of a dying company.

Perhaps even more well-known is the legendary “cakes and ale” statement:137

Take this sort of instance. A railway company or the directors … might send down all the porters at a railway station to have tea in the country at the expense of the company. Why should they not? It is for the directors to judge, provided that it is a m atter which is reasonably incidental to the carrying on of the business of the company, and a company which always treated its employees with Draconian severity, and never allowed them a single inch more than the strict letter of the bond, would soon find itself deserted – at all events, unless labour was very much more easy to obtain in the market than it often is. The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as required for the benefit of the company.

It is clear that the Hutton case enshrines the profit-driven mechanism in our capitalist system. It is thus unlawful to give the workers anything unless it is good for the shareholders, in other words, unless it increases efficiency and therefore increases profits. However, it also contains a frank and unguarded warning to labour: if labour

136 At 677. 137 672-3.

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becomes easy to obtain in the market, it can be expected to be treated “with Draconian severity”. Another relevant case is that of Re Lee, Behrens & Co Ltd.138 The case dealt with the legality of a deed of covenant that the company entered into at a time when it was a going concern, and which entailed the granting of a pension to the widow of a former managing director. Eve, J said:139

But, whether they may be made under an express or implied power, all such grants involve an expenditure of the company’s money, and that money can only be spent for purposes reasonably incidental to the carrying on of the company’s business and the validity of such grants is to be tested as is shown in all the authorities by the answers to three pertinent questions: (i) Is the transaction reasonably incidental to the carrying on of the company’s business? (ii) Is it a bona fide transaction? And (iii) Is it done for the benefit and to promote the prosperity of the company?

The learned judge in the Parke case concluded that the benefit of the company means the benefit of the shareholders as a general body.140 Therefore, if the actions of directors of a company are prompted by laudable motives, but not such as to be recognised as sufficient justification of being in the best interest of the company (the shareholders), the proposal will be one which a majority of shareholders may not ratify.141 However, in the 1966 matter of Bell Houses v City Wall Properties,142 directors were given some limited discretion to extend the objects of the company. In 1982, Re Horsley & Weight143 similarly established that:144

The objects of a company do not need to be commercial; they can be charitable or philanthropic; indeed they can be whatever the original incorporators wish, provided they are legal. Nor is there

138 1932 All ER 889, 1932 2 Ch 46. 139 At 890, 51. 140 948D. 141 These decisions were overturned by the Companies Act 1980, s 74. See now s 719 of the

Companies Act 1985, United Kingdom. 142 1966 2 QB 656. 143 1982 3 All ER 1045 1052. 144 See also s 9(1) of the European Communities Act 1972 (purporting to implement the first

Harmonization Directive art 9(1) (68/151/EEC)).


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any reason why a company should not part with its funds gratuitously or for non-commercial reasons if to do so is within its declared objects.

This model (the contractual model), therefore, is unconcerned with the interests of employees and creditors. The company is the sole property and concern of the contracting parties. However, the separation of ownership and control has led to a debate involving the true role of the shareholder in the company. It has therefore been suggested that it is more realistic to regard the company as clearly distinct from its shareholders and thus as a creature in its own right.145

145 This is not a new approach: see Berle AA and Means G The Modern Corporation and

Private Property (revised ed) (New York 1968). First published in 1932.

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2.3.5 The constituency model The constituency model is also called the stakeholder model of company law. Two variants can be identified. The first sees the company as an entity run in the interests of the shareholders, but arguing that it is in the interests of shareholders to take other interest groups into account. Legislation, which creates a duty to consider interests of different groups but leaves the enforcement thereof in the hands of the shareholders, is usually based on this model. The second advocates that the interests of all interested groups must be taken into account because such an approach directly benefits the company as a whole. Therefore, the “interests of the company” include at least the interests of employees, shareholders and creditors. A substantial number of academic authorities have argued both in favour of and against this model.146 It is important to remember that, in contrast to real people, legal personalities have no inherent interests per se. To assess what a corporation’s interests are, one has to ascertain the interests of some group of people connected to the corporation. The arguments advanced against mandatory consideration of employees’ interests imposed by legislation can be summarised as follows:147 • To require of directors to take into account the interests of employees as well as

those of shareholders, would lead to potential conflicts, since the objectives of the two groups are often in diametric opposition or, at the very least, do not coincide. Such conflicts would make it more difficult to establish a failure on the part of a director to act in the best interests of the company and would thus impede the movement towards greater accountability.148

• With such a duty being incumbent on directors, every board decision would potentially be a subject for judicial review. This would result in a flood of often vexatious and frivolous litigation.

• The acceptance of this position would lead to a distinction between the interests of the company and the interests of employees. The individual employee would have title to sue if his/her views were disregarded. This is a privilege that is not extended to a shareholder who must rely on the company to sue the directors. This would not be fair to the shareholders.

146 See Goldenberg P “IALS Company Law Lecture – Shareholders v stakeholders: the bogus

argument” 1998 The Company Lawyer vol 19 no. 2 34; Mackenzie 1982 NLJ 688. 147 Mackenzie 1982 NLJ 689-690. See also Havenga Fiduciary Duties of Company Directors 47-

52. 148 See Goldenberg (1998 The Company Lawyer 36) where he quotes Sir Samuel Brittain as

having observed in a Financial Times article that if directors are accountable to everybody for everything, they will end up being accountable to nobody for anything.


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Counter-arguments can, of course, be raised: • The management of conflict as a function of a director should not be over-

emphasised. A director’s function is to balance a number of different interests in reaching the decision that he/she is obliged to make and that he/she genuinely believes to be in the company’s best overall interests. There might be some cases of conflict where one group will see its objectives being sacrificed in favour of its rivals, but generally, no group should have supremacy over another. Parties are normally also commercially realistic, although it does imply that all social partners must recognise their own responsibility in this regard.

• These kinds of disputes entail a heavy burden of proof, as it has to be shown that directors had not taken the interests of employees into account. Furthermore, unions and employees are usually not wholly irresponsible and many practical obstacles (least of all financial ones) exist to discourage and impede litigation.

• Many obstacles weaken an employee’s recourse to litigation. If the duty to take the interests of employees into consideration is owed to the company, it is extremely doubtful whether the company would take the necessary action to enforce it when necessary. The preferred notion is still the best interests of the “company as a whole” and this includes both employees and shareholders.

It has also been argued that the whole debate around shareholders versus stakeholders is based on a misconception. Goldenberg submits that one should commence such discussion by separating two different concepts: duties and interests.149

It cannot be said too often that the duty owed by a director of a company is to that company. This is true, to give the most obvious example, even of the statutory obligation to have regard to the interests of that company’s employees. A director, under general corpus of company law, owes no duties whatsoever directly to shareholders or creditors. However, in discharging his or her duties to the company of which he or she is a director, the director must have regard (if the company is solvent) to the interests of shareholders, or if the company is, or may be about to become, insolvent, then to interests of creditors…. There is an interesting little secondary argument at this point. If directors have to have regard to the interests of shareholders, which are the shareholders concerned?

149 Goldenberg 1998 The Company Lawyer 35-36.

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Goldenberg thus believes that the greatest “modern misconception” is to view directors as being responsible only to shareholders and to apply a stakeholder-theory to a company. In June 1995, the Royal Society for the Encouragement of Arts, Manufactures and Commerce launched its final report, entitled Tomorrow’s Company. They concluded that the companies that will sustain competitive success in the future are those that focus less exclusively on present shareholders and on (inevitably historic) financial measures of success, but instead include all their relationships with stakeholders - employees, customers, suppliers, financiers and the community in general. This was aptly called the inclusive approach. Goldenberg submits that this approach should be seen as bringing to an end the debate of “shareholder versus stakeholder”. Only by giving appropriate weight to all stakeholders, can directors maximise the sustainable growth in value of their companies for the benefit of shareholders, both present and future. The author continues:

As regards relationships with employees, it is increasingly recognised that in the modern economy the knowledge and skills of employees and effective team -working are of central importance to competitive strength. Companies that provide good training, and enhance the employability of their staff put themselves in a favourable position to take full advantage of their employees’ talents. Employees who are treated as partners in the organisation and not just dispensable factors of production are, furthermore, liable to respond constructively and innovatively to the challenges they face in carrying out their duties and with a positive attitude to the firm to need less supervision.150

Until employees’ interests are regarded as sufficiently closely linked to that of the wellbeing of a company, company law will continue largely to ignore their position, leaving them to be catered for by labour law. It might be argued that this is not unacceptable in principle, as long as the two bodies of law coincide and work towards the same results and objectives. In South Africa, this is currently the position that most closely resembles the domestic position.151 2.3.6 The enterprise model

150 Goldenberg The Company Lawyer 38. 151 See the LRA’s establishment and regulation of workplace forums (chapter 5), which attempts

to involve employees in day-to-day matters and corporate governance.


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The foundation of the enterprise model still reflects the constituency theory. However, it differs from the constituency model in that directors must not only consider the interests of stakeholders as well as shareholders, but must also regard those interests as part of the company (resulting in it having a corporate governance role of its own within the decision-making process of the company). Under this model, directors would, for example, not only have a duty to take the interests of employees into account, as is the case under section 309 of the Companies Act of 1985 (United Kingdom) (which can only be enforced by the shareholders). They would have to go as far as having employees elected to the boards of companies (as is the position in Germany)152. 2.3.7 The associative model A new model that is currently being developed by some United Kingdom scholars is the associative model.153 It is postulated that all who have dealings of any kind with a company will have a contractual relationship and an associative relationship. The contractual relationship results from contractual dealings, whereas if the dealings are very close, the associative relationship ensues. It is then submitted that the holder of such associative and contractual rights will have a corporate governance role since disregard for the associative rights will result in the company not being run in its own best interests. It is clear that the associative interests in a company will always be changing and this, it is argued, is the strength of this model. This corporate governance right will only be available to a holder thereof who can prove (at that moment in the history of the company) that his/her interests should be taken into account when determining the interests of the company. A person thus has a right based on the importance of his/her personal interests to the interests of the company, without having to prove membership of any particular group at any time. 2.3.8 Evaluation It is submitted that the constituency model is currently the best company model to accommodate the realistic interests of employees and creditors. Thus, although the

152 See Du Plessis J “Werkersdeelname in die bestuursorgane van ’n maatskappy” 1981 THRHR

380. 153 Including Janet Dine, Steve Anderman, James Gobert, Sheldon Leader and Bob Watt.

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company is run in the interests of the shareholders, other interest groups must be taken into account. The issue of enforcement of this right must, however, be considered further. The pure constituency model leaves the enforcement of the duty to have regard for other interests in the hands of the company itself (and thus the shareholders). However, the enterprise model (which is based on the same premise as the constituency model) grants these interests a corporate governance role of their own inside the decision-making process of the company. All representatives of workers would surely consider this last option to be the first prize. 2.4 The employee and the company At common law, directors must act “bona fide in what they consider, and not what a Court considers, to be the best interests of the company as a whole”.154 As stated above the “company as a whole” means the interests of “present and future members”.155 Xuereb156 argues that this formulation embodies a time factor (being concerned with the long-term interests of the hypothetical shareholder), which arguably already protects employees. He submits that this formulation means that the directors must direct their efforts towards securing the continued prosperity of the company’s enterprise (i.e. of the company as a going concern). For this, the existence of a continuing entity is required, which would include offering ongoing employment and furthering or protecting the interests of the company’s employees as a whole. This view is based on the opinion that the supreme interests within the company are those of the “enterprise” itself. The contractual theory of company law is in direct opposition to this view. 157 It thus seems that the crucial issue to be determined in this regard is a substantive evaluation (and perhaps re-evaluation) of the duty owed by all directors. The justification for the present state of company law usually involves the benefits of free enterprise, profit maximisation and private property ownership. However, it should be clear that the long-term best interests of the enterprise encompass much more.158

154 Re Smith & Fawcett Ltd [1942] Ch. 304 306. 155 See Darvall v North Sydney Brick and Tile Company Ltd & others (1988 6 ACLC 154 176)

where the learned judge Hodgson stated that: “ it is proper to have regard to the interests of the members of the company, as well as having regard to the interests of the company as a commercial entity. Indeed, it is proper also to have regard to the interests of the creditors of the company. I think it is proper to have regard to the interests of present and future members of the company, on the footing that it would be continued as a going concern”.

156 1988 Modern Law Review 165. 157 Discussed supra in par 2.3.1. See also par 2.3.4. 158 Havenga (Fiduciary Duties o f Company Directors 21) states that fiduciary duties have been

ascribed to many legal relationships under South African law and it is suggested that


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In the United Kingdom, the Companies Act 1985 provides for the consideration or furtherance of employees’ interests in two respects:

Section 309 1. The matters to which the directors of a company are to have

regard in the performance of their functions include the interests of the company’s employees in general, as well as the interests of its members.

2. Accordingly, the duty imposed by this section on the directors is owed by them to the company (and the company alone) and is enforceable in the same way as any other fiduciary duty owed to a company by its directors.

3. This section applies to shadow directors as it does to directors.

Section 719 1. The powers of a company include (if they would not otherwise

do so apart from this section) the power to make the following provision for the benefit of persons employed or formerly employed by the company or any of its subsidiaries, that is to say, provision in connection with the cessation or the transfer to any person of the whole or part of the undertaking of the company or that subsidiary.

2. The power conferred by subsection (1) is exercisable notwithstanding that its exercise is not in the best interests of the company.

3. The power which a company may exercise by virtue only of subsection (1) shall only be exercised by the company if sanctioned - …

4. Any payment which may be made by a company under this section may, if made before the commencement of any winding up of the company, be made out of profits of the company which are available for dividend.

Section 309 requires the director to consider the interests of employees along with those of the members of the company. However, it does not give guidance on how a

company directors comprise one such a class. She describes directors as “ fiduciaries sui generis”. See her discussion regarding Other Interest Groups 42-52.

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balance should be struck between these two sets of interests should they conflict and the enforcement of this duty is owed to the company alone.159 The effect of Parke v Daily News was cause for great concern in the United Kingdom at the time, but was reversed by the provisions of the Companies Act 1980 and, later, section 719 of the Companies Act 1985 (allowing for a company to provide for employees on cessation or transfer of business). This power may be exercised even when it is not in the best interests of the company.160 Before the winding up of a company commences, provision may be made from profits available for dividend.161 If this is done by virtue of section 719 alone, it may only be exercised if sanctioned by an ordinary resolution of the company or, if the memorandum or articles so require, a resolution of some other description, or compliance with other formalities in accordance with those requirements.162 It is submitted that since section 719 deals with a specific situation, it prevails over section 35 of the Companies Act. This means that where the memorandum includes a specific power to provide for employees and this is a power that the articles do not exclude from those powers which can be exercised by the board, it will be possible to exercise this power without the sanction of the general meeting, and that, if the memorandum does not include such a power, an ordinary resolution will suffice, notwithstanding section 35(3). Section 187 of the Insolvency Act 1986 is also relevant (providing for the power to make assets over to employees). The liquidator may implement a decision previously made by the company and if none has been made, may, after all the company’s liabilities have been met, exercise a similar power to that which the company had. However, the liquidator must receive the sanction of members and on a winding up by Court, any creditor or member may apply to the Court. This is clearly a very limited role that company law has assumed to deal with the place of employees in the institution of a company. Rights to consultation, disclosure of information and participation in decision-making do not even enter the picture. In South Africa the position is not much better.163 2.5 The employee and corporate decision-making

159 See the discussion supra under the constituency model in par 2.3.5. 160 S 719(2). 161 S 719(4). See also s 187 of the Insolvency Act 1986, United Kingdom, which confers similar

powers on the liquidator. 162 S 719(3). 163 See par 2.7 infra regarding the South African position.


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The Draft Fifth European Community Companies Directive envisaged that all Member States would adopt a two-tier structure for boards of public companies above a certain size and that employees would be represented on the upper (supervisory) board.164 This proposal was the main reason for the lack of agreement over this directive. The concept originates from Germany, where a two-tier board structure has existed in public companies since 1861. This structure involves a supervisory board to control basic policy of the company and a management board to manage its operations.165 The supervisory board appoints the management board, but the two are otherwise distinct and a person cannot be a member of both. After the Second World War, representatives elected by the company’s employees were, by law, given half the places on the supervisory boards of coal and steel companies and, in 1952, one third in the case of other large companies. This proportion increased, for the largest companies, to nearly one half in 1976.166 Under company law, the supervisory board is a company organ that is required in the case of all registered cooperative societies and public limited companies. In the case of private limited companies it is obligatory if certain conditions apply. In all other cases, it is optional.167 Thus, according to the German two-tier structure, it is exclusively the management board that represents and manages the undertaking. The supervisory board, on the other hand, has two main functions: to elect the members of the management board and to supervise the activities of the management board. It is typical that the representatives on the supervisory board belong to the workforce of the undertaking and, in most cases, are also works council members.168 In Germany, this system of Mitbestimmung is certainly the forerunner of involving employees in corporate decision-making and even though it has been adopted in some other European countries (in many cases it is optional), such co-determination is still generally frowned upon. The European Works Councils Directive169 is now being used as a possible framework for achieving the ideas postulated in the draft European Community Companies Directive. This indicates a move away from trying to provide for representatives of employees’ interests within company law to mechanisms outside the company in the field of labour law.

164 See Du Plessis J & Dine J “The fate of the draft fifth directive on company law:

accommodation instead of harmonisation?” 1997 JBL 23. 165 This principle was confirmed by the legislator in 1951 (see Weiss M & Schmidt M Labour

Law and Industrial Relations in Germany (Kluwer Law International 2000) 211). 166 Davies P Gower’s Principles of Modern Company Law (6th ed)(Sweet and Maxwell 1997). 167 Weiss & Schmidt Labour Law in Germany 212. 168 Weiss & Schmidt Labour Law in Germany 220. 169 Council Directive 94/45 of 1994.

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In South Africa, labour law provides for the possibility of statutory workplace forums. These are intended to include all employees and are based on cooperation. The Labour Relations Act provides for consultation and, in certain limited circumstances, joint decision-making between the employer and workplace forum.170 However, this system has not been successful, probably owing to the peculiar regulation thereof.171 South African company law does not provide for any other means of representation for employees within the company. 2.6 Insolvency of companies and the rescue of companies The protection of employees in the event of the insolvency of their employer is, of course, a focus area of the law of insolvency.172 However, company law is also relevant since either the directors or the shareholders must usually make a decision about whether or not to confer a benefit on the employees. This is especially the case before the law of insolvency comes into effect. According to the Labour Court, labour law is generally ousted once the law of insolvency comes into play.173 As recently as 1999, the Commission for Conciliation, Mediation and Arbitration (CCMA) considered a case where a voluntary liquidation was initiated by the employer. In Hammond & Others v L Suzman Distributors (PTY) Ltd,174 section 38 of the Insolvency Act 24 of 1936 was applicable - the termination of the contracts of employment on provisional liquidation. The employer applied for voluntary liquidation and thus initiated the process that culminated in the termination of its employees’ contracts. The CCMA commissioner accepted jurisdiction to categorise such conduct as dismissal for operational reasons. In the previous case of Hall,175 the contracts of employment were found to have been terminated by operation of law and the Judge held that the Labour Relations Act was not applicable since the law of insolvency, administered by the High Court, took over.176 This view is prejudicial for employees since South Africa’s insolvency law grants minimal protection to the claims of employees and there is no guaranteed wage fund as yet.177 In the case of Hammond, the arbitrator was willing to consider the voluntary liquidation as a dismissal on the basis of equity, since “for an 170 Ss 84 & 86. 171 See Olivier MP “Workplace forums: critical questions from a labour law perspective” 1996

ILJ 803 & Summers C “Workplace forums from a comparative perspective” 1995 ILJ 806. 172 See chapter 13 infra. 173 SA Agricultural Plantation & Allied Workers Union v HL Hall & sons (Group Services)

Ltd 1999 ILJ 399 (LC). 174 1999 20 ILJ 3010 (CCMA). 175 1999 ILJ 399 (LC). 176 This decision was subsequently followed, although with some reservation regarding the

purpose of s 197 of the LRA, in Roelofsz v The PGA Club/The PGA Amateur Club 2000 22 ILJ 1442 (CCMA).

177 See also Ndima & others v Waverley Blankets Ltd 1999 20 ILJ 1563 (LC).


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employee who had faithfully served an employer for almost 40 years to be given one week’s salary and [be] sent on his way was inequitable in the extreme”.178 The fairness of the dismissal as well as the fairness of the severance pay could thus be evaluated.179 In another important judgement, Waverley Blankets Ltd v CCMA & others,180 the Labour Court had to deal with several issues pertaining to the effect of liquidation on the employment relationship and on collective agreements. The Court stated that section 38 of the Insolvency Act does not have the effect of terminating a recognition agreement, but only of terminating the contracts of employment. It is submitted that the law of insolvency does not take enough cognisance of the problems and interests of employees of insolvent undertakings. The safeguarding of employees’ interests in the event of the transfer of an insolvent undertaking will be discussed infra.181

178 3017F-H. 179 See also National Union of Leatherworkers v H Barnard NO & another Case no.

DA14/2000 dated 29 June 2001, unreported. Here the LAC once again accepted that in the event of a voluntary liquidation, employees are indeed dismissed by their employer.

180 2000 ILJ 2738 (LC). 181 See chapter 13.

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2.7 The role of the employee in company law in South Africa 2.7.1 Introduction The Companies Act of 1973 applies to all incorporated companies under this Act.182 It is also applicable to every external company with a place of business in South Africa and every company that was a company in terms of any Act that was repealed on the commencement of the 1973 Act.183 In South Africa, no provision is made in company law for employee participation in decision-making in companies. It is only through labour law that limited provision for joint decision-making is found.184 As far as the power to make donations or to pay gratuities and pensions to employees is concerned, South African company law generally allows this to be done by a director.185 Havenga states that the potential vulnerability of corporate gifts does not lie in the issue of capacity,186 but in the fact that directors authorising them may be in breach of their fiduciary duty.187 South African company law does not make it obligatory for directors of companies to take the interests of employees into account.188 The Labour Court189 has held that if a scheme of arrangement in terms of section 311 of the Companies Act 61 of 1973 provides that all creditors are confined to a right to claim payment from receivers of dividends, then this does not make sufficient provision for the claims of employees. Even if the dismissed employees are creditors, their claims stem from unfair dismissal and are not the same as the claims of (the other) creditors. Dismissed employees are a sui generis class of creditors and a separate meeting with the dismissed employees should have been held to approve the scheme. It is submitted that more attention ought to be bestowed on the position of employees in current company (and insolvency) laws. However, it is recognised that this would 182 See also the Close Corporations Act 69 of 1984. 183 Ss 1 & 2 of the Companies Act 1973. 184 S 86 LRA. 185 S 33 of the Companies Act provides that a company have the capacity determined by the

main object stated in its memorandum and that there will be included in its capacity unlimited objects ancillary to the said main object except such specific ancillary objects as are expressly excluded in its memorandum. S 34 continues that subject to limitations imposed by the Act, every company have plenary powers, including the common powers stated in Schedule 2 to the Act, to enable it to realise its main and ancillary objects, except if expressly excluded in its memorandum. Schedule 2 includes the powers to make donations and to pay gratuities and pensions and establish pensions schemes, profit -sharing plans and other incentive schemes in respect of its directors, officers and employees.

186 Unless specifically excluded (see s 36 of the Companies Act – although an act of a company may be ultra vires , it is not void by reason only of that fact).

187 Havenga Fiduciary Duties of Company Directors 45. 188 See Havenga 48-52. 189 Waverley Blankets Ltd v CCMA & others 2000 ILJ 2738 (LC).


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involve a rethinking of very traditional and fundamental concepts of company law. It is a well-known fact that such changes take time and need some kind of rigorous impetus. It is therefore submitted that, as a short-term measure, it would be fruitful to investigate our present company laws, at least with a view to identifying possible relevant sections (or the lack of these) in order to better regulate the position of employees in the companies which employ them. The issues of disclosure of information and consultation need to be addressed in particular.190 At the very least, there should be no conflicting provisions in labour laws, insolvency laws and company law.191 Some statutory recognition of the interests of employees in their employer would, of course, be welcomed. 2.7.2 The King Report on Corporate Governance, 2001 The King Report on Corporate Governance that was recently published prima facie does not take the issue of employee involvement and participation in the company much further.192 The report accepts the statement that “corporate citizenship is the commitment of business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life.”193 The report briefly deals with the interests of employees in section 5, under the general framework of “non-financial matters”. Chapter 1 of section 5, dealing with “Introduction and Scope of Review”, states that the overriding goal of any corporate enterprise is to generate, consistently, a competitive return on investment for its shareholders. The hallmark of a successful corporate strategy is the ability to balance the protection and growth of underlying value, competitiveness and profitability.194 It is proposed that non-financial reporting can show what drives underlying or future value-creation within the enterprise (e.g. human and other intellectual capital, brand, reputation). This is in contrast to more traditional financial reporting, which focuses on actual realisation of value within the organisation and is therefore historic in nature.195 The concept of sustainability has been adopted in a business context to mean the achievement of balanced and integrated economic, social and environmental performance. It is thus submitted that non-financial issues (social and environmental) can no longer be regarded as secondary to more

190 Refer to chapter 11, par 11.2 infra . 191 E.g. the current conflict between s 38 of the Insolvency Act and s 197(2)(b) of the LRA. 192 King Report on Corporate Governance (Institute of Directors in Southern Africa, July 2001). 193 See the preface to the Report. 194 Par 6. 195 Par 7.

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conventional business imperatives.196 The concept of sustainability is derived from the term “sustainable development”, which became a legally accepted term in international law at the United Nations Conference on Environment and Development (the so-called “Earth Summit”) in 1992. In that context, it refers to “development, which meets the needs of present generations without compromising the ability of future generations to meet their own needs”. The report states that there is a lack of transparency on non-financial issues at present, making any meaningful comparison between companies difficult.197 Transparency implies openness in fully explaining the reasons for any decision or course of action adopted by the company. Accountability implies acceptance by the company of its responsibility for any decision or course of action it adopts, the consequences thereof, and a commitment to resolving any issues that arise as a result. Both are fundamental tenets of corporate governance.198 Stakeholders have a direct bearing on ongoing corporate viability as corporate reputation (i.e. financial performance and stakeholder perception) is recognised as a significant market value driver. Relationships with stakeholders should thus be managed accordingly.199 The suggestion is thus that companies should develop their ability to identify and engage stakeholders and the processes for non-financial accounting, control and disclosure. The report avers that they can draw on a growing number of practical methodology and management tools in this regard.200 The report observes that the most significant obstacle to implementing meaningful social, ethical and environmental accounting and reporting lies in the way management thinks within an organisation. As long as these are perceived as “soft issues” they are unlikely to receive the focus they merit from a value-generating, economic point of view. This peculiar way of thinking, coupled with a general lack of awareness or understanding of, and commitment to, the principle of sustainable development, contributes greatly to the unsatisfactory position that exists at present.201 The King Report accepts that an integral part of good corporate citizenship entails the recognition of the legitimacy of interests of defined key stakeholders and the publication of policies governing relationships with them. Employee relations also need to be considered. These include:202 Respecting the well-being of employees; treating them fairly and with cultural sensitivity; enabling them to develop their potential through skills 196 Par 8. 197 Par 14. 198 Par 10. 199 Par 11. 200 See par 12 for examples. 201 Par 13. 202 See par 14.


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and technology transfer; sharing the success of the company with the employees; recognising international agreements and the right to freedom of association and collective bargaining; eliminating all forms of forced labour and dealing with the problem of child labour. Even though it is laudable that these principles are acknowledged and promoted, it is doubtful whether any meaningful changes will occur in South African companies without statutory backing regarding criteria for evaluation and enforcement. Chapter 2 of the King Report deals with “Stakeholder Engagement and Social and Ethical Accounting, Auditing and Reporting”. “Stakeholders” are categorised as follows:203 • Shareowners as providers of capital. • Parties who contract with the enterprise, either as providers of input to its

various business processes and activities, or as purchasers of their output. This would include, for example, customers, employees, suppliers, sub-contractors and business partners.

• Parties who have a non-contractual nexus with the enterprise but who provide it with its licence to operate and thus exercise an influence on its ability to achieve its objectives. This class could include, for example, civic society in general, local communities, non-governmental organisations and other special interest groups whose concerns may be with issues such as market stability, social equity and the environment.

• The State as policy maker, legislator and regulator of the economy (generally and specific sectors of it). The State’s power over the activities of companies, as opposed to mere influence, sets it apart from other parties with a non-contractual nexus.

In summary, it is stated that stakeholders can be described as “those whose relations to the enterprise cannot be completely contracted for, but upon whose cooperation and creativity it depends for its survival and prosperity”. However, the report then goes on to state that it subscribes to the essential principle advanced by the Commonwealth Association for Corporate Governance that “directors and boards owe their duty to the company and thereby are accountable to shareholders, as owners of the corporation’s capital”. The stakeholder theory204 does not seem to enjoy much favour in the final instance. On the other hand, it simultaneously acknowledges that global awareness is growing that the long-term commercial success

203 Par 1. 204 See par 2.3.5 supra .

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of any company is inextricably linked to the sustainable development of the social and economic communities within which it operates.205 Stakeholders perceive a company’s integrity and efficiency on the basis of its reputation. This reputation is derived from many sources such as customer service, employee relations, community relations, ethical conduct and environmental practices. Once blemished, a company’s reputation is often hard to recover, and this fact is reflected in the share price. In other words, so it is argued, the many non-financial facets of reputation have become important indicators of the ongoing economic viability and sustainability of companies. “Non-financial issues” thus have financial consequences for a business.206 The report also accepts that there is growing pressure on companies from society to acknowledge their duty to act as responsible corporate citizens. This has found expression, to some extent, in the Constitution and in recent legislative developments in South Africa.207 However, the report envisages that the responsibility in this regard falls on the board of directors to ensure that an appropriate balance is maintained between the individual interests of stakeholders and the collective good of the company in which their interests converge. It is stated that active engagement with stakeholders helps inform strategic planning and risk management. Hence:

Companies mindful of this benefit should adopt a process for the identification and, if necessary, prioritisation of key stakeholders having a legitimate and relevant interest in its operations.

The real measure of organisational integrity lies in the fact that a company practises what it preaches in all areas of its activities. Accordingly, it is reported that it is not only useful but also important for companies to develop appropriate performance measurement criteria and control processes that can be tangibly applied against stakeholder performance objectives.208 As an example, it is submitted that an increasing number of South African companies are publishing reports that describe how their corporate values and business principles have been applied in the interests of their stakeholders. Regarding the enforcement of this principle it is, unfortunately, again stated that:

The manner, extent and frequency of disclosure relating to social, ethical and environmental issues and performance is a matter best left to the discretion of the board and management of each

205 Par 2. 206 Par 5. 207 Par 7. 208 See the earlier remarks regarding the need for evaluation criteria.


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company according to what is appropriate to its circumstances and the requirements of its stakeholders.209

Regarding disclosure, it is noted that it is important for companies to report on stakeholder issues through the most appropriate medium and in the most appropriate manner so that the target stakeholders understand its achievements. Here it is also envisaged that frequency of disclosure is a matter that only companies can determine for themselves.210 It is thus concluded that effective reporting on non-financial issues requires an integrated approach. A gradual approach is foreseen and it is suggested that issues could be categorised into different levels.211 • The first level of disclosure relates to acceptance and adoption of business

principles and/or codes of practice. Acceptance of a particular principle can be verified by reference to documents, board minutes or established policies and standards.

• The second level could address the implementation of practices in keeping with accepted principles. This will involve a review of whether the company has taken steps to encourage adherence to those principles, as may be evidenced in the form of board directives, designated policies and communiqués, supported by appropriate non-financial accounting mechanisms.

• A further level would involve investigation and demonstration of changes and benefits that have resulted from following particular principles.

The latest King Report relies on new legislation promulgated in South Africa since publication of the King Report of 1994. This includes the Constitution, the Bill of Rights and the Promotion of Access to Information Act 2 of 2000, which has as one of its objectives the promotion of “transparency, accountability, and effective governance of all public and private bodies.” Attention is finally drawn to the importance of the benefits to be obtained from independent verification. It is argued that, as with financial reporting, verification serves only to reinforce transparency and so promote stakeholder confidence in a company’s integrity. No recommendations requiring statutory amendment are made with regard to the status and function of employees within a South African company.

209 Par 9. 210 Par 11. 211 Par 10.

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2.8 Concluding remarks A company, whether it operates for gain or not, is an association of a number of people for a common object. Employees play an undeniable role in the functioning and the prosperity of all companies. However, it has been shown that company law does not have much regard for the interests of employees. The position of the employee within the company can be approached in two ways: firstly, by ensuring that the enterprise bestows attention on the interests of its employees, communicates with them and acts reasonably towards them and, secondly, by according employees a role in corporate governance within the company. In the event of the transfer of an undertaking by means of a majority share acquisition, it is evident that labour law provisions will not apply at present. In this instance, it is especially crucial that company law at least provides for the rights of affected employees to disclosure of information and to consultation. It is sometimes said that labour law is concerned with social goals, aiming to regulate the relationship between employer and worker, whereas company law places more emphasis on economic issues and on the relationship between managers and shareholders.212 It is, however, submitted that the company model, in which the interests of employees and other creditors are also taken into account, is preferable. Although the interests of the shareholders are often the main object of the company, it has been shown that the long-term best interests of the company as a whole require the consideration of other interests than just those of the present and future shareholders.213 A comparative perspective was provided in this regard and it seems clear that the most problematic issue will be that of enforcement. Arguments for and against taking enforcement out of the hands of the shareholders were set out in this regard. South African company law does not reflect a movement in this way, even though the King Report of 2001 acknowledges many of the principles to be found in the constituency model of a company. There are important consequences to be noted if a purely labour law approach to these matters is endorsed.214 Firstly, labour law cannot really affect prerogatives of management within the company law sphere. The contract of employment puts the employee at a distance from decision-making as the employer obtains control over the employee and the right to govern the employee is transferred to the employer. Secondly, it has been argued that at European Community level, the Directives in the 212 See Villiers C “The Rover case (1): The sale of Rover cars by BMW – the role of the works

council” 2000 ILJ (United Kingdom) 386 391. 213 See par 2.3 supra. 214 For a discussion see Villiers 2000 ILJ 392-393.


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labour law sphere are much more limited than the company law proposals. They focus on information and consultation, not on employee decision-making or employee influence upon decisions, corporate policies or strategies. It has thus been stated that the Works Council Directive of 1994 succeeded since it focuses on protection rather than on participation in decision-making.215 These labour law measures thus “contribute little to the dismantling of the corporate hierarchy and its replacement by a democratic mode of decision making”.216 In essence, it seems that company laws have not yet recognised the principle that labour is not a commodity. The social component of an employment relationship between company and employee is therefore largely neglected. This omission to recognise the individual and collective interests of employees in their employer, on whom their livelihood depends, is closely related to the long-debated issue of the social responsibility of companies. This chapter attempted to demonstrate that there is room for cross-fertilisation between labour law and company law and that it would be beneficial for both companies and workers if both branches of law considered the interest of workers, business and society as a whole. It is submitted that the social responsibilities of companies cannot be further denied in this new millennium. True democratisation of the workplace should be pursued, and consultation may arguably be considered to entail a first step towards such goal. This approach, favouring consultation and disclosure, should thus be seen as a first step towards an end objective, and not as the achievement of the object itself. A two-tier system as found in Germany may then be something towards which we should be striving in South Africa.

215 This is greatly due to the peculiar notion of “consultation” as found there and also in South

Africa. See chapter 11 infra . 216 Villiers 2000 ILJ 393.

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CHAPTER THREE

SUPRANATIONAL, INTERNATIONAL AND FOREIGN NATIONAL FRAMEWORK

3.1 General The regulation of the transfer of undertakings as going concerns and the protection of employees’ interests (even where such an undertaking is liquidated or rescued) are not new in the supranational and international field and the laws regulating this area can be described as advanced. In the European Community (EC) there are primarily two relevant Council Directives that are binding on Member States. These are Directive 80/98/EEC217 relating to the protection of employees in the event of their employer’s insolvency and Directive 77/187/EEC 218 relating to the safeguarding of employees’ rights in cases where undertakings, businesses or parts of businesses are transferred. Member States have to ensure that employees enjoy the same or more favourable protection under national laws.219 These Directives have led to an impressive amount of case law on the continent, illustrating the extreme importance of these provisions as well as the potential scope for countless practical problems in this area. Section 197 of the Labour Relations Act 66 of 1995 draws from the Acquired Rights Directive as well as from some of the national systems’ measures but is, understandably, not cast in identical terms. On the international front, the International Labour Organisation’s (ILO) Convention concerning the Protection of Worker’s Claims in the Event of the Insolvency of their Employer220 and ILO Convention 158 of 1982 concerning obligations of employers upon termination of employment for operational reasons, are relevant. Even though South Africa has not ratified these conventions, it remains important to consider them. This approach complies with the constitutional duty that when interpreting the Bill of Rights, a Court, tribunal or forum must consider international law and may consider foreign law.221 The word “must” indicates that a Court is obliged to consider 217 Of 20 October 1980 (hereafter the Insolvency Directive). 218 Of 14 February 1977 (hereafter the Acquired Rights Directive). Amended by Directive

98/50/EEC of 29 June 1998. Now replaced by Directive 2001/23/EC of March 2001. 219 Franchovich v Italian Republic Cases C-6/90 & C-9/90 1993 CMLR 66 (ECJ); Commission v

United Kingdom 1994 IRLR 392 (ECJ). 220 173 of 1992. 221 S 39(1)(b) & (c) of the Constitution of the Republic of South Africa 108 of 1996. See also

Devenish A Commentary on the South African Bill of Rights 620-624.


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international law. Furthermore, as discussed supra,222 the social partners in South Africa have reaffirmed their commitment to the implementation of general workers’ rights as manifested in ILO Conventions. In considering the rights of employers and employees in cases of transfers of undertakings, it would be helpful to refer to the domestic law of most industrialised countries. References will thus be made to the United Kingdom and Germany.223 Specific instruments that will be referred to in the remainder of this thesis are the following: • the EC Acquired Rights Directive of 1977 (as amended)(now repealed and

replaced by Directive 2001/23/EC of 12 March 2001); • the EC Insolvency Directive of 1980; • the EC Collective Redundancies Directive 75/129 of 1975 as amended by

Directive 92/56/EC of 1992; • the ILO Convention on the Protection of Workers’ Claims in the Event of the

Insolvency of their Employer of 1992; • Transfer of Undertakings (Protection of Employment) Regulations of 1981 (United

Kingdom)(TUPE) (as amended); and • article 613a BGB (Germany). At supranational level is must be borne in mind that the European Common Market makes it necessary to take certain positive measures to ensure that balanced economies are facilitated and that fair competition is achieved. This fact must play a role in interpreting and applying the law.224 According to the European Court of Justice the fundamental purpose of the Acquired Rights Directive is:

… to ensure as far as possible the continuation without change of the contract of employment or the employment relationship with the transferee in order to avoid the workers concerned being

222 See chapter 1. 223 These two countries were selected, inter alia, as the United Kingdom government was very

sceptical and reluctant about the implementation of transfer provisions (not unlike the South African position). In addition, many of the transfer cases that come before the ECJ originate in Germany. The South African regulation draws from both systems. Even though it is necessary to compare and learn from the experiences of other jurisdictions, one must not neglect to have proper regard to the socio-economic and political context of these measures so as to not “abuse” comparative law.

224 See Blanpain R and Engels C European Labour Law (Kluwer Law International 1993) 191. See also Blanpain R European Labour Law (Kluwer Law International 2000) 35-74 regarding the institutional framework of the European Union and 113-123 regarding the legislative competence of the EC.

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placed in a less favourable position by reason of the transfer alone.225

225 Landsorganisationene i Danmark v Ny Molle Kro 1989 IRLR 37 at par 29.


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As stated earlier, this essentially social objective was added by the European Court of Justice, rather than the European Commission, since the initial objective certainly was to prevent unfair advantages in competition that existed between Member States. In some countries, notably the United Kingdom, the Directive was implemented with much resistance. It is said that when Lord Waddington introduced the TUPE regulations into the House of Commons he said that he did so “with a remarkable lack of enthusiasm”.226 He also averred proudly that the Government had “done a good deal to mitigate some of the worst effects” of the Directive.227 However, the European Commission has a different viewpoint:228

Generally speaking, as far as legislation is concerned, the effectiveness in social terms of the protection afforded by the Directive is beyond dispute. The Directive has proved to be an invaluable instrument for the protection of workers in the event of the reorganisation of an undertaking, by ensuring peaceful and consensual economic and technological restructuring and providing minimum standards for promoting fair competition in the context of such changes.

3.2 The Acquired Rights Directive229 3.2.1 Obligatory nature and direct effect of the Directive It is a basic rule of community law that a directly effective provision of community law always prevails over a provision of national law.230 The following levels of “direct effectiveness” of European law can be discerned: the treaties,231 directives and regulations. There is no statement in any of the treaties as to whether treaty provisions are directly effective. One therefore has to rely on the approach adopted by the European Court of Justice. Hence, articles of the treaties and regulations232 are directly

226 Elias P and Bowers J Transfer of Undertakings: The Legal Pitfalls (Longman Group Ltd

1994) 1. 227 Ibid. 228 Barnard C EC Employment Law (Oxford University Press 2000) 448-449. See also the

memorandum issued on Acquired Rights of Workers in Cases of Transfers of Undertakings, issued by the Commission (http://europa.eu.int/comm/dg05/soc-dial/labour/memo/memoen.htm).

229 Directive 77/187/EEC as amended by Directive 98/50/EC, replaced by Directive 2001/23/EC of 12 March 2001.

230 Hartley TC The Foundations of European Community Law (2nd ed) (1991) 215. 231 See the Treaty of Amsterdam (1997) and the Treaty of Maastricht (1991). 232 Arts 249 EC and 161 Euratom state that a regulation is “directly applicable” in all Member

States. This has led to a controversy regarding the true meaning of the wording of the

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effective where the provision is clear and unambiguous, it is unconditional and its operation does not depend on further action being taken by community or national authorities.233 The two EC treaty articles relating to employment law (article 141 on equal pay and article 39 providing for free movement of labour) are both directly effective in the courts of Member States.234 Directives, however, are directions to Member States. They are binding in terms of the result to be achieved by Member States,235 but not in terms of the form and methods that national authorities must use in order to achieve the result.236 The European Court of Justice has held that directives can, nevertheless, be relied upon in a national Court where they are sufficiently clear and unconditional.237 This has certainly enhanced the effectiveness of Community Law but it has also, to a certain extent, blurred the distinction between regulations and directives. It seems that case law indicates more than one possibility. It may be that certain provisions of a directive are directly enforceable while others are not. There is thus no general principle that directives are directly enforceable. Furthermore, it is crucial to decide whether a party is a private individual, corporation or the state. This is due to the accepted doctrine that directives are, in principle, only enforceable against the state and not against individuals. They have vertical but not horizontal application.238 This also means that directives are capable of conferring rights on individuals against the state but they cannot impose

treaties (“directly applicable” versus “directly effective”) and whether it would mean that regulations can only be directly effective if the same meaning is given to them. If not, the problem remains of interpreting the phrase “directly applicable”.

233 Hartley The Foundations of European Community Law 188. 234 However, in terms of the second Defrenne case (1976 ECR 455 (ECJ)) there is a difference

between “direct and overt discrimination” in art 141 on the one hand and “indirect and disguised discrimination” on the other hand. The former can be identified solely by the criteria laid down in art 141, the latter not. It seems, therefore, that the latter would not be directly applicable and that, where a provision is only partly suitable for application, it will be directly effective only in part.

235 Art 249 EC Treaty. 236 Blanpain (European Labour Law 60) states that compliance can be obtained by an Act of

Parliament, but other ways are also possible. E.g. collective agreements could be rendered obligatory by a governmental decree covering the private sector as a whole. Extension of collective agreements, as is also possible in South Africa in terms of s 32 of the LRA, is possible in quite a number of Member States. Blanpain indicates that in Belgium, Directive 77/187/EEC (as it then was) was the subject of a nationwide collective agreement, No. 32bis, which was concluded in the Belgium National Labour Council in June 1985 and extended by Royal Decree.

237 The requirements for a Directive to have direct effect are formulated in the following way by Harvey Harvey on Industrial Relations and Employment Law (Butterworths Issue 150 – June 2001) F/4: a provision in a Directive must (a) confer individual rights, (b) be clear and precise and (c) be unconditional and unqualified by not requiring further measures on the part of Member States or the EC to give effect to it.

238 The French Conseil d’Etat and the German Bundesfinanzhof clearly indicated their opposition to direct horizontal application.


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obligations on individuals (in favour of the state or other individuals). In the case of Hugh-Jones v St John's College, Cambridge239 the Court said that:

It seems to us that what the Van Duyn case240... really did was to recognise that where an individual alleges that a Member State failed to carry out its obligations under Community Law, he can apply to the National Court for a declaration to that effect, and he can ask the Court, as against the Member State, to take into account the provisions of Community Law which ought to have been implemented or observed by the Member State but which had not so been. In other words, the Member State cannot enforce its own national laws or administrative provisions which conflict with provisions of Community Law which are binding upon the Member State. It does not follow that an individual can rely upon the Directive in proceedings against another person in the state, not being the state itself. We do not consider that he can.

The State is hence prevented from taking advantage of its own wrong in failing to implement the law.241 It is apparent, however, that this approach does result in certain anomalies. In some instances, the fact of working for a public or private employer would thus determine whether an employee could rely on a directive in a national Court or not. Determining whether a body/organisation constitutes an emanation of the State envisages a threefold test: the provision of a public service; control of the State; and the holding of special powers.242 Article 9 of the amended text of the Acquired Rights Directive now provides that:243

Member States shall introduce into their national legal systems such measures as are necessary to enable all employees and representatives of employees who consider themselves wronged by failure to comply with the obligations arising from this Directive to pursue their claims by judicial process after possible recourse to other competent authorities.

239 1979 ICR 848 (EAT). 240 Van Duyn Yvonne v Home Office Case 41/74, 1974 ECR 1337 (ECJ). 241 See Marshall v Southampton and Southwest Hampshire Area Health Authority (Teaching)

1986 2 WLR 780 (ECJ), where the Health Authority was regarded as an apparition of the State.

242 Foster v British Gas plc 1991 ICR 84 (ECJ). See also Doughty v Rolls-Royce plc 1992 IRLR 126 (HL).

243 Directive 2001/23/EC.

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The Acquired Rights Directive can be said to provide three pillars of protection for employees:244 Firstly, it provides for the automatic transfer of the employment relationship with all of its rights and obligations from the transferor to the transferee in the event of a transfer; secondly, it protects workers against dismissal by the transferor or transferee due to the transfer; and thirdly, the Directive requires the transferor and transferee to inform and consult the representatives of the employees affected by the transfer. 3.2.2 Interpretation of the Directive Some countries have a ready-made mechanism for the application of community law, since they give effect to international law by being willing to give direct effect to all treaties. In cases of conflict with national law, if a purposive approach of interpretation cannot save the national law, the treaty will reign supreme.245 The second possibility is for countries to transfer certain powers to the community.246 247 The provisions of the Acquired Rights Directive have been given a wide and purposeful interpretation by the European Court of Justice. The amended Directive’s heading provides that it is accepted, having regard to the Community Charter of the Fundamental Social Rights of Workers (Social Charter),248 that the completion of the internal market must lead to an improvement in the living and working conditions of workers in the European Community. Such improvement must cover, where necessary, the development of certain aspects of employment regulation such as procedures for collective redundancies and those regarding bankruptcies. Information, consultation and participation for workers must be developed along appropriate lines, taking into account the practices that are in force in the various Member States. Such information, consultation and participation must be implemented in due time, particularly in connection with restructuring operations in undertakings or in cases of mergers that have an impact on workers’ employment.249 The objective of the Directive, according to the European Commission, is not only to protect workers’ interests but also to facilitate balanced economies, fair competition and the transfer of undertakings. The European Commission decided to produce a memorandum on the acquired rights of workers in cases where undertakings are transferred, with a view to increasing information and 244 Barnard EC Employment Law 447-448. 245 E.g. France and The Netherlands. 246 Here the possibility exists of a mere delegation of power or the transfer of sovereignty in

limited areas of operation. 247 E.g. Germany, United Kingdom, Ireland and Italy. See Robert Seligman Corp v Baker (1983

ICR 770 (EAT)) where it was held that, in the case of amb iguity, the TUPE regulations must, as far as possible, be construed so as to conform to the requirements of the Directive.

248 Adopted on 9 December 1989. 249 See par 5 of the heading to Directive 2001/23/EC of 12 March 2001.


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guidance on the applying community law, taking into account the large number of cases that have come before the European Court of Justice.250 In the English case of Litster v Forth Dry Dock and Engineering Co Ltd the House of Lords followed a purposive approach in order to bring the application of the TUPE regulations within the scope of the Directive.251 The House of Lords held that “in order that the manifest purpose of the Regulations might be achieved and effect given to the clear but inadequately expressed intention of Parliament certain words must be read in by necessary implication”. Although it is true that national law should be construed, as far as possible, to be consistent with European law, it is, however, clear that words cannot be totally ignored or “wholly distorted” to achieve this.252 3.2.3 Amending Directive 98/50/EC The European Commission first proposed amendments to the Directive in the autumn of 1994, and then presented revised proposals in February 1997. The United Kingdom government used its Presidency of the Council of the European Union for the first six months of 1998 to carry those proposals forward and negotiate agreement amongst Member States. The new Directive is stated to be effective on the date of publication in the Official Journal (O.J. L 201/88), hence 17 July 1998, only as far as its implementation required harmonisation measures within national legal systems. Member States had until 17 July 2001 to comply. Since Directive 77/187/EEC of 14 February 1977 has been substantially amended in the interests of clarity and rationality, it has now been codified in Directive 2001/23/EC of March 2001. According to Davies,253 three general comments are relevant to the substance of the amendments:

250 It was agreed to produce this memorandum in order to facilitate correct application of

European law and to lead to greater transparency (paragraph 11.3.2 of the Medium-term Social Action Programme (1995-1997)).

251 1989 IRLR 161. 252 E.g. see the decision of the House of Lords in Webb v EMO (Air Cargo Ltd (United

Kingdom)) 1992 IRLR 116. Here it was held per Lord Keith that, in principle, English Courts should construe English provisions consistently with European law as far as possible. However, the words cannot be ignored or wholly distorted to achieve that result. The Court referred in this regard to the decision of the ECJ in Marleasing SA v La Commerciale Internacional de Alimentation SA Case C106/89. Legislative amendment may therefore become necessary where effect cannot be given to the established objective of provisions by means of a purposive interpretation because of the clear words of the provision.

253 Davies P “Amendments to the Acquired Rights Directive” 1998 ILJ (United Kingdom) 365 365-366.

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• The predominant concern in the amendments is with the better articulation of the basic individual right created by the 1977 Directive (compulsory transfer of existing terms and conditions of employment) within certain commercial transactions.

• The Amending Directive gives Member States a quite remarkable range of choices at the transposition stage.

• A number of important issues have not been dealt with at all, or were touched on only in an insignificant way.

Regarding the first comment, it can be noted that apart from the degree of clarity that has been achieved (Davies submits that in the case of contracting-out services it is limited), it has to be acknowledged that better articulation should not be equated/confused with increased formal legal rights for employees. The previous position in law has just been articulated further. A note can also be made about the second comment – in the event of insolvent transferors, article 5(1) permits Member States to adopt legal regimes which are, prima facie, less protective of employees. To a large extent, the amendments to the Directive only gave effect to the interpretation of the European Court of Justice of the Acquired Rights Directive, which had become apparent with regard to problematic issues. 3.2.4 The safeguarding of employment 3.2.4.1 Scope and definitions Even though many of the provisions of the Acquired Rights Directive have been given meaning by the European Court of Justice, 254 only the substantive provisions of the Directive will be outlined here. Each of the provisions of the Directive will be discussed according to topics in chapters infra. Nonetheless, since the amended text certainly incorporates some of the Court’s terminology and interpretative guidance, its influence will already be clear when making a straightforward comparison of the original and amended text.255 Article 1 deals with the scope of the Directive.256 Article 1(1)(a)257 has been amended to reflect, without any doubt, that the Directive will apply to any transfer of an undertaking or business (or part of an undertaking or business) to another employer as a result of a legal transfer or merger. Previously, the article provided that it would apply

254 The case law of the ECJ delivered under the previous Directives is still valid for Directive

2001/23/EC. Directive 2001/23/EC thus only codified the amended Transfers Directive. 255 ECJ decisions will be incorporated into the discussions in following chapters. 256 Reference is hereafter made to Directive 2001/23/EC. 257 See chapters 5 & 6 infra .


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to “any transfer of an undertaking, business or part of a business to another employer”. This could have led to questions regarding a part of an undertaking being transferred. Article 1(1)(b)258 has been extended to provide that there is a transfer within the meaning of the Directive in cases where there is a transfer of an economic entity that retains its identity, meaning an organised grouping of resources with the objective of pursuing an economic activity, whether or not that activity is central or ancillary. Furthermore the Directive will apply to public and private undertakings engaged in economic activities, whether or not they are operating for gain.259 An administrative reorganisation of public administrative authorities, or the transfer of administrative functions between public administrative authorities, however, is not a transfer within the meaning of the Directive.260 The previous definition was far more limited in its explanation of when there would actually be a transfer of a going concern and left it largely to the European Court of Justice to determine whether a particular undertaking or business would fall within the scope of the Directive.261 Article 1 also states that the Directive does not apply to sea-going vessels, as it only applies to transferred undertakings, businesses or a part of the undertakings or businesses situated within the territorial scope of the treaty.262 263 Article 2 contains definitions covering the following applicable terms:

258 See chapter 5 infra. 259 Art 1(1)(c). See chapter 6 infra. 260 Art 1(1)(c). See chapter 6 infra. 261 So it was established that a non-profit making concern could be included (Redmond

Stichting v Bartol Case 29/91, 1992 ECR 1-3189; 1992 IRLR 366 (ECJ)), that what was needed was the transfer of a “stable economic entity” (Rygaard v Dansk Arbejds-giverforening Case 48/94, 1995 ECR 1-2745; 1996 IRLR 51 (ECJ)) and that it was for the national Court to determine whether or not a transfer of a stable economic entity had occurred, taking various factors into account, including the transfer of tangible and intangible assets, goodwill, work in progress, employees, customers, suppliers, and whether the same or similar activities were carried on before and after the alleged transfer (Spijkers v Gebroeders Benedik Abattoir CV Case 24/85, 1986 ECR 1119 (ECJ)). The Directive specifically included the transfer of part of a business and the ECJ interpreted that to mean that a service or activity supporting the main undertaking, or even a peripheral activity, could be included, provided that the activity was severable and retained its identity after the alleged transfer (Rask & Christensen v ISS Kantineservice A/S Case 209/81, 1982 ECR 2511; 1993 IRLR 133). The Directive still requires the transfer of an undertaking or business but the ECJ’s phrase “economic entity” is employed now as an aid to identifying an undertaking or business. Art 1(b) states that there is a transfer within the meaning of the Directive where there is “a transfer of an economic entity which retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary”. A major issue is whether this new definition resolves the uncertainty surrounding the transfer of labour-intensive service contracts, particularly in the context of contracting-out and competitive tendering for support services. The new definition adopts the Rask approach so that the activity can be ancillary, but still seems to require the transfer of the activity as part of the transfer of an economic entity.

262 France, Germany, Italy, Portugal and Spain have applied the principles of the Directive to sea-going vessels. See in this regard http://europa.eu.int/comm/employment_social/soc-dial/labour/memo/memo_en.ht (last visited on 6 July 2000).

263 See Barnard EC Employment Law 469, who states that it is the physical location of the business and not the location of ownership that is the determinative feature.

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• Transferor (a natural or legal person who ceases to be the employer due to a relevant transfer (i.e. one within the meaning of article 1(1))).

• Transferee (a natural or legal person who becomes the employer in respect of the transferred entities due to a relevant transfer).

• Representatives of employees (representatives of employees as provided for by the laws or practices of Member States).

• Employee (a person who, in the Member State concerned, is protected as an employee under national law).

A new addition to the Directive relates to article 2(2) that now states that although Member States are free to determine who qualify as employees under national law, contracts of employment will not be excluded from the scope of the Directive solely because: • of the number of working hours; • of being fixed-term contracts of employment; • of being temporary employment relationships264 and the entity or part of the entity

transferred is, or is part of, the temporary employment business, which is the employer.265

The above provisions can be said to deal with the requirements that need to be satisfied in order for the protection embodied in the Directive to apply. Therefore, a party who can show that the transfer of a relevant entity did take place in the prescribed manner (with the desired consequence), falling within the territorial scope of the treaty (and excluding a sea-going vessel), will be entitled to claim that the remainder of the Directive’s provisions apply. The Directive applies to all transfers resulting from a contract, an administrative or legislative act, or a Court decision. Thus the Directive applies to all situations in which there is a change in the legal or natural person responsible for carrying on the business, regardless of whether or not ownership of the undertaking is transferred. Furthermore,

264 Within the meaning of art 1(2) of Directive 91/383/EEC on health and safety at wo rk. This

article defines “temporary employment” as “relationships between a temporary employment business, which is the employer and the worker, where the latter is assigned to work for and under the control of an undertaking and/or establishment making use of his services”.

265 Temporary employment services (labour brokers) are regulated in South Africa in terms of s 198 of the LRA. In s 198(1) “temporary employment services” is defined as “any person who, for reward, procures for or provides to a client other person (a) who render services to, or perform work for, the client; and (b) who are remunerated by the temporary employment service.” The person whose services have been procured for or provided to a client is the employee of the temporary employment service (s 198(2)). The temporary employment service and client are jointly and severally liable if the employer contravenes, for e.g. a collective agreement or the BCEA (s 198(4)).


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the transfer of ownership of most of the shares in a company or a change in the majority shareholder does not constitute a transfer, as the employer’s legal personality remains the same. 3.2.4.2 Safeguarding of employees’ rights (individual and collective) Article 3(1)266 of the Directive provides that the transferor’s rights and obligations arising from a contract of employment (or from an employment relationship) existing on the date of a transfer must, by reason of such a transfer, be transferred to the transferee. Member States may provide for the transferor and transferee to be jointly and severally liable in respect of the said rights and obligations (therefore, rights and obligations arising either before the date of transfer or existing on the date of transfer). Member States may, according to article 3(2), adopt measures to ensure that the transferor notifies the transferee of all the rights and obligations concerned, as far as those rights and obligations are or ought to have been known to the transferor at the time of the transfer. However, a failure to notify the transferee of a right or obligation will not affect the transfer of such a right or obligation and the rights of employees against the transferor or transferee in respect of such right or obligation. Article 3(3)267 provides that, following the transfer, the transferee must continue to observe the terms and conditions agreed upon in any collective agreement on the same terms as the transferor had to, until the date of termination or expiry of the collective agreement or until another collective agreement comes into force. It is possible for Member States to limit the period for observing the said terms and conditions but the period of compliance may not be limited to less than one year. The rights and obligations transferred are, however, limited by article 3(4)268 to exclude employees’ rights to old age, invalidity or survivor’s benefits under supplementary company or inter-company schemes outside the statutory social security schemes in Member States. Member States may, however, provide otherwise. If Member States do not provide otherwise, they still have to protect the interests of employees and of persons no longer employed in the transferor’s business at the time of the transfer in respect of rights that confer on them immediate (or prospective) entitlement to old age benefits, including survivor’s benefits, under the supplementary schemes referred to above.

266 See chapter 7 infra. 267 See chapter 9 infra. 268 See chapter 10 infra.

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The Directive also deals with dismissals in this context and article 4269 states that the transfer of an entity may not, in itself, constitute grounds for dismissal by the transferor or the transferee. However, dismissals may take place for economic, technical or organisational reasons entailing changes in the workforce. Article 4(2) provides that where a contract of employment or employment relationship is terminated because the transfer involves a substantial change in working conditions to the detriment of the employee, the employer will be regarded as having been responsible for the termination. An employee cannot waive the rights conferred upon him/her by the Directive, and these rights cannot be restricted, even with his/her consent and even if the disadvantages resulting from this waiver are offset by such benefits that, taking the matter as a whole, the employee is not placed in a worse position. However, in so far as national law allows the possibility to amend an employment relationship in a way that is disadvantageous to employees, such changes are not prohibited merely because the undertaking has been transferred. Thus, the rights and obligations may be changed vis-à-vis the transferee, subject to the exact same restrictions as would have applied to the transferor, if the transfer is not, in itself, the reason for this change. Where the transferor of an undertaking, business or part of an undertaking or business is the subject of bankruptcy proceedings or any analogous insolvency proceedings that have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (including an insolvency practitioner authorised by a competent public authority), the provisions of articles 3270 and 4271 will not apply to such a transfer, unless Member States provide otherwise.272 It is thus not compulsory for Member States to make transfer provisions applicable in these circumstances. Should articles 3 and 4 be made applicable to the said entities, a Member State may provide that the transferor’s debts that arise from any contracts of employment or employment relationships and that are payable before the transfer or before the opening of the insolvency proceedings, will not be transferred to the transferee.273 However, this would only be possible if the employees’ protection at least complies with the directions given in Directive 80/987/EEC.274 275 Article 5(2)(b) makes it possible for the transferee, transferor, or person or persons exercising the transferor’s functions, on the one hand, and the representatives of the employees, on the other hand, to agree to 269 See chapter 12 infra. 270 Transfer of rights and obligations. 271 Protection against transfer dismissals. 272 Art 5(1). See chapter 13 infra. 273 Art 5(2). 274 Of 20 October 1980. 275 Art 5(2)(a).


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alterations, in so far as law or practice permits, to the employees’ terms and conditions of employment designed to safeguard employment opportunities by ensuring the survival of the undertaking, business or part of the undertaking or business. (This could also apply to other situations of “serious economic crisis” as defined in national law, e.g. rescue proceedings.) Article 5(4) provides clearly that Member States must take appropriate measures to prevent misuse of insolvency proceedings in order to deprive employees of the rights provided for in the Directive. With regard to representatives of the employees or the representation of the employees, article 6(1)276 states that where the undertaking, business or part of the undertaking or business preserves its autonomy, the status and function of the said representatives affected by the transfer must be preserved on the same terms and subject to the same conditions as existed before the date of the transfer. It is immaterial whether this is by virtue of law, regulation, administrative provision or agreement. It is important that the conditions necessary for the constitution of the employees’ representation are fulfilled. The final substantive article of the Directive deals with disclosure of information and consultation. Article 7(1)277 requires that the transferor and the transferee must inform the representatives or their respective employees who are affected by the transfer of: • the date or proposed date of the transfer; • the legal, economic and social implications of the transfer for the employees; and • any measures envisaged in relation to the employees. The transferor should give the said information to the representatives of his/her employees in good time before the transfer is carried out. The transferee should also give such information in good time before the transfer, but in any event before his/her employees are directly affected by the transfer as regards their conditions of work and employment. Regarding consultation, article 7(2) provides that where the transferor or the transferee envisages measures in relation to its employees, such transferor or transferee must consult the representatives of the employees about such measures in good time, with a view to reaching an agreement. Where Member States have laws, regulations or administrative provisions stipulating that representatives may have recourse to an arbitration board to obtain a decision on the measures to be taken in relation to employees, the said obligations regarding disclosure and consultation may be limited to cases where the transfer carried out gives rise to a change in the business that is likely to 276 See chapter 11 infra. 277 Ibid.

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entail serious disadvantages for a considerable number of the employees.278 279 It is expressly stated that the said obligations will apply irrespective of whether the decision resulting in the transfer is taken by the employer or an undertaking controlling the employer. Furthermore, the argument that a breach of these obligations occurred because the information was not provided by the undertaking that controls an employer will not be accepted as an excuse.280 These obligations can be limited to undertakings or businesses that, in terms of the number of employees, meet the conditions for the election of a collegiate body representing employees.281 Finally, where there are no representatives of the employees in an undertaking or business through no fault of their own, article 7(6) provides that the employees concerned must be informed in advance of: • the date or proposed date of the transfer; • the reason for the transfer; • the legal, economic and social implications of the transfer for the employees; and • measures envisaged in relation to the employees.282 3.3 The Insolvency Directive283 In the event of the liquidation of an undertaking or business, the Insolvency Directive foresees that protection should be provided for employees, particularly to guarantee payment of their outstanding claims, while taking into account the need for balanced economic and social development in the community. Member States are therefore obliged to take measures necessary to ensure that guarantee institutions guarantee payment of employees’ outstanding claims resulting from contracts of employment or employment relationships and relating to pay for the period prior to a given date. This date can be decided on by Member States by choosing from any one of the following: • the date of onset of the employer’s insolvency; or

278 Art 7(3). 279 Thus, whereas the obligation to provide information is general, the consultation obligation

is limited. This consultation obligation exists only when the transferor or transferee envisages measures in relation to his/her employees (e.g. a reduction in the size of the workforce).

280 Art 7(4). 281 Art 7(5). 282 See chapter 11 infra. 283 80/987/EEC. See chapter 13 infra.


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• the date of notice of dismissal issued to the employee concerned on account of the employer’s insolvency; or

• the date of onset of the employer’s insolvency or the date on which the contract of employment was discontinued on account of the employer’s insolvency (the combination choice).284

The minimum period for which payment is to be guaranteed will vary according to the choice made, but usually relates to the last three months of employment.285 Guaranteed payments must be made out of a fund to which the employer usually has to make contributions (unless it is fully covered by the public authorities)286 but which is independent of the employer’s assets. The fund’s liabilities may also not depend on whether obligations to contribute to financing have been fulfilled.287 Another important feature of this Directive is that Member States must ensure that an employer’s insolvency does not adversely affect the employees’ or ex-employees’ entitlement to social security benefits.288 Disclosure of information and consultation provisions in the Acquired Rights Directive, as discussed above, will also apply here. 3.4 ILO Convention on the Protection of Workers’ Claims in the Event of

the Insolvency of their Employer289 According to article 1 of the Convention, “insolvency” means: “situations in which, in accordance with national law and practice, proceedings have been opened relating to an employer’s assets with a view to the collective reimbursement of its creditors”.290 Where the existence of an enterprise is threatened by insolvency, several interests of the employee are potentially affected, the most important being the employee’s security of employment. The law of insolvency’s primary object, however, was, for a long time, the protection of the interests of creditors, and it did so at the expense of the interests of both the enterprise and its employees.291

284 Art 3(2). 285 Where the Member State has chosen the combination choice, the minimum period is a total

of eight weeks within the preceding 18 months of employment (art 4(2)). However, in this case, Member States may limit liability to pay corresponding to a period of eight weeks or to several shorter periods totalling eight weeks.

286 Art 5(b). 287 Art 5(c). 288 Art 6 – 8. 289 173 of 1992. 290 Art 1(1). 291 Bronstein Comparative Survey in Yemin & Bronstein (eds) The Protection of Workers’

Claims in the Event of Their Employer’s Insolvency (1991) 5 (as discussed in Olivier MP Employment Claims in Insolvency and Rescue Proceedings (CICLA 1997) 8).

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In current international law, three levels of protection are afforded to employees of an insolvent employer, namely:292 • the protection of the claims of the employees; • the procuring of compensation for the employees in the form of severance pay; and • the safeguarding of the employment of employees, inter alia, through efforts to

rehabilitate enterprises where possible. 3.5 Germany - Article 613a Bürgerliches Gesetzbuch293 In Germany, employees’ rights in the event of a change of the identity of their employer were protected even before the Acquired Rights Directive was implemented.294 After the implementation of the Directive, Germany had to make some changes to article 613a of the Civil Code (Rechte und Pflichten bei Betriebsübergang) in order to ensure that its provisions were in accordance with those of the Directive. These amendments came into force in 1980. In Germany, the legal effect of a business succession on the individual employer-employee relationship is different for universal and singular succession. In the case of universal succession,295 the property as a whole (with all the assets and liabilities) passes to the legal successor; in the case of the employer’s death the legal successor thus takes over the employment contracts. This is the case unless, by virtue of an agreement, the work due under that employment contract is mainly or exclusively due to the employer personally.296 Singular business succession is regulated in article 613a, which provides for the transfer of a contract of employment by operation of law. In order for article 613a to apply, an undertaking or a part of an undertaking must be transferred as a going concern. This transfer must have been effected on the basis of “a transfer of ownership under a sales contract, a creation of usufruct or a similar legal transaction.”297 This means that a transfer by operation of law is excluded from the scope of article 613a.298 The German Federal Labour Court developed the 292 Olivier MP & Potgieter O “The legal regulation of employment claims in insolvency and

rescue proceedings: A comparative enquiry” 1995 16 ILJ 1295; Olivier Employment Claims 8. 293 A comparative perspective on German regulation of specific issues can be found in the

corresponding chapters infra. 294 Since 1972. 295 I.e. the law of succession being applicable. 296 Halbach G, Paland N, Schwedes R & Wlotzke O Labour Law in Germany (Federal Ministry

of Labour and Social Affairs 1994) 155. 297 Halbach et al Labour Law in Germany 155. 298 Thus, where a person inherits an estate, including an undertaking, art 613a is not applicable.

The end result, however, will be the same, since the contracts of employment are transferred according to the relevant provisions of the law of successorship. The question remains


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concept of Widerspruchsrecht des Arbeitnehmers. According to this principle, an employee cannot be forced to transfer to a transferee against his/her own free will. Since article 613a is silent on the question of whether or not the employee has to consent to the transfer of his/her employment relationship, this concept was a very important “invention” of the Court299 which was later endorsed by the European Court of Justice.300 In German law, there is only one parallel to this provision. This can be found in article 571 of the Civil Code. This provision stipulates that where a landlord sells a house, which is leased to a tenant, the buyer of the house automatically becomes a party to the lease agreement. Article 613a reads as follows:

§613a(1) Geht ein Betrieb oder Betriebsteil durch Rechtsgeschäft

auf einen anderen Inhaber über, so tritt dieser in die Rechte und Pflichten aus den im Zeitpunkt des Übergangs bestehenden Arbeitsverhältnissen ein. Sind diese Rechte und Pflichten durch Rechtsnormen eines Tarifvertrags oder durch eine Betriebsvereinbarung geregelt, so werden sie Inhalt des Arbeitnehmer und dürfen nicht vor Ablauf eines Jahres nach dem Zeitpunkt des Übergangs zum Nachteil des Arbeitnehmers geändert werden. Satz 2 gilt nicht, wenn die Rechte und Pflichten bei dem neuen Inhaber durch Rechtsnormen eines anderen Tarifvertrags oder durch eine andere Betriebsvereinbarung geregelt werden. Vor Ablauf der Frist nach Satz 2 können die Rechte und Pflichten geändert werden, wenn der Tarifvertrag oder die Betriebsvereinbarung nicht mehr gilt oder bei fehlender beiderseitiger Tarifgebundenheit im Geltungsbereich eines anderen Tarifvertrags dessen Anwendung zwischen dem neuen Inhaber und dem Arbeitnehmer vereinbart wird.

whether or not the “right to object” will also be maintained in these circumstances, and furthermore, whether or not it will be applicable to both the heir and the employees.

299 Judgements of 2 October 1974 in DB 1975 at 601, and of 30 October 1986 in RdA 1987 at 63. 300 See chapter 7 infra.

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(2) Der bisherige Arbeitgeber haftet neben dem neuen Inhaber für Verpflichtungen nach Absatz 1, soweit sie vor dem Zeitpunkt des Übergangs entstanden sind und vor Ablauf von einem Jahr nach diesem Zeitpunkt fällig werden, als Gesamtschuldner. Werden solche Verpflichtungen nach dem Zeitpunkt des Übergangs fällig, so haftet der bisherige Arbeitgeber für sie jedoch nur in dem Umfang, der dem im Zeitpunkt des Übergangs abgelaufenen Teil ihres Bemessungszeitraums entspricht.

(3) Absatz 2 gilt nicht, wenn eine juristische Person oder

eine Personenhandelsgesellschaft durch Umwandlung erlischt; §8 des Umwandlungsgesetzes in der Fassung der Bekanntmachung vom 6. November 1969 (BGB) bleibt unberührt.

(4) Die Kündigung des Arbeitsverhältnisses eines

Arbeitnehmers durch den bisherigen Arbeitgeber oder durch den neuen Inhaber wegen des Übergangs eines Betriebs oder eines Betriebsteils ist unwirksam. Das Recht zur Kündigung des Arbeitsverhältnisses aus andere Gründen bleibt unberührt.

Article 613a provides not only for an automatic transfer of the rights and obligations arising from the employment relationship but also that the transferee has to be regarded as the successor of the transferor in all matters that relate to the employment relationship. Article 613a(1) provides that the transferee becomes the new employer and is thus liable for fulfilment of all obligations that arise after the transfer. Obligations that arose before the transfer and that were not already fulfilled by the transferor are also for the transferee’s account, but the employee has to bring his/her claim within one year of the transfer for the transferee to be liable.301 Article 613a(2) also provides for joint liability of the transferor and transferee for obligations that came into existence before the transfer and will become due within one year after the transfer. If, however, such obligations become due only after the date of the transfer, the transferor is liable

301 Art 613a of the Civil Code is not applicable to the claims for retirement pensions of retired

former employees; the former employer continues to be the party liable to the retirees (e.g. Federal Labour Court, judgement of 11 November 1986 in BB 1987 at 1392).


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only for that part of the period that had expired at the time of the transfer.302 This joint liability is compulsory, and accordingly, the transferor and transferee cannot dispose of this liability in the transfer agreement. However, they remain free to reach an agreement regarding a right of redress operating between the contracting parties. Article 613a(1) regulates rights originating in terms of collective agreements as well. It provides that where rights and obligations between an employer and employees are stipulated in collective agreements or works agreements (with works councils), the provisions of these agreements are deemed to be part of the individual contract of employment. Dismissals by either the transferor or the transferee are prohibited if the reason for the dismissal is the transfer of the undertaking or part of the undertaking. However, this does not take away the employer’s right to dismiss employees for other reasons than the transfer of the undertaking. A dismissal for operational reasons (economic, technical or organisational reasons entailing changes in the workforce) would therefore still be lawful, if it was not because of the transfer itself.303 The motive for the termination is thus of crucial importance.304 Article 613a(4) prevents a transferor and transferee from using the transfer of a business to get rid of certain employees (e.g. by stating that a particular employee was “too expensive”). A dismissal contrary to article 613a(4) will be ineffective, regardless of the provisions of the Act on Protection against Dismissal.305 There is a possibility that right of action may be forfeited if the action is brought after a long period of time and the employer may safely have assumed that he/she will no longer be sued.306 It is important to note that, in principle, it is the employee’s obligation to explain and, if need be, prove that the transfer of the business was the employer’s reason/motive for the dismissal.307 However, if the dismissal and the transfer of the business take place in rapid succession, dismissal “because of a transfer” may be assumed and the employer will have to try and disprove this assumption by indicating “other” reasons for the dismissal.308

302 Thus, if the transfer takes place on the 15th of the month, the transferor is liable only for half

of the monthly salary, which has to be paid retrospectively at the end of the calendar mo nth. 303 Halbach et al Labour Law in Germany 157. See chapter 12 infra . 304 Federal Labour Court, judgement of 26 May 1983 in BB 1983 at 2116. 305 This Act only applies where there are at least six employees in the workplace and where the

dismissed employee has been in employment for at least six months (Halbach Labour Law in Germany 157). This Act also provides (s 4) that a claim must be brought within a 3-week period.

306 Federal Labour Court, judgement of 20 May 1988 in DB 1988 at 2156. 307 Halbach et al Labour Law in Germany 158. 308 Federal Labour Court, judgement of 5 December 1985 in DB 1986 at 1290.

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It is not entirely clear whether all parties concerned could jointly decide to dispose of the protection of article 613a. Based on the principle of freedom of contract, it should, in principle, be possible. However, the danger is that employees might not exercise their discretion in an entirely unfettered fashion. It is significant to note that article 613a also applies to insolvency situations, even though this position is often severely criticised. However, according to the Federal Labour Court,309 the provision is not to be applied in as much as it stipulates that the new owner of the business is liable for claims that had already arisen at the time of the institution of bankruptcy proceedings. The principles of distribution in insolvency law have priority in this case.310 Some of the most important judgements of the European Court of Justice have originated in Germany. One of the most controversial questions relating to the application of the Acquired Rights Directive has related to the contracting out of services.311 Some of the judgements have been reflected in the amended Directive as discussed above. The Works Constitution Act provides that a works council may not enforce its right of codetermination in the company’s economic affairs nor in alterations of the establishment (e.g. closure or transfer of establishments), which may entail substantial prejudice to the staff. However, articles 111, 112 and 112a provide for such cases by granting the works council the right of participation, and, partly, codetermination rights too, so as to enable it to retain jobs or to compensate employees concerned, either in full or in part, for any economic prejudice they might suffer as a result of such proposed action by the company. Nevertheless, no alteration within the meaning of article 111 of the Act is deemed to exist where there is the mere transfer of an establishment or part of the establishment to a new owner by way of a legal transaction. Article 613a of the Civil Code applies in these circumstances. This is also the case where a company is divided into a holding company and operating company, each of which are legally independent. (Where there is a division of an establishment in such a way that part of the establishment is transferred to another company, the setting up of an independent subsidiary is considered to constitute a transfer within article 613a of the Civil Code).312 313

309 Judgement of 17 January 1980 in DB 1980 at 308. 310 See chapter 13 infra. 311 The first of the controversial judgements being Christel Schmidt v Spar- und Leihkasse der

Früheren Ämter Bordesholm, Kiel und Cronshagen 1994 ECR 1311 (ECJ) and Süzen v Zehnacker Gebäudereinigung GmbH Krankenhausservice 1997 IRLR 255 (ECJ).

312 Federal Labour Court, ruling of 17 February 1981 in DB 1981 at 1190. 313 Alterations that are subject to worker participation might be deemed to exist in so far as the

transition of an establishment is linked to further measures taken by the seller or the buyer (e.g. if in compliance with the buyer’s plans, the seller dismisses part of the staff (Federal Labour Court, judgement of 26 May 1983 in DB 1983 at 2690) or if the buyer makes


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3.6 United Kingdom: Transfer of Undertakings (Protection of Employment)

Regulations 1981 (TUPE)314 These regulations apply to a transfer from one person to another of an undertaking that is situated in the United Kingdom immediately before the transfer or a part of an undertaking that is so situated.315 It is provided that such a transfer of an undertaking or part of one may be effected by a series of two or more transactions316 and may take place irrespective of whether or not any property is transferred to the transferee by the transferor.317 Regulation 2 clearly states that “undertaking” includes any trade or business. The qualification that excluded any undertaking that was not in the nature of a commercial venture, was repealed in 1993 (being contrary to European community law). Regulation 5 provides for continuity of employment where the transfer of a business as a going concern (and not the transfer of assets) is concerned. The effect of a relevant transfer is thus that the relevant contracts of employment are not terminated,318 but that such contracts have effect after the transfer as if these were originally made between the person so employed and the transferee. On the completion of a relevant transfer, all the transferor’s rights, powers, duties and liabilities under or in connection with any such contract are therefore transferred to the transferee in terms of regulation 5(2). Also, anything done before the transfer by or in relation to the transferor in respect of that contract or a person employed in that undertaking or part of that undertaking will also be deemed to have been done by or in relation to the transferee.319 Transfers by receivers and liquidators are covered in regulation 4. In a hive-down, the transfer from the parent to the subsidiary is deemed not to have been effected until the subsidiary is sold or the business of the subsidiary is sold to another person. It is also deemed to be effected as one transaction only.320 This provision seemed to give receivers and administrators an opportunity to free the new subsidiary from any obligations to the existing employees of the business.

substantial changes in the organisation or purpose of the original establishment which might give rise to business alterations within the meaning of art 111 (Federa l Labour Court, judgement of 16 June 1987 in DB 1987 at 1842)).

314 A comparative perspective on United Kingdom regulation of specific issues can be found in the corresponding chapters infra .

315 Reg 3(1). 316 Reg 3(4)(a). 317 Reg 3(4)(b). 318 Reg 5(1). 319 See chapter 7 infra. 320 See chapter 13 infra.

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A rather important amendment entails the addition of regulations 5(4A) and 5(4B). The former stipulates that neither an employee’s contract of employment nor rights, powers, duties and liabilities under or in connection with it will be transferred if the employee informs the transferor or the transferee that he/she objects to becoming employed by the transferee. The latter then stipulates that where an employee so objects, the transfer of the undertaking or the part of the undertaking in which he/she is employed must operate so as to terminate his/her contract of employment with the transferor, but that he/she shall not be treated, for any purpose, as having been dismissed by the transferor. This leaves an employee worse off by negating the possibility of claiming compensation against the transferor. However, regulation 5(5) does provide that an employee may terminate his/her contract without notice if a substantial change is made in his/her working conditions to his/her detriment. It is not sufficient for the identity of the employer to change in order to invoke this provision; the employee must show that, in all the circumstances, the change is a significant change and is to his/her detriment. In this case, the employee can claim constructive dismissal and will be entitled to claim damages.321 Regulation 8 of the TUPE regulations also expressly regulates dismissals within the context of transfers. In terms of this provision, any dismissal will be an unfair dismissal if the reason or principal reason for such dismissal was the transfer or a reason connected with the transfer. However, where an economic, technical or organisational reason entailing changes in the workforce of either the transferor or the transferee before or after a relevant transfer is the reason or principal reason for dismissing an employee, the above will not apply. Any dismissal will then be regarded as having been for a substantial reason of such kind that the dismissal of the employee is justified.322 According to regulation 5(3), the TUPE regulations apply to a person employed in an undertaking or part of one transferred by a relevant transfer if employed immediately before the transfer. Where the transfer is effected by a series of two or more transactions, a person so employed immediately before any of those transactions is also covered. This led to instances where old employers dismissed employees before that time323 to circumvent the provisions of the regulations. However, it is clear that a transferor cannot escape the TUPE net so easily.324 321 See chapters 7 & 12 infra. 322 Reg 8(2). 323 The case of Litster v Forth Dry Dock and Engineering Co Ltd (1989 ICR 341 HL) invoked a

purposive approach in order to give effect to the Directive. The House of Lords held that the dismissal was linked to the transfer and was, therefore, ineffective. This approach construed regulations 5 and 8 of the TUPE regulations consistent with the stated purpose of the Acquired Rights Directive.

324 Litster resulted in such dismissals being both unfair and ineffective, as the contract would still be transferred to the transferee. The transferor could thus not dismiss the employees


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Employers are required to consult with workers’ representatives in terms of both the Collective Dismissals Directive325 and the Acquired Rights Directive.326 Although British law imposed a similar obligation, consultation was only required with recognised trade unions. This meant that where there was no recognised trade union, employees did not have a right to consultation. This was clearly a breach of the Directives, and was accordingly held to be a breach by the European Court of Justice.327 As a result, the Collective Redundancies and Transfers of Undertakings (Protection of Employment) (Amendment) Regulations 1995 were passed. This issue is also regulated by the Trade Union and Labour Relations (Consolidation) Act of 1992 (in section 188). The duties to consult under regulation 10 of the TUPE regulations and section 188 of TULRCA are in parallel terms, but there are some important differences. Under the TUPE regulations, the duty to consult applies to both transferor and transferee and the scope of the consultation is wider, covering the legal, social and economic implications of the transfer. The timing of the consultation is also different: no specific period is laid down in the TUPE regulations, provided that it is “long enough before…”. TULRCA used to require consultation “at the earliest opportunity” but was watered down by the 1995 Regulations. Under section 188, consultation is required when the employer proposes to dismiss workers for redundancy. Both instruments allow an employer a defence where special circumstances render prior consultation not reasonably practicable (regulation 10(7) and section 188(7)). It is clear that an employer could choose to consult non-union representatives even where there is a recognised trade union, although this may have been unlikely to happen in practice.328 It is also clear that provided that the employer invited employees to elect representatives in good time, there is no affirmative obligation to ensure that an election takes place. In such case, employees could still find that they were not represented. Under TULRCA section 189, the remedy for failure to consult is for the trade union to apply for a protective award on behalf of the employees. The maximum award corresponds to the minimum consultation periods for multiple redundancies in section 188. This may be contrasted with the maximum protective award of four weeks’ pay available for breach of the duty to consult under the TUPE regulations (as it was, see infra). The two protective awards should not be set off against each other when both are payable, nor are they to be set off against any contractual severance payment.

and simply negotiate with the transferee for compensation payable to the unfairly dismissed employees.

325 75/129/EEC. 326 2001/23/EC. 327 EC Commission v United Kingdom Case 382/92, 1994 ECR 2479 (ECJ). 328 Pitt G Cases and Materials in Employment Law (Financial Times/Pittman Publishing 1998)

383-386.

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In 1999, the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 1999 were adopted. These regulations came into force on 28 July 1999. The regulations amend the provisions of the Trade Union and Labour Relations (Consolidation) Act 1992 relating to information and consultation on redundancies and the provisions of the TUPE regulations of 1981 relating to information and consultation. For both redundancies and transfers, they provide that employers must consult representatives of recognised trade unions. If, however, no trade union is recognised, then employers must consult either existing employee representatives or specially elected employee representatives. If elections are held for employee representatives, they must be held in accordance with these regulations. If employees fail to elect representatives after being invited to do so, the employer must give the employees concerned the information he/she would have had to give to their representatives. The maximum compensation that can be awarded in the event of an employer’s failure to consult has been increased in some cases. In all cases involving redundancies, the maximum compensation is now 90 days’ pay. In cases involving transfers, this is 13 weeks’ pay. It is forbidden to contract out of those parts of the Regulations that deal with the duty to inform and consult the Unions or that deal with the transfer of employment and with unfair dismissal.329 3.7 Concluding remarks Common law does not provide satisfactory protection of employees’ interests in the event of the transfer of an undertaking (or part of an undertaking) as a going concern.330 This fact has been recognised for decades on the supranational and international front. Statutory intervention has thus been present in all Member States of the European Community since 1980, and even prior to that in some jurisdictions (for example Germany and France). The aim of these statutory measures can be described as to ensure, as far as possible, that the contract of employment or the employment

329 See reg 12. See also Harvey (Harvey on Industrial Relations and Employment Law F/29)

where it is stated that: “[t]he prohibition does not extend to those parts of the Regulations which deal with the transfer of collective agreements and Union recognition, but it is unlikely that such agreements would, in any event, be legally binding even between the original parties. In the Daddy’s Dance Hall case, the ECJ made it clear, in the context of the Acquired Rights Directive, that an employee is not in a position to validly waive rights under the Directive even in circumstances where, as a consequence, the employee receives benefits which place him in a better position.”



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relationship continues without change with the transferee in order to prevent the workers concerned from being placed in a less favourable position because of the transfer alone. The Acquired Rights Directive provides for the automatic transfer of employment contracts whenever there is a legal transfer or merger331 of an undertaking, business or part of an undertaking or business.332 Rights and obligations originating from the employment contract or employment relationship are transferred to the transferee,333 with certain limitations regarding old age, invalidity and survivor’s benefits under supplementary schemes outside the statutory social security schemes in Member States.334 Dismissal because of the transfer is prohibited, but operational requirement dismissals are not outlawed. If a contract or employment relationship is terminated because the transfer will result in a substantial change in working conditions to the detriment of the employee, the employer is regarded as responsible for the dismissal.335 The status and function of employee representatives are protected where the transferred undertaking preserves its autonomy and extensive provision is made for information and consultation.336 Even though there is a Directive applicable at European Community level, this Directive is only binding on Member States as to the result to be achieved. The means adopted to achieve the result are left to the discretion of the individual Member States. It has been shown that this results in quite divergent regulation of the transfer of undertakings in the European Community. Member States have the option of providing for more favourable provision for employees and there is thus ample scope for conflicting parameters. Regulations of the United Kingdom and Germany were briefly outlined in this chapter, making several differences apparent.337 However, an extensive discussion of the regulation of specific issues was not included. In the following chapters, reference will constantly be made to the legal position of the European Community, the United Kingdom and Germany on specific subjects. Nevertheless, the general framework relating to the labour law implications of the transfer of an undertaking has now been provided.

331 See chapter 5 infra. 332 See chapter 6 infra. 333 See chapters 7 & 8 infra . 334 See chapters 8 & 10 infra. 335 See chapter 12 infra. 336 See chapters 9 & 11 infra. 337 E.g. regarding provision for joint liability, the effect of a transfer dismissal, the regulation of

transfers in insolvent circumstances, etc.

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What has become evident from this framework is that employees enjoy protection pertaining to many different identifiable interests at European Community level. Employees’ interests in the event of the transfer of an undertaking should thus not be considered in a vacuum, since other measures dealing with the protection of employees’ interests in situations, such as the insolvency of their employer or collective redundancies, are also relevant. A good example of how these measures work can be seen in the regulation of the Acquired Rights Directive relating to transfers in situations of insolvency. Although Member States can choose whether or not to make protection available in these transfers, they must at least comply with the minimum requirements of the Insolvency Directive in order to apply the provisions of the Acquired Rights Directive to a limited extent (providing for the transfer of contracts without accompanying rights and obligations).338 It is evident that South Africa can learn much from the experiences of these Member States. Even though the South African regulation of the transfer of undertakings was drafted with these provisions in mind, it is, however, submitted that the South African provisions differ in some very important aspects.339 One should therefore not blindly have regard to the supranational and international regulation of transfers. Where South African regulation differs substantially, one should also consider the motivation for this in order to determine whether such substantial differences are preferable or not.

338 See chapter 13 infra. 339 E.g. the ability to contract out of the protection in certain circumstances.


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CHAPTER FOUR

LABOUR LAW IMPLICATIONS OF THE TRANSFER OF AN UNDERTAKING IN SOUTH AFRICA:

A COMMON LAW, STATUTORY AND JURISPRUDENTIAL EXPOSITION

4.1 General The employment relationship between employer and employee is regulated by individual labour law. Generally, these rules can be found in the contract of employment, legislation and common law, subject to the Constitution of the Republic of South Africa of 1996. The termination of the employment relationship is an area of the law that covers many instances (including plant closures, retrenchments, redundancies and transfers). The basic aim of the doctrine of unfair dismissal is to protect the employee against dismissal in the absence of substantive grounds and/or a fair procedure.340 In the past the Industrial Court treated unfair dismissals as a species of unfair labour practices.341 This position has now been changed since a closed list of residual unfair labour practices is provided for in Schedule 7 of the Labour Relations Act 66 of 1995. However, the legislator thought it apposite to include a chapter on unfair dismissals in the Labour Relations Act (chapter 8 of the Act). This was said to be a temporary solution to dealing with these individual labour law matters and it was envisaged that it would eventually be repealed from the Labour Relations Act and would be included in new laws regulating basic conditions of employment and employment equity.342 Both the Basic Conditions of Employment Act 75 of 1997 and the Employment Equity Act 55 of 1998 have, however, been in effect for some time now and it seems improbable that another separate statute will be enacted to deal with unfair dismissals and residual unfair labour practices. Common law does not provide employees with lavish protective rules against unfair dismissal. The rules of natural justice more or less encompass the whole scope of protection available against unfair dismissal under common law.343 In most modern

340 Van Jaarsveld SR & Van Eck BPS Principles of Labour Law (Butterworths 1998) 280. 341 See e.g. Gumede v Richdens (Pty) Ltd 1984 ILJ 84 (IC). 342 Explanatory Memorandum to the Draft Bill, item 5. 343 Audi alteram partem and nemo iudex in sua causa . The rules for the working of natural

justice were originally available where a person’s liberty, property or other existing rights were affected detrimentally. These were also restricted to the public sector and to procedural issues. This right to procedural justice was then extended to cases where

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labour markets, the legislator has thus intervened by providing for protective laws regulating the termination of contracts of employment. In terms of common law, the sale or partial closure of a business meant termination of the existing contracts of employment.344 The decision whether or not to re-employ all or some of the employees was then left to the purchaser of the business.345 At most there could therefore be a claim on the basis of an unfair dismissal for operational requirements because an unfair procedure had been followed. It is possible for an employer to dismiss346 an employee for several reasons that would be regarded as substantively fair.347 A dismissal for operational requirements348 is also included in this regard. In the past the Industrial Court in South Africa was not indifferent to the predicament faced by many employees who were not offered re-employment with the purchaser/transferee. However, in the absence of any statutory regulation of the same, the Court was faced with very limited scope to assist such employees. The assistance that was forthcoming was thus predominantly procedural in nature, relating to disclosure of information, consultation and the payment of severance pay.349

persons had legitimate expectations. See Administrator Transvaal v Traub 1989 4 SA 731 (A). S 33 of the Bill of Rights regarding administrative justice has been held to be applicable to private bodies exercising public power (see Dawnlaan Beleggings (Edms) Bpk v Johannesburg Stock Exchange 1983 3 SA 344 (W)).

344 Le Roux PAK & Van Niekerk A The Law of Unfair Dismissal (Juta 1994) 90 states that in terms of ordinary contractual principles, where a contract has become permanently and objectively impossible to perform, and this is not due to the fault of a party, the contract comes to an end automatically. In the context of employment contracts, a different approach was, however, followed. On the question of whether there is a dismissal or whether one could say that the contracts were terminated by operation of law (impossibility of performance), it is generally accepted that there is a dismissal since the employer can give notice and since the employer initiates the sale or closure of the undertaking. Le Roux & Van Niekerk The Law of Unfair Dismissal 91 state “… where the impossibility is on the side of the employer there is no such automatic termination”. In this regard, the authors refer to Voet 19.2.27. as translated by Gane P The Selective Voet Being the Commentary on the Pandects (Butterworths 1956). Thus, where an employer dies or a fire destroys his/her factory, the contract continues until it is terminated by notice or some other means. See also Brassey M “The effect of supervening impossibility of performance on a contract of employment” 1990 Acta Juridica 22.

345 See Nokes Doncaster Amalgamated Collieries Limited 1940 AC 1014 HL. 346 See s 186 of the LRA 66 of 1995 for acts comprising “dismissal”. 347 See s 188 of the LRA. 348 When a dismissal for operational requirements may be relevant, Van Jaarsveld & Van Eck

(Principles of Labour Law 301) distinguishes two terms, retrenchment and redundancy, in this regard. After reviewing several Industrial Court decisions, the authors give the following content to the concepts: In the event of retrenchment, an employer is usually compelled to terminate the employment relationship for financial reasons. In the event of redundancy , however, the termination of services can rather be attributed to restructuring of personnel or the undertaking itself, the introduction of new business ventures or new technology, or rationalisation consequent upon a merger (operational reasons). The latter will more often be a threatening occurrence in the event of the transfer of undertakings or parts thereof. However, the LC and LAC have not made use of these terms under the LRA of 1995. The term “dismissal for operational requirements” is now used as a generic term.

349 See more regarding the Industrial Court’s approach in par 4.3 infra , as illustrated by a discussion of the most important case law on this subject.


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4.2 Common law In terms of our common law, a transferor of an undertaking cannot rid himself/herself of the obligations incurred under a contract of employment by transferring such contracts to the transferee of the undertaking without the consent of the employee and transferee concerned. The transferor would thus generally have had to terminate the services of its employees prior to the transfer by giving notice to such employees.350 The transferee would then have been free to choose which of the employees, if any, he/she wished to engage in the newly acquired undertaking. Of course, there may have been an agreement in place between the transferor and transferee regarding the offering of re-employment to most, if not all, the employees. In Nokes v Doncaster Amalgamated Colleries Ltd351 the reasoning behind this state of affairs was explained as follows:

[A] free citizen, in the exercise of his freedom, is entitled to choose the employer whom he promises to serve, so that the right to his services cannot be transferred from one employer to another without his assent.

The rule in Nokes was formulated on the basis of freedom of contract. However, this “freedom” could work against employees, because a person to whom the undertaking was transferred was clearly under no legal obligation to offer to employ existing employees working in the transferred business. If no such offer was forthcoming, the employee’s only claim was against his/her former employer (often being an insolvent former employer, resulting in an even more prejudicial position for the employee due to the poor protection employees enjoyed in cases of insolvency in terms of common law). Some of the first laws to touch this subject were made in order to benefit former employers and not the affected employees. Consider, for example, a law stating that an employee could not claim redundancy against a former employer, if, on the change of ownership, he or she refused an offer of alternative employment with the new employer on the same or similar terms.352 Later, the employee was also afforded some additional rights by laws stating that where the employee accepted the offer of re-engagement by 350 See Jordaan B “Transfer, closure and insolvency of undertakings” 1991 ILJ 935 937-938. In

the event of a contract for an indefinite period, reasonable notice should be given in the absence of an agreed or stipulated period. Where the contract was entered into for a fixed or definite period, such notice will constitute repudiation of the contract in the absence of the employee’s consent or agreement to the transfer. See in this regard Isaacsohn v Walsh & Walsh 1903 SC 569 where only nominal damages were awarded and not positive interests for wages lost for the unexpired period of the contract.

351 1940 AC 1014 at 1020. 352 See e.g. EPCA 1978, s 94 in the United Kingdom.

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the transferee, statutory continuity of service was preserved.353 Recent case law has also indicated that statutory provisions regarding automatic transfer of employment contracts can be to the advantage of employers. In the absence of such provisions, an employer could face onerous procedural obligations, compensation orders and costly severance payments in situations where it seeks to transfer a business, including the services of its employees.354 However, regardless of such difficulties that an employer may face, the primary purpose of these statutory provisions, including section 197 of the Labour Relations Act 66 of 1995, is to protect the rights of employees during certain processes of business restructuring. In terms of common law, an employer could not demand that an employee work for him/her without that employee’s consent. This position was based on the employee’s freedom to choose whom he or she wishes to serve (as stated in Nokes) but was also in accordance with the law of cession. Although a creditor is generally free to transfer rights against a debtor by way of a cession without the latter’s consent, this is not the case where personal contracts are involved. According to authority,355 a contract is personal in nature if it makes any reasonable or substantial difference to the other party whether the cedent or cessionary is entitled to enforce it. If this is the case, the consent of the debtor is necessary before a transfer can be effected. In Nokes, the Court had no trouble in finding that the contract of employment was of such a personal nature for two main reasons.356 Firstly, it was stated that however excellent a new master may be, it is the servant who has the choosing of him. Secondly, it was stated unequivocally that it is a complete mistake to suppose that people, whether they are servants or landlords or authors, do not attach importance to the identity of the particular company with which they deal. Therefore, in terms of common law, if an employer wishes to transfer the entire undertaking, including the rights and duties between itself and its employees, a mere cession would not suffice. What in fact would have been needed to succeed in such a transfer was a combined cession and delegation. Continuity of employment was thus not applicable and the consent of all the parties involved (old employer, new employer and employees) was required. Old rights and duties were not automatically preserved and the new contracts may have incorporated the old terms or may have consisted of completely fresh terms in such cases. 353 See e.g. ERA 1996, s 218(2) in the United Kingdom. 354 See e.g. Schutte v Powerplus Performance (Pty) Ltd & Super Group Trading (Pty) Ltd 1999

20 ILJ 655 (LC). 355 Eastern Rand Exploration Co v Nel 1903 TS 42 at 53. 356 Cited with approval by the Industrial Court in Ntuli v Hazelmore t/a Musgrave Homes 1988 9

ILJ 709 (IC) and NUMSA v Metkor Industries 1990 11 ILJ 1116 (IC). However, rejected summarily by Van Niekerk SM in Young v Lifegro Assurance 1990 11 ILJ 1127 (IC).


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4.3 The Industrial Court The Labour Relations Act of 1956 did not provide for measures regarding the automatic transfer of employment contracts in the event of the transfer of an undertaking as a going concern. The normal rules regarding unfair dismissals and unfair labour practices were therefore the only avenues available to the Industrial Court if it was to address any complaints brought in applications based on such factual circumstances. However, as stated supra, the Industrial Court was not indifferent to the predicament of employees in these circumstances and did attempt to assist them on the basis of fairness under its unfair labour practice jurisdiction. 4.3.1 Kebeni v Cementile Products Pty Ltd (1987) One of the first noteworthy matters that came before the Court was the case of Kebeni v Cementile Products (Ciskei) Pty Ltd357 in which the employment of 30 applicants was terminated with effect from 19 September 1986. The respondents claimed that the second respondent had been forced to close down its business in South Africa because of intimidation and threats to the personal safety of certain members of its workforce. The employees were notified that the first respondent had been incorporated in Ciskei and would take over the second respondent, which would cease operating. The employees were thus invited to apply for work with the first respondent. The applicants applied for reinstatement in terms of section 43 of the Labour Relations Act 28 of 1956. They based their application on the allegation that the transfer was a ruse to enable the respondents to carry out selective re-employment and in this way rid themselves of the union operating in the second respondent. The Court agreed that the labour problems, which the second respondent had begun to experience, had had a strong influence on its decision to transfer the factory to the first respondent. This was strengthened by the fact that trade unions could not operate legally in the Ciskei. The Court went on to investigate the fairness of the dismissals. The Court held that an employer is not to be excused from implementing certain relevant retrenchment procedures simply because it has decided to make the entire workforce redundant as opposed to the retrenchment of only a limited number of employees. Neither may an employer ignore the guidelines simply because he intends to dispose of his business, or a substantial part of his business assets, to someone else.358 The Court regarded the following as necessary, and

357 1987 8 ILJ 442 (IC). 358 449D-E.

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reasonable, for an employer to implement in order to ensure that the employees receive fair and just treatment in any “contemplated take-over”: • Adequate notice and consultation; • employee notification; and • agreement between transferor and transferee in respect of the rights of

employees.359 Regarding adequate notice and consultation: the employer should, prior to any retrenchment, first give reasonable notice to and consult with the recognised or representative union, or in the absence of a union, with any other recognised form of employee representation. The Court stated that this consultation should be initiated by the employer and should take place well in advance of the date planned for the take-over. Issues to be discussed include the measures that are to be taken to protect the interests of the employees and preservation of the employment relationship, notwithstanding the change of ownership of the business.360 Regarding employee notification: The Court required that the employer should give sufficient prior notice in writing to the workforce as a whole of the intended disposition of the business (or its assets) and the steps that have or will be taken to safeguard the interests of the workforce in the proposed take-over.361 Regarding an agreement between transferor and transferee: The Industrial Court significantly held in this regard that:

[I]f it is intended to transfer the undertaking and/or its major assets such as plant and machinery of the employer (transferor) to another party (transferee), safeguards should be incorporated into the agreement between the parties to ensure that the interests of the work-force is adequately protected.362

The Court made this requirement in terms of its unfair labour practice jurisdiction. A dismissal by the old employer based on these circumstances, without ensuring that the interests of the workforce are adequately protected, could thus be deemed to be unfair.

359 449F-450D. 360 449F-I. The Court also endorsed the approach of the ILO regarding consultation as

manifested in Recommendation 20(1), ILO Recommendation on Termination of Employment (Consultations on Major Changes in the Undertaking) 22 June 1986.

361 450A. 362 450B.


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The Court also indicated how an employer could ensure that his/her workforce would be “adequately protected”:

One of the safeguard clauses could for example be that all existing contracts of employment would be deemed to have been transferred to the new employer who would be obliged to retain all existing employees without discrimination, save an individual employee may have the option not to continue his employment relationship with the transferee.363

The Court held that the dismissals in casu were indeed unfair, since scant attention was paid to essential canons of fair play on all the key issues relating to retrenchment. Even though the Court had no legal basis to require the first and second respondents to continue employing all the second respondent’s workers, it thus clearly set very high standards for considering such retrenchment to be fair and valid. The Court also held that if the Court were to have made a contrary finding, this may have opened the flood-gates to chicanery in labour relations.364 A high premium must be placed on the preservation of industrial peace and this makes it imperative for employers and employees to exhibit the greatest degree of good faith in their dealings with one another. 4.3.2 Ntuli & others v Hazelmore Group t/a Musgrave Nursing Home (1988) The four applicants were employed by the Musgrave Nursing Home since 1984 as a trainee nurse, laundry assistant, domestic maid and nursing assistant respectively. The proprietor of the Home, Lehnora (Pty) Ltd, sold the business to the respondent, Hazelmore Nursing Homes, a close corporation, during July 1987. The respondent commenced operating the home on 1 August 1987. The respondent alleged that the previous proprietor, Lehnora (Pty) Ltd, gave notice to the entire staff of the nursing home and terminated their services with effect from 31 July 1987. The applicants alleged that they had no knowledge of Lehnora (Pty) Ltd and also denied that their services were terminated. On 3 August, a member of the respondent addressed the staff and introduced herself as the “new owner”. She said that due to the amount of vacant beds in the home, there would have to be redundancies. Eventually 17 employees were retrenched; the applicants were mainly retrenched because they were unable to work the new hours introduced by a new roster system. The Court stated that, in addition to the retrenchment exercise, this application also raised the difficult

363 450C-D. 364 451A. Refer to the maxim nullus commodum capere potest de iniuria sua propria.

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questions regarding the responsibility of the previous proprietor and the new proprietor of an undertaking towards the employees of an undertaking. The Court acknowledged that, in terms of our common law, it is clear that the transferor of an undertaking cannot transfer his/her obligations under a contract of service to the transferee of the undertaking without the consent of the employee concerned. Furthermore, the employees would not be obliged to accept service with the transferee against their will.365 The Court found that this subject was broached in only two statutes and only in a limited way. The Manpower Training Act 56 of 1981 provided that if any person is apprenticed to a partnership, his/her contract of apprenticeship may not be terminated by reason of the death or retirement of any partner if the partnership or business of the partnership is continued by any other person or partnership, but the rights and obligations of the employer under the contract will be deemed to be transferred to the person or partnership continuing the business.366 Section 12 of the then Basic Conditions of Employment Act 3 of 1983 obliged an employer to grant an employee annual leave, remunerate him/her for that leave and remunerate him/her in respect of accrued leave. The meaning of employer had been extended for the purposes of this section and included the new owner in the case of the transfer of a business, but only if the new owner of the business continued to employ the employee of the former owner. The Court also referred to certain provisions in the laws governing professional bodies regulating the transfer of employment contracts of trainees upon the incapacity of the principal.367 The Court referred to the decision in Kebeni and stated that no responsibility was attached to the new proprietor, regardless of the comments made by that Court regarding the equitable obligations of a proprietor who sells his/her undertaking, as it were, lock, stock and barrel.368 Based on the facts, the Court held that the respondent (as transferee) believed that when it took over the home it was free to engage its own staff. It did engage the staff of the transferor, but the engagement was subject to the proviso that a number of them would possibly be retrenched at the end of the month. The Court held that, in equity, the respondent did not invoke any reasonable expectation that the employees could rely on the security of their tenure beyond the month of August.369 The question regarding severance pay was answered by the Court, stating that the respondent had in law been the employer of the applicants for less than a month, resulting in no unfair labour practice being committed. Only if the

365 Ntuli & others v Hazelmore Group t/a Musgrave Nursing Home 1988 9 ILJ 709 (IC) 713A-D. 366 S 22(5)(a). 367 E.g. Attorneys Act 53 of 1979, s 10. 368 714A-G. 369 718E.


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respondent could be said to have assumed responsibility or be deemed (in equity or otherwise) to have assumed responsibility, could such an obligation arise.370 The Court then stated that it did not believe that equity required the Court to adopt the principles embodied in the EEC Directive of 1977. Rather, the Court thought it good to approach the problem from the vantage point of our common law.371 Even though the Court was not willing to read into our law equitable provisions as found elsewhere in the world, it made some remarks regarding consultation. The Court stated that:372

An employer, the transferor, who parts with an undertaking as a going concern should consult with his employees and their representatives in regard to the possible consequences of the take-over. The transferee should also be involved in these consultations or at least consult separately with the employees and their union. An agreement which may be arrived at would ordinarily be enforced by the Courts. Such an agreement could provide for the possibility of retrenchments following the transfer of the undertaking.

The Court did not explain the circumstances in which such an agreement would not be enforced.373 It did state that, in the absence of such an agreement, the transferor would terminate the contracts of employment by notice. Such a dismissal would only be unfair without compensating the employees if there were to be no prospect of any continuity of employment. The Court opined that the termination would be fair and that it would not give rise to a claim for compensation if the employees’ employment were to continue with the only change being the identity of the employer. Thus, if the transferee were genuinely to offer employment on the same terms and conditions of employment, there should not be any compensation claimable. The Court did accept that there may be exceptions, for example, where an employee has sound reasons for not accepting the transferee’s offer. The Court also stated that if the transferee genuinely offered the employees security of tenure but found himself/herself obliged to retrench these employees at some later stage, the transferee would in fairness be expected to compensate the employees on the basis that they had been employed by him/her since

370 719C-D. 371 719E-721F. 372 719E-F. 373 The Court held that “[a]n agreement … would ordinarily be enforced by the Courts”.

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they were first employed in the undertaking by the transferor.374 However, the Court continued by stating that as regards retrenchment benefits, it seemed that it would be fair and reasonable to hold that if the employees were retained by the transferee for a certain period, then he/she would be liable for adequate compensation based on their service with the undertaking. If, however, the employees were not retained by the transferee for a certain period after the transfer, they should be entitled to look to the transferor for compensation for it is he/she who made use of their services in the past. The Court stated that, in its opinion, equity did not require the transferee to be deemed to be the employer of the employees for the period prior to the transfer as of the moment that the undertaking was transferred.375 What should this period be to which the Court referred? The Court answered that it ought clearly to be a reasonable period – a period sufficiently long to demonstrate that the employees may safely look to the transferee for security of tenure. Furthermore, the period must be one sufficiently lengthy to have eliminated the problems relating to staff that often accompany a change in management. It should, however, not be too lengthy so that the transferor experiences uncertainty as to his/her contingent liability for possible retrenchments. In the present case, the applicants were advised from the outset that their positions were not secure. The uncertainty manifested itself within a month. The Court accepted that a month was well within the reasonable period envisaged in the solution outlined above by the Court. Their employment was terminated within a month of the transfer of the undertaking. The transferee cannot, in equity, be said to have assumed any responsibility for their security of tenure. In these circumstances it seemed to the Court that the applicants were obliged to look to the transferor for satisfaction. The Court held that there was no legal barrier to their doing so. The transferor was no longer their employer and they were no longer his employees. This fact does not, however, prevent a former employee from declaring a dispute against a former employer. The fact that the employees had been employed by another person, the transferee, for a period is not a barrier to an application based on an unfair labour practice that stems from retrenchment. The employees would, in this case, not be asking for their reinstatement in the transferor’s employ. The alternative to the solution proposed would have been to hold that there is an automatic continuity of employment when an undertaking is transferred. However, the Court did not (and could not) accept that this was the appropriate solution. The Court

374 719J-720A. 375 720B-C.


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argued that the solution outlined above acknowledges the common-law consequences of the transfer of an undertaking, namely that the employees’ contracts of service come to an end in the absence of an agreement. It also provides for continuity of service, not on an artificial basis (as the imposition of automatic continuity would entail) but on the basis of the assumption of responsibility for the welfare of the employees by the transferee after the lapse of a reasonable period of time. Not only does the transferee assume liability after the lapse of a reasonable period of time, but he/she invokes an expectation in the employees that he/she will be responsible for their security of tenure, i.e. their continued association with the undertaking. The solution, which invokes continuity of service after the lapse of a reasonable period of time, found a parallel in what was then the Basic Conditions of Employment Act 3 of 1983. The Court thus held that the concept of continuity of employment was not unknown in our statutory labour law. In addition, the solution (particularly as far as the duties of the transferor and the transferee vis-à-vis the employees and a representative union are concerned) was an extension of the procedure regarding retrenchments that had been developed by the Industrial Court. The Court felt that the solution was not out of step with similar solutions to the problem that had evolved in other jurisdictions. Most importantly, the Court stated that the solution is one that attempts to be fair to the three parties involved in the transfer of an undertaking. The transferor could not reasonably expect to terminate the services of its employees in circumstances approximating retrenchment without being liable for compensation. The employees are entitled to expect compensation for the loss of their jobs. They are not ordinarily entitled to expect compensation when arrangements are made to ensure continuity of employment. The transferee who engages the employees is entitled to expect that it may need to rearrange the business operations on the transfer of the undertaking and that (if this entails retrenchments) the transferor who has had the benefit of the services of the employees should bear the brunt of any compensation to which they may be entitled. However, if the transferee continues to employ the employees for a reasonable length of time in the undertaking, then he/she can be assumed to have accepted responsibility for the employees as if he/she had originally engaged them in the undertaking.376 It was submitted that the solution outlined above need not be rigid and that the transferor and the transferee would be free to displace the burden by way of an indemnity or otherwise. The Court made this solution applicable to a sale lock, stock

376 720I-J. This approach thus accepted that a transferee could retrench staff after a transfer

because of the transfer and that the affected employees would have to turn to the transferor for compensation.

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and barrel. However, the question of sham transfers or gratuitous transfers was not discussed. 4.3.3 Hoogenoeg Andolusite (Pty) Ltd v National Union of Mineworkers &

others (1)377 A mine, the only asset of the appellant, had been unprofitable for some time. The applicant continually sought an organisation that was willing to take over its management and improve its profitability over a period of eleven months. In July 1988, an agreement was reached, in principle, with a company that was prepared to take over the management and running of the plant. On 5 August 1988, the workforce was informed by the appellant that it had been suffering losses and that there were three options available: to sell the mine; to transfer the mine to new management; or to subcontract the operation of the plant. The workers were informed on 10 August that the mine was under the control of Andu Mining and that Andu Mining would employ those of the workers whom it wanted. The workers were handed a notice of termination of services with effect from 31 August 1988. Andru took over only 18 of the retrenched workers and the respondent and another 94 of the retrenched workers sought and were granted an order by the Industrial Court that the retrenchment of the workforce was an unfair labour practice. The senior member of the Industrial Court who had presided found that the appellant had failed to give prior notice or to consult with the workforce over the proposed retrenchments. The senior member also found that the appellant had failed to adopt legal measures to protect the interests of the workers as a result of the transfer of the management of the mine to Andu. The appellant thus appealed against the finding as well as the order of compensation. The Labour Appeal Court held that a business is not obliged to inform employees of negotiations for a sale, but that it must consider implications of such a sale on the workforce when negotiating.378 The Court stated that when an agreement had been reached, in principle, that the management of the mine by the appellant was likely to terminate within a short period of time, a far greater duty rested upon the representatives of the appellant to take into account, and to attempt to ameliorate, any hardship that the surrender of the management of the mine might cause the employees of the appellant.379 Once the sale is concluded, an employer should make full disclosure

377 1992 13 ILJ 87 (LAC). 378 92I-J. 379 93B.


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to its employees of the effect that such a transfer will have on the employees. The Court found that the failure to do so would constitute an unfair labour practice. 4.3.4 Kellog SA (Pty) Ltd v FAWU & others380 This case dealt with the retrenchment of 30 of the appellant’s employees. The Court a quo held that the retrenchment of 11 of the employees amounted to an unfair labour practice.381 An order for compensation equivalent to three months’ wages was given and the appellant then appealed against this finding. The applicant contracted with a food distribution company to take over the distribution of its products. It then informed the respondent union that, as a result of the agreement, the positions of 11 warehouse employees had been eliminated. It also notified the union that a further 19 employees in other positions were to be retrenched as a result of rationalisation and restructuring. It subsequently held meetings with the union. However, the Industrial Court found that the 11 warehouse employees had been confronted with a final, unilateral decision to retrench them, and the appellant’s failure to consult constituted an unfair labour practice. The Labour Appeal Court held that there was no need to differentiate between the 11 warehouse employees and the other employees. All 30 had to be treated alike and, since the management had taken a final decision to retrench and had considered and closed its mind to alternatives, merely going through the motions of a process of consultation, there had been no realisation of the primary aim of the Labour Relations Act of 1956, namely the preservation of industrial peace. The Court thus dismissed the appeal but allowed the cross-appeal and concluded that the retrenchment of all 30 employees constituted an unfair labour practice. 4.4 Concluding remarks As shown earlier, the common law did not bestow any protection relating to job security on employees whose employer decided to transfer his/her undertaking or part thereof as a going concern.382 The contract of employment was terminated by the sale or closure of an undertaking. Only in the event of agreement between the employee, transferor and transferee could the contract of employment be transferred to the transferee. Although this regulation was originally intended to protect the employee,383

380 1994 15 ILJ 83 (LAC). 381 1993 14 ILJ 406 (IC). 382 See par 4.2 supra. See also chapter 1 supra . 383 See Nokes v Doncaster Amalgamated discussed in par 4.2.

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it resulted in a position where employees did not enjoy continuity of employment and where, as a whole, it worked to their disadvantage in the modern labour market. The South African statutory regulation of the same was non-existent up to the enactment of section 197 of the Labour Relations Act of 1995. It is clear that the Industrial Court was not willing to incorporate principles of automatic transfer of contracts of employment into our law in the event of the transfer of an undertaking in the absence of a statutory right thereto. However, even though continuity of employment was a luxury not afforded to employees by operation of law, such continuity was not impossible if due to an agreement reached between the relevant parties. As illustrated by the case law of the Industrial Court and Labour Appeal Court, the Courts did have a fair measure of sympathy with employees faced by these circumstances. The Court thus evaluated the fairness of any retrenchments in these circumstances by having regard to the following factors: • Adequate notice and consultation of a proposed transfer; • employee notification of possible retrenchments; • attempts made to reach an agreement between transferor and transferee in respect

of the rights of employees; • consultation regarding the possible consequences of the transfer; • involvement of the transferee in consultation with employees and their union; • the making of a genuine offer of security of tenure by a transferee; • the lapse of a reasonable period of time after the transfer, resulting in continuity of

service with a transferee; • full disclosure once a sale is concluded; • consideration of the implications of an envisaged transfer for employees during

negotiations; • the preservation of industrial peace; and • the fairness of any subsequent termination of services. The Industrial Court, true to its intended nature, thus emphasised fairness towards all parties in these circumstances. The Court utilised its unfair labour practice jurisdiction to require fair play towards employees in the context of business transfers. The Court on occasion stressed the importance of legitimacy as the kernel of fairness by referring to Brassey:384

384 Kebeni 448J-449B referring to Brassey MSM, Cameron E, Cheadle MH & Olivier MP The

New Labour Law (Juta 1987) 98.


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Unilateral conduct is not always fair simply because it has a commercial rationale to it. This is plain if one takes the case of the employee who is dismissed for joining a union. The dismissal has a commercial rationale for the employer, because it rids him of a unionist, discourages other employees from joining the union, and ultimately tends to make his work -force more amenable and compliant. It is, nevertheless, victimisation, and victimisation we know for certain, constitutes an unfair labour practice. It is not enough, therefore, that conduct should have a commercial rationale. It must, in addition, be legitimate.

However, even with this sentiment in mind, it was really impossible to depart from entrenched common-law principles without statutory intervention. Thus the Industrial Court and Labour Appeal Court under the Labour Relations Act of 1956 could only assist employees to a limited extent. This protection was, for the most part, procedural in nature.

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CHAPTER FIVE

THE NOTION OF A TRANSFER

5.1 Introduction If provisions regarding the automatic transfer of employment contracts are to apply, then it is a prerequisite that a relevant transfer must indeed have occurred. The question of what exactly constitutes such a transfer is therefore of crucial importance in determining the scope of application of transfer provisions. It is of immense importance that a sound analytical and theoretically correct approach be adopted in these matters. Consequently, one must recognise that when dealing with transfer provisions, there are four levels of concepts that must be dealt with separately and chronologically: first, determining whether there has been a transfer, secondly, whether a business, trade or undertaking or part thereof was transferred, thirdly, as a going concern385 and fourthly, what the legal effect of such a relevant transfer is.386 This chapter attempts to provide more substance to the concept of a transfer. It also attempts an analysis of the manner in which our Labour Court and Labour Appeal Court have approached the issue of the transfer of a business, trade or undertaking (or part thereof) as a going concern. The question of whose contracts are affected by a transfer is also addressed. Since the Court’s jurisprudence in this regard is still rather limited, reference will often be made to the case law of the European Court of Justice. The provisions of the Labour Relations Act 66 of 1995 that regulate transfer of undertakings are not helpful in this regard, as no definitions are provided for the terms “transfer”, “going concern”, etc. The Concise Oxford Dictionary defines a transfer as meaning: to convey, remove, hand over (a thing, etc.) from a person or place to another; or to make over possession of (property, rights, etc.) to a person. Owing to the lack of clarity in South African jurisprudence as to the content of these concepts, it is helpful to refer to the wording of some supranational and foreign national instruments regarding the transfer of undertakings. At European Community (EC) level, much emphasis is placed on the result of a transaction. It is accepted that there is a legal transfer or merger where there is a change in the legal or natural person who is responsible for carrying on the business and who, by virtue of that fact, incurs the obligations of an employer vis-à-

385 Considered in chapter 6 infra. 386 Considered in chapters 7-13 infra .


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vis employees of the undertaking, regardless of whether or not ownership of the undertaking is transferred. It is clear that no emphasis is placed on the change of ownership as such. Before turning attention to the exact content of the notion of a transfer the question to be considered first of all is that of whose contracts are transferred. The question concerning which rights and obligations are transferred in the event of a relevant transfer will be considered at a later stage as this question is closely connected to the third enquiry regarding the effect of a relevant transfer.387 5.2. Whose contracts are transferred? 5.2.1 Employees The contracts and rights and obligations that transfer in the event of a relevant transfer relate to those people employed in the transferred undertaking or part of the transferred undertaking. After the transfer, the transferee takes on the mantle of the transferor.388 In this regard, two questions beg to be answered: First, whose contracts are subject to the transfer? Secondly, which rights, powers, duties and liabilities connected with those contracts are transferred?389 As a general rule, it can be stated that persons employed by the transferor before the transfer are the subject of the transfer and all rights and obligations that existed between the old employer and such persons employed at the time of the transfer, are transferred to the transferee.390 As far as the concept of “persons employed” by the transferor is concerned, it seems implicit that this means “employees” of the old employer. The European Court of Justice has held that it is for national Courts, applying principles of national law, to determine whether someone is an employer within the meaning of the Acquired Rights Directive.391 In the United Kingdom, the definition of “contract of employment”, in regulation 2(1) of the TUPE regulations is wide, as “employee” includes not only a servant or apprentice, but anyone who works for another in any other capacity, except an independent contractor under a contract for services or otherwise. The definition is wider than the definition of an employee contained in the

387 See chapters 8 & 9 infra . 388 This is, however, not true for transfers in insolvent circumstances in South Africa in terms of

s 197(2)(b). 389 As recognised by Elias & Bowers Transfer of Undertakings 33. The second question will

be addressed in chapters 8 & 9 infra . 390 See s 197(2)(a) & (b). 391 See Mikkelson v Danmols Inventar 1986 CMLR 316 (ECJ). See also Barnard EC

Employment Law 449-452 regarding the personal scope of the Directive.

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Employment Rights Act 1996 as it includes an individual who works for another, whether under a contract of employment or otherwise. 392 The amended Directive does contain a condition in this regard to the effect that contracts of employment393 or employment relationships should not be excluded solely because of394the number of working hours performed, whether taking the form of a fixed-term contract or being temporary employment relationships.395 396 In South Africa, an “employee” is defined in the Labour Relations Act of 1995 as:

any person, excluding an independent contractor, who works for another person or for the State and who receives, or is entitled to receive, any remuneration; and any other person who in any manner assists in carrying on or conducting the business of an employer.397

Employees of temporary employment services398 are the employees of that temporary employment service, and are not employees of the client of such service.399 Despite this provision, the client and the temporary employment service are jointly and severally liable if the temporary employment service contravenes a collective agreement, a statutory provision or a wage determination.400 It thus seems prima facie that employees will only transfer if it is the employment service’s undertaking or part thereof that is transferred as a going concern.401 However, it is submitted that a purposive 392 McMullen Business Transfers and Employee Rights 6/2. However, the definition does not

include the self-employed (see Cowell v Quilter Goodison Co Ltd v QG Management Services Ltd 1989 IRLR 392 (CA)).

393 It is also a matter for national law whether a contract of employment exists (Wendelboe v LJ Music 1985 ECR 457 (ECJ)).

394 Art 2(2). 395 See chapter 3, par 3.2.4.1 regarding the concepts of “fixed-term contract” and “temporary

employment relationship”. 396 McMullen Business Transfers and Employee Rights 6/2 holds the view that the large

number of agency supplied workers currently comprising part of the United Kingdom labour force are, apparently, excluded from the transfer process as they are not employees of the transferor. On the other hand, it could be argued, he says, that TUPE reg 2(1) covering a person who “works for another person” is manipulable enough to cover agency workers working in the transferor’s business.

397 S 213 LRA. The following employees are excluded from the scope of the LRA: memb ers of the National Defence Force, members of the National Intelligence Agency and the South African Secret Service (s 2).

398 Defined in s 198(1) as “any person, who for reward, procures for or provides to a client other persons – (a) who render services to, or perform work for, the client; and (b) who are remunerated by the temporary employment service”.

399 S 198(2) LRA. 400 S 198(4). See also s 82 BCEA. 401 Unless the employment by the temporary employment service can be shown to be a sham, in

which case it should be possible for a Court to lift the corporate veil and consider the employer where the services are delivered as the old (“real”) employer. Elias & Bowers opines (Transfer of Undertakings 34-35) that the ECJ will interpret a situation where there are distinct legal entities involved in a way that “even if the employer and transferor are distinct legal entities, nonetheless the transferor must be taken to be that legal person


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interpretation of section 197 would result in the Court considering the de facto employer as the transferor.402 403 The position of groups of companies has to receive specific consideration. For example, this could result in a position where employees employed by a parent company to work in a subsidiary may not be subject to the transfer principle, since even though they are actually working in the transferred undertaking or business, they are not employed by that undertaking. However, it is arguable that Courts adjudging the applicability of transfer provisions will consider that the de facto employer (being the person to whom services are rendered), and not the formal employer of the undertaking, would be the transferor.404 405 This would be consistent with the implementation of a purposive approach. Another possibility of not allowing the corporate form of an alleged transferor to oust the working of transfer provisions is that of agency. In Duncan Web Offset (Maidstone) Ltd v Cooper406 the Employment Appeal Tribunal had to consider a situation where an employee was employed by X to

who, as a consequence of the transfer, ceases to employ the workers in respect of the undertaking”. This interpretation seems to be in accordance with the definition of “transferor” in art 2(1)(a) of the Directive, namely “any natural or legal person who, by reason of a transfer within the meaning of Art 1(1), ceases to be the employer in respect of the undertaking, business or part of the undertaking or business”. See also the viewpoint of McMullen in this regard (supra 6/2).

402 For the approach of the Labour Court and Labour Appeal Court to the issue of “piercing the veil”, see Buffalo Signs Co Ltd v De Castro & another 1999 20 ILJ 1501 (LAC) and Board of Executors Ltd v McCafferty 1997 7 BLLR 835 (LAC). See also the position regarding groups of companies in chapter 6 infra.

403 See par 6.2.2 infra regarding the transfer of part of an undertaking and the requirement that the employee should be “assigned” to the part being transferred.

404 See Elias & Bower (Transfer of Undertakings 34) who argue convincingly that “… the employees transferred are those actually working in the business at the material time, irrespective of who, in formal terms, is their employer”. Even if this is not correct, it is submitted that the Courts might be willing to pierce the corporate veil if the separation of the employer and the owner of the business was brought about with the express objective of avoiding the effect of the transfer provisions. See also McMullen Business Transfers 6/4-6/9. McMullen states that in company law there has always been some support for treatment of groups of companies as a single economic entity. However, the Courts seem to prefer the presumption of separate corporate personality and any departure from corporate personality has apparently been on special facts (see McMullen 6/6 for reported cases in this regard). McMullen does show that the ECJ has adopted a broader approach for the purposes of competition law of the European Union and that, in a number of cases, it has been held that groupings of more than one legal entity could be viewed as a single whole. It is, however, still unclear what the approach of the ECJ will be in transfer-related cases.

405 In Michael Peters Ltd v (1) Farnfield and (2) Michael Peters Group plc 1995 IRLR 190 (EAT) the EAT held that it was not correct to pierce the corporate veil so as to find that the business of the subsidiaries was the business of the parent company and that the parent company could thus not be held to be a transferor and employer of the employee. The Court also considered that the employee was not assigned to that part of the undertaking that was transferred. This decision is criticised by McMullen (Business Transfers 6/7-6/8) for rejection of the group theory as developed under European Union competition law for purposes of the TUPE regulations.

406 1995 IRLR 633 (EAT).

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work on Y’s business and Y transferred that business to Z. The Employment Appeal Tribunal remarked:


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Industrial tribunals will be astute to ensure that the provisions of the Regulations are not evaded by devices such as service companies, or by complicated group structures which conceal the true position. Thus it may well be possible to say, in any given case, that if the person always and only works on Y’s business, then X was employing him on behalf of and as an agent for Y. Alternatively, there may be circumstances in which X may be regarded as a party to the transfer, even if not expressly named in the contract of sale. Or, on the other hand, it may be that the employee remained employed by X who had other work for him to do.

5.2.2 Persons employed at the time of the transfer Under the Acquired Rights Directive the employees must be employed by the transferor undertaking on the date of transfer.407 Employees who were not employed in the undertaking on the date of the transfer and subsequent employees of the transferor are therefore not covered.408 McMullen states, with reference to the United Kingdom position under regulation 8 of the TUPE regulations, that the effect of Litster v Forth Dry Dock & Engineering Co Ltd is:409

… that a transferee may be liable for pre-transfer dismissals even if the employees are not employed in the undertaking immediately before the transfer. This will be in a case where the dismissals are automatically unfair under reg 8 (see below) and not for an economic, technical or organisational reason entailing changes in the workforce (reg 8(2))…. There will be a transfer-connected dismissal because the dismissal would not have taken place but for the transfer (reg 8(1)).

McMullen therefore limits the effect of Litster to only automatically unfair dismissals due to the transfer:410

In other cases, that is to say, where either the dismissal is not connected with the transfer or where there has been a dismissal

407 See McMullen Business Transfers 3/3-3/5 and 7/7-7/18. 408 Barnard EC Employment Law 450; Wendelboe 1985 ECR 457 (ECJ). 409 1989 IRLR 161 (HL). See McMullen Business Transfers 7/8-7/9. 410 Ibid 7/9.

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prior to the transfer and although a transfer-connected dismissal, it is for an economic, technical or organisational reason entailing changes in the workforce (because prior to the transfer there has been no direction from the transferee to dismiss and there is a genuine redundancy or inability to pay wages or such like, although this will be rare when a transfer follows shortly thereafter), the question of whether liability for employees is transferred to the transferee depends on the rule in Secretary of State for Employment v Spence [1986 IRLR 248 (CA)]. This, as stated, provides that, in such cases, only employees employed in the business up to the point of (or immediately before the) transfer will be transferred under reg 5. In such cases of non-connected dismissals or connected pre-transfer dismissals that are for economic, technical or organisational reasons entailing changes in the workforce, all liabilities will therefore stay with the transferor.

The South African provision relating to the transfer of undertakings, section 197 of the Labour Relations Act of 1995, refers to the transfer of rights and obligations between the old employer and each employee “at the time of the transfer”.411 Does this mean that if an employee’s services are terminated immediately before the transfer, such a person will not benefit from the provision? It is submitted that this could clearly not be the result (at least not where the dismissal is related to the transfer).412 The principle of automatic transfer cannot be avoided simply by a dismissal prior to the moment of transfer. This is evident where the dismissal was for reason of the transfer, since such a dismissal would/should be ineffective. However, it is not so evident in the case of other forms of unfair dismissal. The question which remains is what the consequences and legal nature of a dismissal,413 albeit an unfair one, are. If it is unfair and therefore invalid, the contract would have transferred at the relevant time but for the dismissal. The transferee is thus liable for reinstatement, reemployment or compensation. If it is unfair but effective, the contract of employment will not be transferred and the transferee cannot be expected to execute the remedy ordered by the Court.414 This is due to the fact that “at the time of the

411 S 197(2)(a) & (b). 412 See Litster v Forth Dry Dock Engineering Co Ltd. 413 I.e. a dismissal not for reason of the transfer. 414 See chapter 12 infra regarding liability for dismissals prior to a transfer.


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transfer” the dismissed employee was not employed by the transferor. However, this has not been the approach of the Labour Court to date.415 Although no judgements have been found on the exact nature and consequence of an unfair dismissal, the Industrial Court has held that the remedy of “reinstatement” meant “to restore the original contract, not to make a new one”.416 Du Toit et al,417 commenting on this statement, maintain that this “implies continuity of the employment relationship notwithstanding the attempt by the employer to terminate it”.418 However, “re-employment” according to Du Toit et al “implies termination of a previously existing employment relationship and the creation of a new employment relationship…”.419 In terms of the Labour Relations Act, reinstatement or re-employment is the primary remedy for unfair dismissal.420 It is submitted that an approach that requires of a transferee to give effect to a reinstatement or re-employment order following a relevant transfer, as followed by our Labour Court up to now, is fitting. Section 197 does not require the existence of a contract of employment at the time of the transfer. All rights and obligations (in the wide sense) between the old employer and the employee get transferred, indicating that the existence of an employment relationship should be sufficient.421 It is therefore submitted that an employee who has been unfairly dismissed prior to the transfer, for a reason other than that of the transfer, still has a vested claim against the old employer for a remedy due to his/her unfair dismissal, regardless of the termination of the contract. The unfairly dismissed employee’s right to reinstatement, re-employment or compensation is merely “suspended” until the appropriate institution422 grants the appropriate relief to which such employee is entitled because of his/her unfair dismissal. Since such right (and accompanying obligation) was

415 See NUWA v Success Panelbeaters & Service Centre CC 1999 9 BLLR 970 (LC) where the

new employer was ordered to comply with an Industrial Court order against the old employer to reinstate an employee. Confirmed in Success Panel Beaters & Service Centre CC v NUMSA & another 2000 6 BLLR 635 (LAC).

416 Steel Engineering & Allied Workers Union Trident Steel 1986 7 ILJ 418 (IC) 437F. 417 Labour Relations Law: A comprehensive guide 416. 418 Brassey et al New Labour Law 48 comments that “the Court’s remark about restoring the

contract, not creating a new one, is not to be taken too literally”. The Court emphasised that it was not creating a new contract; it merely recreated the one that the parties had shaped for themselves. However, it is clear that an order of reinstatement does not operate in the realms of contract; it is an exercise of statutory power (Brassey ibid).

419 Labour Relations Law 416. 420 S 193(1). 421 See NAAWU v Borg Warner SA (Pty) Ltd 1994 15 ILJ 509 (A) where it was held that the

employment relationship is a wider concept than that of employment contract and that it could endure even where the contract has been terminated.

422 Whether it is the Commission for Conciliation, Mediation and Arbitration (CCMA) or the Labour Court.

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in existence at the time of the transfer, it is capable of transferring to the transferee.423 424 5.2.3 Persons employed in the part transferred and persons choosing not to

transfer When a whole undertaking is transferred, it is relatively easy to determine the persons who worked there and who will transfer. However, when only a part of an undertaking gets transferred, it becomes more difficult to determine whose contracts are transferred. The European Court of Justice has held that only those persons assigned to the part that gets transferred will transfer to the transferee.425 Employees who choose not to transfer should not be transferred to another employer against their will.426 This has also been the finding of the European Court of Justice.427 5.3 The meaning of a relevant “transfer” of an undertaking (or part thereof) The point of departure should preferably be to give the term transfer a wide interpretation to include all transfers resulting from, inter alia , a contract, an administrative or legislative act, or even a Court decision428 (thus, all situations where there is a change in the legal or natural person responsible for carrying on the business). Successive transfers should also be included under the scope of a relevant transfer. The transfer of ownership of the shares in a company or a change in the majority shareholder does not commonly constitute the transfer of an undertaking, since the employer’s legal

423 Elias & Bowers Transfer of Undertakings 41 state that it is their opinion that liability under

the TUPE regulations only arises if the dismissal is by reason of the transfer within the meaning of the regulations. However, the TUPE regulations are expressly made to apply to “a person so employed immediately before the transfer” (reg 5(3)). The ECJ has not expressed a view on this issue.

424 In South Africa, s 197(2)(b) transfers (insolvent undertakings etc) do not provide for the transfer of rights and obligations but only for the transfer of the employment contract. It is thus uncertain whether a person unfairly dismissed, who does not want to be reinstated or re-employed, will have to claim compensation from the transferor or transferee. It seems unlikely, on the basis of the express restrictive provisions of s 197(2)(b), that a compensation order would be enforced against a transferee. See also chapter 12, par 12.5 infra.

425 In this regard, see the discussion in chapter 6, par 6.2.2 infra . 426 See chapter 7 infra. 427 See Katsikas v Konstantinidis 1993 IRLR 179 (ECJ). 428 It is submitted that the concept of “transfer” should be given a wide and purposive

interpretation, as it is crucial for the application of employment protection measures in these circumstances that a transfer must have occurred. It is thus a sine qua non for transfer provisions to apply. Furthermore, no undue limitation should be read into this seemingly wide-sweeping term in the absence of an express provision to such effect.


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personality remains the same.429 However, the fact that provisions regarding safeguarding of employees’ rights in the event of the transfer of an undertaking as a going concern do not generally cover the takeover of a business which is effected through a sale of shares in the business, has often been severely criticised. Because a company is distinct in law from its members, the identity of the employer in such a situation remains the same. Yet clearly, if control of the company passes to new owners, it is very likely that there will be considerable changes in the conditions for employees.430 However, an employee cannot decline to work for the company because of the change of control, nor is it, strictly speaking, necessary that the employer inform and consult the representatives of the employees in this regard. Instruments such as the Acquired Rights Directive, section 197, the TUPE regulations etc, of course, adopt the approach that there is indeed a potential injustice to employees in the event of a change in the ownership of an undertaking. It is, however, argued that there is a fundamental flaw in their approach: they do not apply to the most common method by which control of a business, as distinct from its formal ownership, is transferred (that is, by the sale of a controlling shareholding).431 Some of the most difficult cases concern the effects of privatisation,432 sub-contracting, the transfer of staff within the public sector and other forms of outsourcing. These instances will be discussed under chapter six, which attempts to attach some more significance to the notions of a “business, trade or undertaking” and of the notion of a “going concern”. In Merckx and Neuhuys v Ford Motor Co Belgium SA433 it was emphasised, in the opinion of Advocate-General Lenz, that the concept of a legal transfer has been given a flexible interpretation by the Court.434 It is submitted that the same flexible and purposive approach should be followed in South Africa. 5.4 The Acquired Rights Directive

429 See e.g. SI (Systems and Instruments) Ltd v Grist 1983 IRLR 391 and Ndima & others v

Waverley Blankets Ltd (Sithukuza & others v Waverley Blanket Ltd) 1999 20 ILJ 1563 (LC). 430 See Pitt Cases and Materials in Employment Law 339-340. 431 Deakin S & Morris G Employment Law (Butterworths 1995) 199-201. 432 If it is accepted that government departments or organs carry on economic activities, it is, in

principle, possible that public sector terms and conditions may be transmitted to the private sector. Legislation could, of course, expressly exclude privatisation of a given entity from transfer provisions. Furthermore, agreements to the contrary are allowed in South Africa. Finally, many instances of privatisation will occur due to a share capital transfer, which is in any event not covered by transfer provisions. The desirability of such exclusions is highly debatable.

433 1996 IRLR 467 (ECJ). 434 In this case it was argued that there had been no legal transfer, because no contract had

been concluded between Anfo Motors (the Ford dealership) and Novarobel (the new dealer).

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The Directive435 applies to any transfer of an undertaking, business, or part of an undertaking or business, to another employer as a result of a legal transfer or merger.436 It is clear that there must be a transfer to another employer. Thus, the Directive does not apply when another company acquires the majority of shares in a limited company. Both public and private undertakings engaged in economic activities (whether or not they are operating for gain) are included in the scope of the Directive. In the well-known case of Spijkers,437 the European Court of Justice did not consider the question of whether the transfer of the undertaking had been the result of “a legal transfer”. The facts, however, suggested that the transfer of the undertaking had been effected through a relatively simple form of legal transfer, that of a sale. In many other cases brought before the Court, the transfer of the undertaking was the result of much more complex transactions. The Court therefore offered an explanation of the expression “legal transfer”. Although the European Court of Justice has not adopted a consistent approach on this point, the decision in Bartol438 suggests that two distinct enquiries should occur: first, was there a legal transfer within the meaning of the Directive? Secondly, if so, was there a transfer of an undertaking as a going concern on the facts?439 This notion of “a legal transfer or merger” thus relates to the method of the transfer. It is not necessary for there to be a direct contractual link between the transferor and the transferee.440 The European Court of Justice has held, for example, that the Directive applied to the termination of a lease of a restaurant, followed by the conclusion of a new management contract with another operator.441 The European Court of Justice has also held that both the termination of a lease followed by a sale by the owner, as well as the case where a public authority ceases to grant subsidies to a legal person, thereby bringing about the full and definite termination of its activities in

435 Directive 2001/23/EC. 436 Art 1. 437 Spijkers J.M.A. v Gebroeders Benedik Abattoir CV and Alfred Benedik en Zonen BV 1986

ECR 1119 (ECJ). 438 Redmond Stichting v H. Bartol & others 1992 ECR 3189 (ECJ), par 9. 439 See also Barnard EC Employment Law 453. 440 See Eilert Eidesund v Stavanger Catering A/S Case 2/95 1996 IRLR 684 (EFTA)(European

Free Trade Association, established in terms of the European Economic Area 1992). See also Liskojärvi & another v Oy Liikenne Ab Case C 172/99 where the ECJ held that the Directive could apply even where there was no direct contractual link between two undertakings successively awarded the contract to operate a public bus transport service, but did not apply in casu where no significant transfer of tangible assets between the undertakings took place. This was the case as public transport by bus requires substantial plant and equipment and tangible assets contribute significantly to the performance of the activity. The absence of a transfer of any significant assets thus led to the conclusion that the entity did not retain its identity.

441 See Foreningen af Arbejdsledere I Danmark v Daddy’s Dance Hall A/S Case 324/86 1988 ECR 739.


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order to transfer them to another legal person with a similar aim, fall within the scope of the Directive.442 In Landsorganisationen i Danmark for Tjenerforbundet i Danmark v Ny Mølle Kro,443 the European Court of Justice considered the question of whether the words “transfer to another employer as a result of a legal transfer or merger” in article 1(1) of the Directive cover the situation where, following the lessee’s breach of a lease agreement, the owner of a leased undertaking rescinds that agreement and subsequently takes over the running of the undertaking. The Court answered in the affirmative. The Court reached this conclusion with reference to the purpose of the Directive. It stated that the Directive is applicable where, following a legal transfer or merger, there is a change in the legal or natural person who is responsible for carrying on the business and who, by virtue of that fact, incurs the obligations of an employer vis-à-vis employees of the undertaking, regardless of whether or not ownership of the undertaking is transferred. Employees of an undertaking whose employer changes without any change in ownership, find themselves in a situation comparable to that of employees of an undertaking that is sold, and require equivalent protection. A lease agreement therefore comes within the meaning of article 1(1), as does the transfer of an undertaking that results from the sale of an undertaking.444 It seems that the Court has not always clearly distinguished between the expressions “the transfer of an undertaking” and “a legal transfer”. The Court further developed its reasoning, as set out in Ny Mølle Kro, in the judgements of Foreningen af Arbejdsledere i Danmark v Daddy’s Dance Hall445 and Bork International v Foreningen af Arbejdsledere i Danmark.446 In Daddy’s Dance Hall A/S, Palads Teatret had leased a number of restaurants and bars to Irma Catering A/S. After the termination of the lease, Palads Teatret entered into a new lease agreement by which Daddy’s Dance Hall A/S became the lessee. The Court of Justice ruled that these circumstances could constitute the legal transfer of the undertakings in question from the former lessee, Irma Catering (as transferor), to the new lessee, Daddy’s Dance Hall A/S (as transferee). In Bork the facts were very similar, except that in Bork the first lease agreement upon its termination was not followed by a new lease agreement, but by a sale of the undertaking. The Court ruled that these circumstances could also come

442 See (Dr Sophie) Remond Stichtung v Hendrikus Bartol et al 1992 ECR 3189 (ECJ). 443 Case 287/86 1987 ECR 5465. 444 Having regard to the phrase “without any change in ownership”. 445 1988 ECR 739 (ECJ). 446 1988 ECR 3057 (ECJ). See also Berg v Besselsen 1988 ECR 2559 (ECJ). In this case a Bar-

Discotheque was taken over by a company under a lease/purchase agreement, and under Dutch law the effect of this agreement was not to transfer the ownership of the business immediately. However, the ECJ again pointed out that the Directive applied not only where there had been a change in the ownership of an undertaking, but also in circumstances where there was a change of employer.

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within the meaning of article 1(1) of the Directive. In Besselsen, Mr Besselsen had transferred an undertaking that was operated by him to a commercial partnership between Messrs. Manshanden and Tweehuijzen. This transfer took place under a lease-purchase agreement.447 On application by Besselsen, a national Court ruled that the lease-purchase agreement was to be terminated on the grounds of failure by Manshanden and Tweehuijzen to perform their obligations under the agreement and that the undertaking was to be restored to Besselsen. The national Court referred the questions to the European Court of Justice of whether, on the one hand, the Directive applied to the transfer of an undertaking under a lease-purchase agreement and, on the other hand, to the transfer of that undertaking on the termination of the agreement by judicial decision. Although all the parties agreed that the Directive would apply to the first situation, there was no consensus as to whether the Directive would apply to the second. The Court ruled that the Directive was applicable in both situations. The Court reaffirmed the principles enunciated in Ny Mølle Kro (see above) and stated that:

… in so far as the purchaser of an undertaking becomes, by v irtue of a lease-purchase agreement, the employer …, the transfer must be regarded as a transfer of an undertaking as a result of a legal transfer within the meaning of Article 1(1) of the directive, notwithstanding the fact that such a purchaser acquires the ownership of the undertaking only when the totality of the purchase price has been paid. Similar considerations apply where the undertaking transferred in this way is restored to the former employer, following the termination of the lease-purchase agreement, regardless of whether the termination results from an agreement between the contracting parties or a unilateral declaration by one of them or indeed a judicial decision. (…) Consequently, in so far as the retransfer of the undertaking deprives the purchaser of the status of employer, a status which reverts to the vendor, it must be regarded as a transfer of an undertaking to another employer as a result of a legal transfer within the meaning of Article 1(1) of the directive.448

447 An agreement available under Netherlands law, whereby property sold for a price that is to

be paid in instalments, involves that the ownership of the property that is being transferred from the lessor/vendor to the lessee/purchaser remains with the former party until the lessee/purchaser has paid the entire price (see discussion in De Groot C “The council directive on the safeguarding of employees’ rights in the event of transfers of undertakings: an overview of the case law” 1993 CMLR 331 340).

448 Considerations 18 and 19.


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Following these cases, the Court considered the matter of Sophie Redmond Stichting v Bartol.449 In this case a municipal authority had ceased paying a subsidy to the Sophie Redmond Foundation (its only source of revenue) and had begun to subsidise the Sigma Foundation. The two foundations had identical objects, the assisting of addicts. The decision to move the subsidy was the result of a change in the municipal authority’s subsidisation policy. The national Court referred several questions to the European Court of Justice, one regarding the interpretation of the expression “a legal transfer”, another regarding the expression “the transfer of an undertaking”. The Court dealt with the meaning of the first expression in the first place, referring to its earlier decisions in Ny Mølle Kro, Daddy’s Dance Hall, Besselsen and Bork. The Court did not consider it to be important that the transfer of the activities from the Sophie Redmond Foundation to the Sigma Foundation was the result of a unilateral decision that had been made by the municipal authority. The Court considered both the situation where an owner of an undertaking makes the decision to terminate the existing lease of an undertaking and enter into a new lease agreement with another lessee, and the situation where a public authority makes the decision to change its policy on subsidisation, to be examples of decisions made unilaterally. The Court found that there had been “a legal transfer” within the scope of article 1(1) of the Directive. It can thus be stated that the European Court of Justice has adopted a broad and purposive approach to the interpretation of the notion of a “legal transfer or merger” so that all transfers resulting not only from a contract but also from an administrative or legislative act or a Court decision are covered. In Allen v Amalgamated Construction Co Ltd,450 the Court also expressly stated that it is clear that the Directive is intended to cover “any legal change in the person of the employer”.451 5.5 Atypical transfers and atypical workers The preamble to the Acquired Rights Directive refers to the need to legislate because:

… economic trends are bringing in their wake both at a national and Community level changes in the structure of undertakings, through transfers of undertakings, businesses or parts of

449 Case 29/91 ECJ, judgement of 19 May 1992. 450 1999 ECR 8643 (ECJ). 451 The concept of “merger” is not defined in the Directive (see Barnard EC Employment Law

459-460). However, it is clear that under the Acquired Rights Directive a merger must involve a change of identity of the employer. Therefore, “assets mergers” and “sale mergers” are excluded from the scope of the Directive.

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businesses to other employers as a result of legal transfers or mergers.452

A typical transfer could be described as the transfer of an undertaking from one employer to another employer for some kind of consideration.453 Under atypical transfers one could thus understand, inter alia, contracting out, compulsory tendering, a changeover of lessees, the forfeiture of the sale of a business under a conditional sale agreement, the outsourcing of management, etc. A purposive approach adopted by the European Court of Justice has brought many of these atypical transfers within the scope of the Acquired Rights Directive (this is also the case in the United Kingdom under the TUPE regulations). It is, however, also necessary to have regard to the reality of employment relationships. It is submitted that a flexible approach must be followed when having regard to where and by whom an employee is employed in reality. The question of which employees are covered by a relevant transfer will be addressed infra.

452 Refer to McMullen J “Atypical transfers, atypical workers and atypical employment

structures – a case for greater transparency in transfer of employment issues” 1996 ILJ (United Kingdom) 286 287.

453 Not including a sale of shares.


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5.6 A series of transactions In the case of Merckx and Neuhuys v Ford Motors Company Belgium,454 the European Court of Justice ruled expressly that:

30.It is clear that …, for the directive to apply, it is not necessary for there to be a direct contractual relationship between the transferor and the transferee.

The European Court of Justice has, however, also held that, although the absence of a direct contractual relationship between the transferor and the transferee does not exclude the application of the Directive, a mere succession of two contracts for the provision of the same or similar services will not, as a rule, be sufficient for there to be a relevant transfer of an undertaking, business or part of a business.455 In a case that involves a tripartite transfer (for example, where there is a change of service provider at the behest of the customer) it is clear that this transfer qualifies as a relevant transfer under the Directive as well as under the TUPE regulations and article 613a. However, the question is whether this involves two transfers or one. Stated otherwise, in the event of a change of contractors, is there an initial transfer from the first contractor to the customer and a second transfer out again to the second contractor, or is there a direct, single transfer from contractor to contractor? The relevance of this question pertains primarily to the duty (if any) of disclosure of information and consultation. If there are two transfers, a duty to inform and consult will rest with the customer before re-letting the contract. However, if there is a direct transfer from contractor to contractor, the representatives of the employees can claim observance of these duties from the old employer (the outgoing contractor) and not from the customer. There are supporters and opponents of each approach. It is sometimes argued that the two-transfer analysis is correct on policy grounds, since the customer should come into the frame at some stage. It is after all the customer who makes the decision to switch from the contractor and to choose the successor to whom the employees will eventually go.456 This would also be the better option if the customer was to alter the requirement of service production on the re-tender that it can no longer be said that an “economic

454 Joined Cases C 171/94 and C 172/94, 1996 ECR 1253. See also Oy Liikenne supra . 455 See Nielsen R European Labour Law (DJØF Publishing 2000) 319 and authority referred to

there. It is also required that an identifiable economic entity should be transferred so as to retain its previous identity. See chapter 6 infra.

456 See e.g. McMullen J “One transfer or two?” 1996 Solicitor’s Journal 283 and 284.

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entity” 457 has been transferred. If one transfer is involved, the outgoing contractor may have to pay redundancy, since there would then be no transfer of employment contracts to the second contractor. If, however, there are two transfers (to the customer and then to the successor), the identity of the entity will not have been lost and the outgoing contractor walks away while the customer then pays redundancy. However, unless the customer becomes actively involved in the management of the enterprise during this process, it seems that there will be a direct transfer from the outgoing contractor to the incoming contractor. It is thus submitted that only one transfer is involved.458 5.7 The legal position in South Africa The wording and provisions of section 197 of the Labour Relations Act 66 of 1995 must be considered. The section is cited completely for future reference as well.

Section 197 Transfer of contract of employment (1) A contract of employment may not be transferred from one

employer (referred to as 'the old employer') to another employer (referred to as 'the new employer') without the employee's consent, unless: (a) the whole or any part of a business, trade or

undertaking is transferred by the old employer as a going concern; or

(b) the whole or a part of a business, trade or undertaking is transferred as a going concern (i) if the old employer is insolvent and being wound

up or sequestrated; or (ii) because a scheme of arrangement or compromise

is being entered into to avoid winding-up or sequestration for reasons of insolvency.

(2)(a) If a business, trade or undertaking is transferred in the circumstances referred to in subsection (1) (a), unless otherwise agreed, all the rights and obligations between the old employer and each employee at the time of the transfer continue in force as if they were rights and obligations

457 See chapter 6 infra. 458 As implicit in Daddy’s Dance Hall; Dr Sophie Redmond ; Dines v Initial Health Care

Services Ltd 1993 ICR 978 (EAT); P. Bork International A/S, in liquidation et al v foreningen of Arbejdsledere I Danmark 1988 ECR 3057 (ECJ).


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between the new employer and each employee and, anything done before the transfer by or in relation to the old employer will be considered to have been done by or in relation to the new employer.

(b) If a business is transferred in the circumstances envisaged by subsection (1) (b), unless otherwise agreed, the contracts of all employees that were in existence immediately before the old employer's winding-up or sequestration transfer automatically to the new employer, but all the rights and obligations between the old employer and each employee at the time of the transfer remain rights and obligations between the old employer and each employee, and anything done before the transfer by the old employer in respect of each employee will be considered to have been done by the old employer.

(3) An agreement contemplated in subsection (2) must be concluded with the appropriate person or body referred to in section 189 (1).

(4) A transfer referred to in subsection (1) does not interrupt the employee's continuity of employment. That employment continues with the new employer as if with the old employer.

(5) The provisions of this section do not transfer or otherwise affect the liability of any person to be prosecuted for, convicted of, and sentenced for, any offence.

Section 197(1)(a) provides that where a business, trade or undertaking is transferred as a going concern, certain consequences must be attached to that transfer. In terms of section 197(2)(a), unless otherwise agreed, all the rights and obligations between the old employer and each employee at the time of the transfer continue in force as if they were rights and obligations between the new employer and each employee, and anything done before the transfer by or in relation to the old employer will be considered to have been done by or in relation to the new employer. Sections 197(1)(b) and 197(2)(b) deal with winding-up and sequestration circumstances where the contracts of all employees transfer automatically to the new employer. However, all the rights and obligations between the old employer and each employee at the time of the transfer remain between the old employer and each employee. Anything done before the transfer by the old employer in respect of each employee will also be considered to have been done by the old employer.

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When reading the section, it is clear that the first scenario in section 197(1)(a) involves a transfer by the old employer. The second scenario in section 197(1)(b) involves a transfer if the old employer is insolvent and being wound up or sequestrated; or because a scheme of arrangement or compromise is being entered into to avoid winding-up or sequestration for reasons of insolvency.459 Prima facie it seems as if both contractual and ex lege transfers might be covered. It seems as if nothing prevents the undertaking from being “transferred” by two or more transactions instead of just one transaction. To date, the Courts seem to have given more attention to the expression “transfer of a going concern” than to the concept of a “transfer” as such. This seems to suggest that a broad interpretation of the notion of a “transfer” from one person to another will be given by our Labour Courts. However, the lack of attention to the concept of a “transfer” can be attributed to the fact that no complex factual circumstances have as yet presented themselves to the Courts.460 It is trite law that when a business is sold, a relevant transfer would have occurred. In Manning v Metro Nissan & others461 the Labour Court had no difficulty in holding that where a business, trade or undertaking is sold as a going concern, a relevant transfer has taken place and the transfer of relevant contracts of employment would thus ensue automatically, unless specifically excluded, even if not specifically provided for in the agreement of sale. In the more recent case of Schutte & others v Powerplus Performance (Pty) Ltd,462 the Labour Court also considered the question of when a transfer is effected. The Court held explicitly that the application of section 197 is not limited to situations where there has been a sale of a business. It applies if a business, or part thereof, has been transferred as a going concern. This may be done in circumstances other than a sale. The Court held that:463

[T]hese may arise in the case of a merger, takeover or as part of a broader process of restructuring within a company or group of companies. Transfer can take place by virtue of an exchange of assets or a donation.

The Court also referred, apparently with approval, to the position under the TUPE regulations in the United Kingdom (i.e. that a transfer can be effected by a sale or by

459 In Ndima & others v Waverley Blankets Ltd 1999 20 ILJ 1563 (LC) the Court stated that

“…it would be difficult to find that the reference to the old employer and to the new employer [in s 197(2)(b)] does not have much significance” (1576I-J).

460 Instances of outsourcing have, however, caused considerable headache for the Court, see chapter 6 infra.

461 1998 19 ILJ 1181 (LC). 462 1999 20 ILJ 655 (LC). 463 657A-C.


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some other disposition or by operation of law464 and whether the transfer is effected by a series of two or more transactions.465) The Court was thus satisfied that given the range of circumstances under which a transfer can take place, the need for an agreed price or valuation of the undertaking may not arise. Consideration may take some other form (in casu the outsourcing was part of a broader process of restructuring by the second respondent and the Court held that it should be seen against the backdrop of the second respondent’s acquisition of a 50 per cent stake in the first respondent). The Court also stated that this was ultimately a question of fact and degree. In Fourie and another v Iscor Ltd,466 the applicant employees were both employed in the respondent’s information technology division. The respondent decided to consolidate its various information technology functions into a single business unit. Thereafter, having decided to commercialise, it sold the information technology division to AST, a small unlisted company, as a going concern. Even though the facts were clear, having involved a sale, the Court considered whether the transaction was in fact governed by section 197(1)(a) and 197(2)(a) of the Labour Relations Act. The Court found that a going concern had been transferred. However, the Court also went on to hold that even if the parties did not intend to effect a transfer of employees in terms of section 197, the nature of the transaction determined whether section 197 was applicable to the transfer, and not the intention of the parties.467 Our Labour Courts have endorsed a purposive approach to the interpretation of section 197 on at least two occasions. In Tekwini Security Services CC v Mavana,468 the Labour Court held, in circumstances where there was no agreement between the old employer and the new employer, that such absence of an agreement did not preclude the existence of the transfer of a business where other factors indicated such a transfer.469 The employee was employed by Protector CC as a security guard. The sole member of this corporation fled the country to avoid the Receiver of Revenue. The manager of the close corporation, together with a colleague, then set up a close corporation, Tekwini Security Services CC, and clients of Protector were asked to transfer their contracts to Tekwini Security Services. The Court held that the transfer of a going concern indeed took place, even though there was no evidence of an agreement between the member of Protector and the members of Tekwini Security Services. The Court accepted that section 197 has its origins in the TUPE regulations, and that the

464 Reg 3(2). 465 Reg 3(4)(a). 466 2000 21 ILJ 2018 (LC). 467 2030B-2033D. 468 1999 20 ILJ 2721 (LC). 469 2728H-2729B.

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purpose thereof is the protection of employees’ rights in the event of the transfer of a business or undertaking.470 The Court, however, seemed to confuse the expressions “transfer” and “transfer of a going concern” when referring to Dr Sophie Redmond where, according to the Court, the European Court of Justice had set out the circumstances which may qualify as a transfer.471 The two points to which the Labour Court referred with approval (a business retaining its identity and certain factors to be considered individually by the national Court) actually dealt with the expression “transfer of an undertaking”472 and not with the expression “legal transfer”, as discussed above. The Labour Court also followed a purposive approach in interpreting section 197 in Pexies Restaurant and another v Chelane Ephraim Mosehla.473 Mosehla was employed in a restaurant called Pexies Restaurant when he was dismissed in December 1997. According to the employer, one Jose Carvallo had previously owned the restaurant, but the latter had sold the business to one Mr D’Oliveira in August or September 1997. Since then, he had had nothing to do with the business until about January 1998. According to the employer’s version, at the time that the employee was dismissed, although the employee was in the employ of Pexies Restaurant, Jose Carvallo was no longer the proprietor of that business and the proprietor of that business was a D’Oliveira, apparently a relative of Jose Carvallo. The business was sold for a price of R20 000, to be paid over a period of 36 months. In January 1998, D’Oliviera absconded from the business. Carvallo therefore returned and took over the business. It was unclear whether any part of the purchase price had been paid, but it was clear that the whole price had not been paid. Thus, the employer’s main defence was that, at the time of the dismissal, there was no employer/employee relationship between itself and the employee. The Court held that the question to be answered was whether there could be said to have been a transfer of a business within the meaning of section 197(2)(a). The Court, presided over by the honourable Judge Zondo, once again held that section 197 has its origins in the TUPE regulations, which give effect to the European Community Directive. The Court accepted that, when dealing with the issue of the transfer of a business, one interprets such provisions with a purposive approach.474 The Court was satisfied that Carvallo “took over” the restaurant: there was a change of hands in the business, constituting the transfer of the business when Carvallo took the restaurant back after D’Oliveira absconded.

470 2727E-G. 471 See 2728B-E. 472 I.e. transfer of a going concern. 473 Case No. J651/99, judgement of 26 February 1999. 474 Par 13.


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In Ndima & others v Waverley Blankets Ltd (Sithukuza & others v Waverley Blankets Ltd),475 section 197 also had to be interpreted. More specifically, the Court had regard to the words “if a business is transferred”, which appear at the commencement of section 197(2)(b) of the Labour Relations Act. It was accepted by both parties that, upon the granting of the provisional liquidation order, possession and control of the respondent’s business was transferred from the respondent to the Master of the High Court and then to the provisional liquidators. Upon the sanctioning of the scheme of arrangement by the High Court, such possession and control was transferred from the provisional liquidators back to the respondent. The applicant thus argued that the transfer of possession and control was enough to bring the applicants within the ambit of section 197 of the Act. The facts were that when the respondent company was placed under provisional liquidation, it notified its employees that their contracts of employment were being terminated. The joint provisional liquidators concluded temporary contracts with some of the employees, not including the applicants. When, some five months later, a proposed scheme of arrangement was agreed to and sanctioned by the High Court (in terms of which another company bought all the shares in the respondent company), the provisional liquidation order was subsequently discharged. Following the High Court’s sanctioning of the scheme of arrangement, the applicant employees tendered their services, but the company refused to take them into employment. The Labour Court held that the transfer of a business, trade or undertaking does not include a transaction involving the transfer of possession and control of a business or the sale of shares. Such an extensive interpretation would go beyond the acceptable limit to which a Court may go in disregarding the language in a statute. The Court held that the “transfer of a business” and the “transfer of possession and control of a business” are two separate concepts. Although the Court realised that it may be easy for employers to circumvent section 197, if it were held that section 197 does not cover the sale of shares, the Court concluded that it could not read into the wording of the section more than was obviously intended. The Court did go on to state that, in its opinion, there is a crying need for an amendment of section 197 to cover the situation such as the one that occurred in this case.476 This was held in view of the fact that, in most cases, it would be very difficult for anyone to prove that a particular transaction of the sale of shares was a simulation or a sham. It is thus not so simple to argue that, in a case where there is evidence that the purchase of shares was a simulation or a sham in order to avoid section 197, the Court could go behind the sale of shares and find that, in truth, the transaction was a sale of a business.477 This

475 1999 20 ILJ 1563 (LC). 476 1579G-I. 477 As argued by the respondent’s counsel (1578C-D).

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problem is compounded by the fact that it is not at all difficult to have a company placed under provisional liquidation. 5.8 Concluding remarks The case law of the European Court of Justice initially gave the expression “a legal transfer” a very broad interpretation. This approach culminated in the Sophie Redmond case where the transfer did not take place on the basis of a lease,478 or on the basis of a contract,479 but rather “in the context of contractual relations within the meaning of the Directive and the case law”.480 It would therefore seem that this condition could be met wherever there is a change in the natural or legal person who carries on the business in question, regardless of the type of transaction that caused the transfer. Although the European Court of Justice will leave the question as to the fulfilment of, or compliance with the requirement of “the transfer of an undertaking” to the national Courts of Member States, the interpretation of the expression “a legal transfer” has, it would thus appear, been taken on by the European Court of Justice itself. This can possibly be explained by the fact that the notion of “a legal transfer” is one of the main notions in the Directive, which to a large extent determines its scope of application.481 However, the rule on partial harmonisation means that other important notions such as “employee”, “employment contract” and “employment relationship” are notions that are still derived from the national legal orders of the Member States.482 In South Africa, an “employee” is defined in our legislation and the Courts have utilised the dominant impression test to determine the status of an individual in cases of doubt.483 It is submitted that the notion of an “employee” must be interpreted widely so as to achieve the object and purposes of the Act as defined in section 1 thereof. It has been shown that it is only those persons employed by the transferor at the time of the transfer that benefit from the protection of transfer provisions.484 However, in the event of an unfair dismissal prior to the transfer, the contract will also be subject to the transfer

478 As in Ny Mølle Kro. 479 As in Besselsen. 480 Sophie Redmond consideration 17. 481 See De Groot 1993 CMLR 350. 482 E.g. the protection provided in terms of the Acquired Rights Directive only applies to

individuals who qualify as “employees” in their own national systems. 483 See Du Toit et al Labour Relations Law 71-76 regarding who is an employee and who is an

employer for purposes of the LRA of 1995. See also SABC v McKenzie 1999 20 ILJ 585 (LAC). Refer to par 5.2 supra.

484 The requirement “by the old employer” has been shown to be problematic in the instance of groups of companies and temporary employment services. It is submitted that the second part of the definition of “employee” in s 213 of the LRA can assist in reaching an equitable solution for employees.


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principle.485 Where only a part of an undertaking is transferred, one has to determine which employees were employed in that part of the undertaking.486 Finally, it should be accepted, without a doubt, that an employee who objects to transferring cannot be forced to transfer against his/her own free will.487 In South Africa, our Labour Court has also endorsed a wide and purposive interpretation of section 197 and, more specifically, of the notion of a transfer. The Court has accepted that more possibilities than a straightforward sale were envisaged by the legislator and that the important consideration is whether or not the undertaking is “taken over” by the new employer.488 It is clear that an undertaking can be taken over even in the absence of an agreement between the transferor and transferee, and that the intention of the parties, although relevant, is not the ultimate consideration. The true nature of the transaction will be crucial. A transfer can therefore be effected by means of a sale, or some other kind of disposition, or by operation of law.489 It does not matter whether the transfer is effected by a series of two or more transactions.490 The Courts have stated that this enquiry depends ultimately on fact and degree. It is submitted that there will be a relevant transfer if, following a legal transfer or merger, there is a change in the legal or natural person who is responsible for carrying on the business and who, by virtue of that fact, incurs the obligations of an employer vis-à-vis employees of the undertaking, regardless of whether or not ownership of the undertaking is transferred. Some transactions will plainly not qualify as relevant transfers. For example, a mere change in the majority shareholder of an undertaking will not constitute a relevant transfer (transfers by share take-over are excluded because, when a company’s shares are sold to new shareholders, there is no change in the identity of the employer - the same company continues to be the employer). Some transactions, for example transfers of assets only, will not qualify in order for transfer provisions to apply.491 However, in order to approach this issue of employment protection in a principled way, the enquiry into whether or not a going concern has been transferred should not enter the picture at this early stage. It is submitted that such an approach would only muddle matters unnecessarily. 485 This would at least be the case in the event of a dismissal for reason of the transfer. See

chapter 8, par 8.2 infra. Also refer to chapter 12. 486 In this regard see chapter 6 par 6.2.2. 487 In this regard see chapter 7 infra. 488 See chapter 6, par 6.3.4.2 regarding outsourcing infra. 489 See the discussion in chapter 13 infra regarding insolvency circumstances. 490 See chapter 6, par 6.3.4.2 infra . 491 Here the relevant consideration pertains to the enquiry into whether or not the undertaking

was transferred as a going concern. See chapter 6 infra.

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CHAPTER SIX

THE TRANSFER OF A BUSINESS, TRADE OR UNDERTAKING (OR PART THEREOF) AS A GOING CONCERN

6.1 General Once it has been determined that there has been a transfer492 of a business, trade of undertaking or part thereof, the next enquiry relates to whether or not the transfer of the undertaking was effected as a going concern. Only after it is found that a business, trade or undertaking (or part thereof) was indeed transferred, as a going concern, should the legal effect493 of such a transfer be considered. The legal effect of a relevant transfer should not influence the decision that must be reached regarding the existence of a relevant transfer.494 South African labour law does not contain a precise definition of the notion of a “going concern” and since this is one of the main determining factors in provisions that regulate the transfer of undertakings, it is of crucial importance to give more content to this term. Moreover, although the terms “business”, “trade” and “undertaking” prima facie seem to be sufficiently clear, these notions could also be much better defined.495 It is therefore essential that the legislator and/or our Labour Courts provide some principled guidelines on the interpretation of these notions. The Concise Oxford Dictionary defines the notions as follows: • Business: buying and selling; trade; commercial consideration; commercial house,

firm • Trade: business carried on as means of livelihood or profit; exchange of

commodities for money or other commodities, commerce • Undertaking: work undertaken • Going concern: business already in operation These definitions are not very helpful when complex factual circumstances arise. An absolutely ad hoc approach should be avoided for the sake of legal certainty. It is also not helpful to refer to definitions in, for example, tax or commercial legislation, since these concepts are directed at determining whether or not VAT is payable, etc. Their 492 See chapter 5 supra . The enquiry into whether or not there has been a transfer is largely a

factual one. 493 See chapters 7-13 infra. 494 The term “a relevant transfer” is used to describe a situation where there was a transfer of a

business, trade of undertaking or part thereof as a going concern. 495 It is especially the notion of a part of a business, trade or undertaking that is problematic.

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purpose is very different from that of provisions on the safeguarding of employment. In this regard, the Labour Court has held that these concepts cannot be applicable since section 197, for example, deals with the transfer of a business and is not limited to the sale of a business.496 Regarding the notions of “business”, “trade” and “undertaking” at supranational level, Advocate-General Van Gerven stated in his opinion on the Christel Schmidt case,497 that the phrase “undertaking, business or part of a business” within the meaning of the Directive is underpinned by the concept of:

… an economic unit or economic entity, which refers to an organised whole consisting of persons and (tangible and/or intangible) assets by means of which an economic activity is carried on having an objective of its own, albeit one that is ancillary to the objects of the undertaking; a whole which, moreover, can be part of an even larger corporate whole.498

Where a transfer of such an economic entity takes place with the result that the economic entity retains its identity,499 it is accepted that a relevant transfer has occurred. The Acquired Rights Directive, as amended, applies to public and private undertakings and also covers undertakings that do not operate for gain.500 This implies that, in principle, all of the following entities can qualify as “a business, trade or undertaking or part thereof”: welfare organisations; governmental institutions and departments;501 para-statal institutions; instances of privatisation;502 partnerships; leases; outsourcing and franchises. To summarise, after it has been found that a transfer has occurred, one has to determine whether this transfer involved the transfer of a business, trade or undertaking or part thereof as a going concern. Two closely connected factors are important: firstly, an identifiable economic entity (by means of which an economic

496 Schutte v Powerplus Performance (Pty) Ltd 1999 20 ILJ 655 (LC). 497 See infra par 6.2.3. 498 1994 IRLR 306 at par 14. This definition can be compared to the one where the ECJ, in the

context of different rules (regarding the concept of “part of a business” within the meaning of art 7 of Directive 69/335/EEC concerning indirect taxes on the raising of capital), referred to “any part of an undertaking” as if it constitutes an organised whole of assets and persons capable of acting together to perform a particular activity (Commerz-Credit-Bank AC Europartner v Finanzamt Saarbrücken 1992 ECR 5225 at par 12).

499 As it does if it is a going concern whose operation is actually continued or resumed by the new employer; see Blanpain European Labour Law (2000) 392.

500 Art 1(1) of Directive 2001/23/EC. 501 See, however, the discussion infra in par 6.2.4 on administrative entities. 502 See, however, the remarks on privatisation in chapter 5.


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activity is carried on with an objective of its own) must be transferred and, secondly, this entity must be transferred in such a way that the economic entity retains its identity. This means that it must be transferred as a going concern. The rest of this chapter will deal with the evaluation of these two factors.

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6.2 The Acquired Rights Directive Article 1(1)(b) of the Acquired Rights Directive has been extended to provide that there is a transfer within the meaning of the Directive where there is a transfer of an economic entity that retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity, whether or not that activity is central or ancillary. Furthermore, the Directive also applies to public and private undertakings engaged in economic activities, whether or not they are operating for gain. However, an administrative reorganisation of public administrative authorities, or the transfer of administrative functions between public administrative authorities, is not a transfer within the meaning of the Directive.503 504 The previous definition was far more limited in its explanation of when there would actually be a relevant transfer and left it largely to the European Court of Justice to determine whether a particular undertaking or business or part thereof would fall within the scope of the Directive.505 It thus seems that the following aspects are important when considering whether or not a relevant transfer has occurred: • The transfer of an economic entity retaining its identity; • the transfer of a part of an undertaking; • the transfer of functions involving public authority; • the transfer of non-commercial activities; • atypical transfers; • contracting out; • contracting in; and • transfers within a group. 6.2.1 The transfer of an economic identity In Spijkers v Gebroeders Benedik Abattoir C.V. & Alfred Benedik en Zonen B.V.,506 the following factors were considered to be relevant in deciding whether or not

503 Art 1(1)(c). 504 See par 6.2.4 infra regarding activities encompassing the exercise of public authority. 505 So it was established that a non-profit making concern could be included (Redmond

Stichting v Bartol Case 29/91 1992 ECR 3189; 1992 IRLR 366), and that what was needed was the transfer of a “stable economic entity” (Rygaard v Dansk Arbejdsgiverforening Case 48/94 1995 ECR 2745; 1996 IRLR 51). The Directive specifically included the transfer of a part of a business and the ECJ interpreted that to mean that a service or activity supporting the main undertaking, or even a peripheral activity, could be included, provided that the activity was severable and retained its identity after the alleged transfer (Rask and Christensen v ISS Kantineservice A/S Case 209/81 1982 ECR 2511; 1993 IRLR 133).

506 Case 24/85, 1986 ECR 4989 (ECJ).


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a business or undertaking had been transferred as a going concern (thus in such a manner that the entity retained its identity): • The type of undertaking or business; • whether or not tangible assets such as buildings, etc are transferred; • the value of intangible assets at the time of the transfer; • whether or not the majority of employees are taken over by the new employer (a

problematic criterion);507 • whether or not the customers are transferred; • the degree of similarity between the activities carried on before and after the

transfer; and • the period, if any, for which those activities were suspended.508 The Court held that the undertaking must therefore have preserved its business identity. All these circumstances are merely single factors to be considered in the overall assessment and they cannot be considered in isolation.509 The European Court of Justice did not give an indication in Spijkers as to which factors should receive greater consideration than others. The Court did, however, hold that it is necessary that the business should have been disposed of as a going concern, meaning, inter alia, that its operation was actually continued or resumed by the new employer with the same or similar activities.510 It is thus submitted that this factor is the strongest inidicium of a 507 It seems illogical to equate the result of a relevant transfer (i.e. the transfer of the affected

employees) with a factor indicating such transfer. Certainly it is a fallacy to make the very consequence that transfer provisions try to achieve, a precondition for its application. It is thus argued that the fact of whether or not the new employer has taken over a majority of employees should not weigh too much. The other factors listed are more appropriate.

508 Gebroeders Colaris Abattoir employed Spijkers as an assistant manager. On 27 December 1982, by which date the business activities of Colaris had entirely ceased and there was no longer any goodwill in the business, the entire slaughterhouse with various rooms and offices, the land and certain specific goods were purchased by Benedik Abbattoir. With effect from that date, although in fact only since 3 February 1983, Benedik Abattoir operated a slaughterhouse. All the employees of Colaris were taken over, apart from Spijkers and one other employee. The business activities carried on by Benedik Abattoir in the same buildings were of the same kind as those carried on by Colaris. However, Benedik did not take over the customers of Colaris. To further complicate things, Colaris was declared insolvent on 3 March 1983. Spijkers thus claime d outstanding wages from Benedik Abattoir, as well as the opportunity to work there. He contended that there had been a transfer of an undertaking.

509 See also Kenmir Ltd v Frizzell 1968 1 All ER 414 (HL) where it was held that substance rather than form should be considered when determining whether or not an undertaking was transferred as a going concern. Furthermore, it was also stated that consideration must be given to the whole of the circumstance, weighing the factors that point in one direction against those that point in another. See also Lloyd v Brassey 1969 2 QB 98 (CA) where this test was approved and it was held that, in the end, the vital consideration is whether the effect of the transaction was to put the transferee in possession of a going concern the activities of which he could carry on without interruption. Or, “does the business remain the same business but in different hands?”.

510 See Duffen v (1) Fuzzard (2) Marist Sisters COIT 1395/158 (IT) where school premises were sold by the Marist Sisters to a private tutorial college. The Industrial Tribunal held that there had been no transfer as no one who saw the school before and after the sale would

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relevant transfer.511 Where an employer’s activities before and after a putative transfer differ to a significant extent, this may suggest that no transfer occurred, but that only the transfer of assets took place.512 This should not be interpreted to mean that any variation in the work done before and after the transfer would preclude a finding of a relevant transfer. It is only where the activities are so different as to come to the conclusion that the identity of the economic entity is not retained, that no transfer may be found to have taken place.513 A transfer may also not be at issue where “it might not be possible to identify the business as the same undertaking in the hands of the transferee as it was in the hands of the transferor, because the transferee so integrates it into his/her existing operations that it loses its distinct and separate identity”.514 The European Court of Justice stressed that it is for the National Court to make the necessary factual appraisal, having regard to the criteria laid down by the European Court of Justice. The European Court of Justice also dealt with the requirement that the business or undertaking must have preserved its identity in the cases of Landsorganisationen i Danmark for Tjenerforbundet i Danmark v Ny Mølle Kro and P Bork

say that it was the same school. This was held even though the new owner wrote to parents to emphasise the degree of continuity. It appeared that the school, before the transfer, was run as a Catholic junior school for girls, whilst afterwards it catered for both sexes and all denominations. The new owner did not retain any of the previous teaching staff.

511 See the judgements of the ECJ in the cases of Ny Mølle Kro , Bork and Rask discussed infra where this factor was also highlighted by the Court.

512 See Applebee v Joseph Allnat Centre EAT 292/80 where the vendor ran St Albans Hotel as a traditional family hotel whilst the purchaser intended to use it as part of a chain of holiday centres for educational and sporting activities, primarily for children. The EAT did not want to find that there had been a relevant transfer as the economic activities before and after the agreement were entirely different.

513 Consider an example where the undertaking manufactured shoes prior to the transfer and the factory remains open at the same premises after the transfer, but now manufactures winter coats. In terms of a labour law test, the employees will transfer as they are still working at the same place, assets were transferred, and the undertaking is carrying on similar activities to those previously carried on (i.e. manufacturing). Even though the end product is different, the customer base may well be the same. However, what would the case be where after the transfer, wooden furniture is now manufactured? Could it be said that the economic entity transferred had retained its identity? Here, the answer does not seem so clear any more. Although employees are still manufacturing a product at the premises, it is a product of a completely different nature than before. It is evident that the employees may indeed not have the skills to manufacture wooden furniture and it may be argued that the transferee therefore cannot be expected to take over the employees.

514 See Elias & Bowers Transfer of Undertakings 26. The authors give the following example: services for a particular client may be operated as a distinct part of the transferor’s business, but the transferee may integrate it so that the function can no longer be separately identified in respect of the particular client at all. Elias & Bowers hold the view that this will not constitute a transfer, albeit that it is unsatisfactory that the decision by the transferee as to how he/she will run his/her business should affect the rights of employees. However, they state that if the integration is carried out after the transfer, so that there is a period of time when it is possible to identify the same economic unit, it should not preclude a finding that a transfer did occur.


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International v Foreningen of Arbejdsledere I Danmark.515 In the first case, the European Court of Justice held that the Directive envisages:

… the case in which the business retains its identity inasmuch as it is transferred as a going concern, which may be indicated in particular by the fact that its operation is actually continued or resumed by the new employer, with the same or similar activities.

In the latter case (Bork), the European Court of Justice dealt with a situation where the lessor of buildings, plant and machinery used for the operation of an undertaking, regained possession of the leased property after giving notice bringing the lease to an end or upon termination of the lease and the undertaking’s cessation of operations. After this he/she then transferred it to a third party who shortly afterwards resumed the operation of the undertaking without engaging new staff, as the transferee took on again, without there being an agreement on the subject either with the former lessee or with the transferor or between those two parties, just over half of the employees who were employed in the undertaking by the former lessee. The Court held that the fact that the transfer was effected in two stages in such a case, did not prevent the Directive from being applicable, provided that the undertaking in question retained its identity, as it does if it is a going concern whose operation is actually continued or resumed by the new employer, with the same or similar activities. As was held in Ny Mølle Kro, the Court pointed out that the temporary closure of an undertaking and the resulting absence of staff at the time of the transfer do not of necessity preclude the possibility that there has been a transfer of an undertaking within the meaning of article 1 of the Directive. The transfer of labour-intensive service contracts is still problematic in practice and is bound to cause further litigation in South Africa as well.516 The European Community Commission made a proposal to alter the transfer definition in the revised Acquired Rights Directive so that the new article 1(1) would read that:

… the transfer of an activity, which is accompanied by the transfer of an economic entity, which retains its identity shall be deemed to be a transfer within the meaning of the Directive. The transfer of only an activity of an undertaking, business or part of a business

515 1987 ECR 5465 (ECJ) & 1988 ECR 3057 (ECJ). 516 Important cases to consider include Schmidt v Spar- und Leihkasse der früheren Ämter

Bordeshold, Kriel und Cronshagen Case C-392/92 and Süzen v Zehnacker Gebäudereinigung G.m.b.H. Krankenhausservice Case C-13/95. See par 6.2.3 infra.

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whether or not it was previously carried out directly does not in itself constitute a transfer within the meaning of the Directive.517

It is submitted that even in the case of contracting out, the overriding criterion must be the transfer of an economic entity retaining its identity. The fact that no assets are being transferred or that only one person was employed in the undertaking before the transfer are thus only two factors to take into consideration. According to Spijkers, no one factor is conclusive. Thus, the fact that there is no contractual relationship/connection between the transferor and transferee does not per se prevent the Directive from applying either.518 The European Court of Justice has held in Rask and another v ISS Kantineservice A/S, that the Directive is applicable where, following a legal transfer or merger, there is a change in the legal or natural person who is responsible for carrying on the business and who, by virtue of that fact, incurs the obligations of an employer vis-à-vis the employees of the undertaking, regardless of whether or not ownership of the undertaking is transferred.519 However, as discussed earlier,520 this was held with regard to the expression “a legal transfer” and not as such with regard to the expression “transfer of an undertaking”. The transfer of part of an undertaking will be discussed further infra.521 6.2.2 The transfer of a part of an undertaking In the event of the transfer of a part of an undertaking or business, the general principles regarding the weighing up of certain factors listed in Spijkers also apply. Thus it has to be determined whether that part that is transferred is capable of qualifying as an economic entity as described supra.522 If it is found that the part of the undertaking transferred is “an economic unit or economic entity which refers to an organised whole consisting of persons and (tangible and/or intangible) assets by means of which an economic activity is carried on having an objective of its own, albeit one that is ancillary to the objects of the undertaking; a whole which, moreover, can be part of an even larger corporate whole”, it still has to be determined whether it 517 This unpopular proposal was abandoned in February 1996 (European Parliament Plenary

Session, 16 January 1996) followed by the European Commission meeting of 7 February 1996.

518 Nor the fact that there is no actual transfer of property between the parties. See Dr Sophie Remond Stichting v Bartol 1992 IRLR 366 (ECJ).

519 1993 IRLR 133 at par 15. See chapter 5 in this regard. 520 Chapter 5. 521 Par 6.2.3. 522 Par 6.2.1.


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retained its identity after the transfer. At European Community level, the European Court of Justice has remained true to the criteria laid out in Spijkers. However, as a result of Schmidt and Süzen, it seems as if separate consideration is given to some of the factors previously outlined by Spijkers.523 In the United Kingdom it has been considered, albeit under the redundancy provisions, that the sale of part of a business will seldom occur unless the part transferred is, to some extent, separate and distinct from the rest of the business, either geographically, or by reference to the product, or in some other way.524 A separate problem that arises in these instances is that where only part of an undertaking is transferred, a complication may arise pertaining to the question of how to apply the transfer to an employee whose duties prior to the transfer related both to that part which was transferred and partly to other aspects of the business of the transferor (which are not the subject of the transfer).525 In these circumstances, the European Court of Justice has held that the transfer relates only to employees assigned to that part of the undertaking, since an employment relationship is essentially characterised by the link between the employee and the part of the undertaking or business to which he/she is assigned to carry out his/her duties.526 This was the decision in Arie Botzen et al v Rotterdamsche Droogdok Maatschappij BV 527 where the Court went on to state:

14. Thus, when an undertaking entrusts by contract the responsibility for operating one of its services, such as cleaning, to another undertaking which thereby assumes the obligations of an employer towards employees assigned to those duties, that operation may come within the scope of the Directive. As the Court held at paragraph 17 of its judgment in Watson Rask and Christensen, ... the fact that in such a case the activity transferred is for the transferor merely an ancillary activity that is not necessarily connected with its objects cannot have the effect of excluding that operation from the scope of the directive.

The European Court of Justice thus rejected an argument that the relevant test was whether the employee worked in the department or sector that was transferred on a

523 In this regard, see infra pars 6.2.3.1, 6.2.3.2 & 6.2.3.3. 524 Melon v Hector Powe 1981 ICR 43. See Elias & Bowers Transfer of Undertakings 27. 525 See chapter 5, par 5.2 supra regarding the question of whose contracts are susceptible to a

transfer. 526 See Barnard EC Employment Law 450-451. 527 1985 ECR 519 (ECJ), Case 186/83.

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full-time basis, “to the exclusion of those engaged in partial tasks in various businesses or parts of businesses and those who, although working for several businesses or parts of businesses, form part of the remaining staff”. Instead, the Court accepted as the relevant test “whether a transfer takes place of the department to which they were assigned and which formed the organisational framework within which their employment relationship took effect”. However, this test has been criticised as being rather unclear. For example, if an employee only devotes a small portion of his/her time to the part that is transferred, is such an employee assigned to that part or not? In the United Kingdom, the Employment Appeal Tribunal applied Botzen to the case of a company secretary who was employed by one company but was also company secretary of a subsidiary company in the group and worked on the subsidiary’s affairs for part of the time. Both companies went into receivership and the subsidiary was sold, together with a part of the parent company’s undertaking. The Employment Appeal Tribunal held, in Sunley Turrif Holdings Ltd v Thompson,528 that the employee’s employment had been transferred to the transferees, since his employment related to that part of the parent company which was subject to the transfer. The European Court of Justice does not make use of any percentages (for example a requirement that 80 per cent of an employee’s working time must have been spent in the transferred undertaking). However, commentators are of the opinion that the assignment test employed in Botzen is quite stringent, if the test involves the implication of a full-time commitment by the employee to the part of the undertaking being transferred. McMullen highlights the following anomalies that could appear:529 An employee spends 50 per cent of his/her time working for business X and 50 per cent of his/her time working for business Y. Both X and Y are sold off and the employee transfers with neither. He/she is left with the transferor, who has no work for the individual, and so he/she loses his/her job. Conversely, pursuant to a mobility clause, an unwanted individual is assigned to business X shortly before it is sold in the knowledge that transfer provisions will transfer him/her to a transferee. This could be the case even if the employee had worked elsewhere in the retained business for many years. McMullen thus proposes that, in accordance with a purposive approach, the realities of the employment relationship should be explored.

528 1995 IRLR 184 (EAT). 529 See McMullen J “Atypical transfers, atypical workers and atypical employment structures –

a case for greater transparency in transfer of employment issues” 1996 ILJ (United Kingdom) 286 303-304.


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In both the cases of Schmidt and Merckx and Neuhuys v Ford Motor Co Belgium SA,530 the opinions of the Advocate-Generals held that there is a common denominator underlying the three concepts of “undertaking”, “business” and “part of a business” used in the Directive. These are terms that refer to a unit with a minimum level of organisational independence. It is submitted that an undertaking need not have been carried on before the transfer as a separate business for it to be covered by transfer provisions (even though the part that is transferred must have been a separate and identifiable part of the business). The European Court of Justice’s view in Spijkers can be used as authority for such interpretation.531 Complications may, of course, arise with regard to the transfer of a part of an undertaking, having regard to the increasingly frequent occurrence of outsourcing in the market today. This is a practice in terms of which a service or activity (often peripheral to the employer’s main business) is discontinued and an outside contractor is engaged to perform it. The troublesome question of when such a service or activity forms part of an undertaking that has been transferred will be discussed infra.532 6.2.3 Contracting out/Outsourcing It is certain that the most controversial area of application for the Acquired Rights Directive has been in the area of services that are contracted out (also commonly known as outsourcing)533. Governments worldwide have recently turned to competitive tendering in public services to make the labour market more flexible.534 Outsourcing has also become very popular in the private sector.535 “Outsourcing” has been defined as:536

[T]he policy of hiring outside consultants, trainers, t echnicians and other professionals to take over the complete function of a particular department (e.g. human resources) of an enterprise,

530 1996 IRLR 467 (ECJ) par 27. 531 In Spijkers (1986 CMLR 296 303), the ECJ held that “[t]he decisive criterion of the existence

of a transfer is thus whether the entity retains its identity. Mere sale of the assets of an enterprise does not constitute such a transfer; the enterprise itself must be transferred.”

532 See par 6.2.3 infra . 533 See also par 6.3.4 infra. 534 However, competition should be limited to quality and efficiency gains in the utilisation of

labour rather than a “race to the bottom” regarding the terms and conditions of employees. The Acquired Rights Directive certainly limits price competition amongst service providers.

535 See Bosch C “Transfer of contracts of employment in the outsourcing context” 2001 ILJ 840 842 for particulars on the occurrance of this phenomenon in both the public and private sector.

536 Barker F & Holtzhauzen M South African Labour Glossary (Juta 1997).

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rather than employing full-time personnel. This often involves non-core activities such as catering, communications and data processing.

It has been shown that the European Court of Justice’s test for whether or not a transfer has occurred, concerns the key criterion of whether there is a transfer of an economic entity537 retaining its identity.538 It has, however, been submitted that in the context of contracting out, at least, there may be relatively little opportunity for a transferee to assert that the basic identity of the operation has indeed changed.539 Thus it was that in Dines v Initial Healthcare Services Limited,540 the Court of Appeal declared that regardless of the importance, for example, of cleaning to a hospital, there are relatively few ways in which that function can be performed. This must be the case in many instances of outsourcing. This is emphasised by the fact that a fundamental change is necessary before the identity of the economic entity can be lost. An undertaking can thus be carried on in different ways, without destroying its identity. In the case of Rask and Christensen v ISS Kantineservice A/S,541 the employer (Philips) decided that the management of its staff canteens, an ancillary part of its operations, could be run more effectively if entrusted to a specialist operator, ISS. In essence, this was a sub-contracting contract between Philips and ISS. Philips undertook to pay ISS a fixed monthly sum to cover ISS’s direct and indirect labour costs, insurance, the upkeep of the workplace and the costs of management. Furthermore, a variable sum was payable by Philips to cover items such as cleaning materials, table napkins and other disposable items. Philips also retained ownership of the buildings and equipment used but made them available to ISS without charge. Finally, Philips also undertook to pay for the electricity, water and telephone costs involved in the canteen operation and for the removal of waste. ISS, in return, agreed to provide the skills involved in planning the menus, ordering and preparing the food and, importantly, recruiting and training the workforce employed in the canteen. It was thus the management skills of ISS that Philips wanted to acquire. The agreement did contain a clause requiring ISS to employ all the former canteen personnel of Philips on the same terms and conditions, but ISS took two steps to which the plaintiffs objected. ISS moved the payment date for the monthly salaries to the last working day of the

537 The first factor to be considered, see par 6.2.2. 538 The second factor to be considered, see par 6.2.2. 539 For a general discussion, see Bourn C “When does the transfer of a service contract

constitute the transfer of an undertaking?” 1998 European Law Review 59; McMullen J “Contracting out and marketing testing – the uncertainty ends?” 1994 ILJ (United Kingdom) 230; McMullen 1996 ILJ 286.

540 1994 IRLR 366 (CA), a matter of second generation contracting out.


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month from the last Thursday, and ISS ceased to pay certain allowances for laundry and shoes, which had been paid by Philips as part of the employees’ remuneration. The Danish Court referred two questions to the European Court of Justice, the important one being: whether there had been a relevant transfer within article 1(1) of the Acquired Rights Directive as result of a legal transfer or merger. Following its earlier decision in Ny Mølle Kro, the Court reasserted the irrelevance of the transfer of the ownership of the enterprise for a finding that there had been a legal transfer or merger.542 The Court held that what is important is that there has been a change in the person responsible for the running of the enterprise and whether the new controller, in consequence of the change, undertakes the obligations of employer vis-à-vis the employees. The Court also held that it is not fatal to the employee’s claim that: • only a part of the enterprise had been transferred;543 or • that the part transferred was not integral to the achievement by the enterprise of its

business objectives; or • the activities at issue concerned the provision of services for the benefit of a single

client, which had previously provided them directly, in exchange for remuneration based on a fixed agreement between the provider of the services and the client.544

The Court then held that, keeping in mind that the above should not prevent a relevant transfer, the national Court must follow the approach of Spijkers to determine whether the activity in question preserves its identity. The Court here stressed the fact that preservation of identity flows in particular from the actual continuation or resumption of the operation of the activity. On the basis of this judgment, commentators have said that the Court’s test for transfer of an enterprise is not an employment one but rather a commercial one, relating to the transfer of economic or organisational activities.545 Thus, where a transferee employer uses the factory and machines to produce different products from those made by the transferor and sells them in a different market, the relevant employees are still working at the same machines, doing the same kind of jobs, but their fate is quite uncertain.546 If a Court makes its decision on the basis that the ownership of a business was not transferred to the transferee

541 1993 IRLR 133 (ECJ). 542 Par 15. 543 Par 16. 544 Davies P “Transfers again: contracting out and the employee’s option” 1993 ILJ (United

Kingdom) 151 153 shows that this seems to indicate that the degree of risk, to which the provider of the services is subject, is not crucial in determining the applicability of art 1 of the Directive.

545 Davies 1993 ILJ 153-154. 546 See Woodhouse v Peter Brotherhood 1972 ICR 186. See par 6.2.1 supra.

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employer and therefore does not assist the employees, the result could be likened to that under the organisational test of the Directive. It could be said that the business did not preserve its identity - the same machines were being used, but in a different business. On the other hand, a pure labour law test might hold that, because the employees were doing the same kind of work on the same machines, this should be enough to amount to the transfer of a business.547 The approach in Rask was also in line with the earlier decided case of Dr Sophie Redmond Stichting v Bartol548 where the additional point made by the Court was that the transferor foundation was, in principle and in fact, a legal person whose objects were non-commercial and nonprofit-making and that this did not prevent the Directive from applying. The Court held that the transaction was not incapable of falling within the scope of the Directive on the grounds that it arose out of the grant of subsidies to foundations or associations whose services were not remunerated.549 Rask concerned the initial decision to contract out, but it could equally apply to any subsequent transfer of the function to another sub-contractor. This decision did leave the question open as to whether a retention of the business’s identity can be found in cases where none of the employees,550 equipment or buildings used by the transferor in the activity pass to the transferee (e.g. in the case of the termination and regranting of a franchise). Although this would be an unusual situation, it could easily be the case in transfers of simple contracts to provide services. It is submitted that these factors should be weighed up against other factors that indicate the transfer of an economic entity as a going concern. It seems implicit that the transfer of staff cannot weigh much in this evaluation.551 As the assets involved in service contracts are quite common and usually not unique to a specific undertaking,552 it seems as if this should not carry too much weight either. However, this approach is not demonstrated by the judgements of the European Court of Justice, as will be shown infra. 6.2.3.1 Christel Schmidt

547 For a detailed discussion, see Davies 1989 Yearbook of European Law 21. 548 1992 IRLR 367 (ECJ). The case involved a transfer of patients and the lease of a building

from one drug-dependency foundation to another as a result of the local authority’s decision to transfer its subsidy.

549 See also the judgements of Süzen and Schmidt discussed infra in pars 6.2.3.1 & 6.2.3.2. 550 The transfer of all or a major part of the staff is one of the factors to be considered according

to the ECJ (Spijkers). However, this is an illogical and dangerous route to go: the transfer of the staff is the result of a relevant transfer and one should not attach too much weight to the transfer or non-transfer of staff as an indication of a relevant transfer.

551 Ibid. 552 E.g. cleaning equipment, brooms, buckets, chemicals, etc.


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According to the judgement of Schmidt v Spar- und Leihkasse der Früheren Ämter Bordesholm, Kiel und Cronshagen,553 the European Court of Justice has held that there may be a relevant transfer even though only one employee is affected. Christel Schmidt was employed by the Savings and Lending Bank of the former Bordesholm, Kiel and Cronshagen Districts as the only cleaner at their branch in Wacken. In February 1992, when the branch was refurbished and extended, she was dismissed because the bank decided to contract the cleaning out to Spiegelblank, the firm already responsible for cleaning most of its other premises. Spiegelblank offered to employ Schmidt at a higher monthly wage, but she turned the offer down on the grounds that she would be receiving a lower hourly wage since there was now a larger area to clean. She brought an action under the German law on protection against dismissal on the grounds that her dismissal was not socially justified. The local Labour Court held that the savings bank was able to rely on business-related grounds in order to justify the dismissal. Mrs Schmidt appealed to the Schleswig-Holstein Labour Court, which referred the following preliminary questions to the European Court of Justice: • May an undertaking’s cleaning operations, if they are transferred by contract to a

different firm, be treated as part of a business within the meaning of the Acquired Rights Directive?

• If the answer to the question above is affirmative, in principle, does that also apply if, prior to the transfer, the cleaning operations were undertaken by a single employee?

Several interested parties made representations to the Court: • The savings bank maintained that the provision of cleaning services was neither its

principal nor an ancillary object. The transfer of a very small part of all the services, therefore, could not constitute the transfer of a part of a business within the meaning of the then Directive 77/187/EEC, nor could it be such by an analogy. As for the fact that the work in question was carried out by a single employee, it was submitted that one had to take into account that the interested party was to be taken on by the cleaning business but refused the offer.

• The German government suggested that the Court give a negative reply to the first preliminary question, which would make it unnecessary to reply to the second

553 1994 ECR 1311 (ECJ), Case 392/92.

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question. According to the German government, the concept of an economic unit used in the Court’s case law to summarise the three concepts of undertaking, business or part of a business within the meaning of the Directive, implies that a defined economic objective is pursued, in the context of an autonomous organisation that may be part of a larger whole,. This prevents an isolated element, such as a piece of machinery or a plot of land, from constituting a part of a business. It was submitted that the decision in Dr Sophie Redmond Stichting,554 which led the Court to refer to examining the classification of “activities of a special nature” as parts of a business, should not be understood as contradicting the case law. Those activities mentioned in the judgement can only be classed as businesses or parts of businesses if the factual circumstances effectively permit classification as an economic unit capable of being transferred. In the present case, the savings bank had simply decided to stop using one employee for its services and to entrust them to an independent undertaking, to which, furthermore, it had not transferred any of the means of production or any tangible or intangible assets.

• The United Kingdom government considered that the fact that an undertaking ceases an activity, such as the cleaning of its own premises, and instead pays another undertaking to provide that service to it, does not in itself constitute the transfer of an undertaking, business or part of a business. The case law of the Court, confirmed in the decision in Rask,555 set out the criteria that the national judge should apply in deciding whether or not there has been a relevant transfer of an undertaking in each case. Thus, referring to the criteria, the British government was of the opinion that, in the present case, there was no transfer of an economic unit to which the employee was assigned, nor any transfer of premises or assets. While there is no reason to exclude cleaning services from the type of activities that may constitute a part of a business within the meaning of the Directive, it does not follow that a simple contractual arrangement with a third party to carry out such services amounts to the transfer of a business or part of a business. Regarding the second question, the British government did not think that the number of employees employed prior to a transfer was relevant to the question of whether or not the Directive is applicable or not.

• The European Commission opined that the answer to the question of whether cleaning services should be considered as part of a business, depends on the conditions under which the services are carried out. If the cleaning is provided by the staff of the undertaking, within the framework of that undertaking and making use of its means, this could be compared, in law, to the running of a staff canteen according to the definition given in the Rask decision. (Rask concerned a

554 1992 IRLR 366 (ECJ). 555 1992 IRLR 133 (ECJ).


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department that was run directly. The fact that the service only constituted an ancillary activity that was not necessary to the object of the undertaking, could not have the effect of excluding it from the scope of the Directive.) On the other hand, it was submitted, if the cleaning is entrusted to an independent undertaking, it could not be deemed to be part of a business within the meaning of the Directive. In such a case, the services are provided to the undertaking under a contract because the undertaking cannot or does not want to devote either its staff or its materials to the provision of that service. With regards to the second question, where only one person provides the cleaning services, the Commission also submitted that the Directive could apply if he/she is integrated into the undertaking to be cleaned from the point of view of labour law. However, if the person works independently, the Directive will not apply.

• Advocate-General Van Gerven delivered his opinion on 23 February 1994. The opinion states that cleaning operations constitute an economic activity that may come within the scope of what was then Directive 77/187/EEC. In determining whether the Directive does in fact apply to a situation in which an undertaking ceases cleaning operations previously performed by its staff in order to contract them out to a separate undertaking, the national Court must, in view of the criteria for interpretation provided by the Court in its well-established case law, consider whether a particular case involves the transfer of an economic unit (that is to say an organised whole consisting of persons and (tangible and/or intangible) assets by means of which an economic activity is carried on having a specific, if even an ancillary, objective of its own).

The European Court of Justice held that article 1(1) of the Directive was to be interpreted as covering a situation in which an undertaking entrusts, by contract to another undertaking, the responsibility for carrying out cleaning operations which it previously performed itself, even though, prior to the transfer, such work was carried out by a single employee. The Court also held that: • Where a transfer relates only to a part of a business, the protection provided by the

Directive applies to employees assigned to that part of the undertaking. Thus, when an undertaking contracts out the responsibility for operating one of its services, such as cleaning, to another undertaking, which then assumes the obligations of an employer towards employees assigned to those duties, such operation may fall within the scope of the Directive.

• The Court reiterated that the decisive criterion for establishing whether or not there is a transfer for the purposes of the Directive is whether the business in question

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retains its identity. This is indicated, inter alia , by the actual continuation or resumption by the new employer of the same or similar activities.556

• The Court held expressly that the application of the Directive does not depend on the number of employees assigned to the part of the undertaking that is the subject of the transfer.

• The Court went on to state that the absence of any transfer of tangible assets does not preclude the existence of a transfer (even though the transfer of such assets is among the various factors to be taken into account when assessing a complex transaction as a whole and deciding whether an undertaking has in fact been transferred). The Court concluded that the safeguarding of employees’ rights, which constitutes the subject matter of the Directive, could not depend exclusively on consideration of a factor that the Court has held not to be decisive on its own.

This interpretation (the pre-Süzen interpretation in Schmidt) is preferable to the narrower interpretation of the Directive in Süzen,557 where the European Court of Justice endeavoured to make a distinction between first-generation and second-generation contracts. It is submitted that there is, in principle, no reason why these kinds of transfers should be judged differently from other transfers. The same criteria should be applied to make a factual determination, and the determining feature should still be the retention of a certain identifiable economic identity.558 The nature of services suitable for outsourcing will often result in a position in which no assets are transferred. This should, however, not be the sole indicator of the absence of a relevant transfer. It is also submitted that the transfer of employees should not weigh too much when balancing all the factors against each other, since, as explained earlier,559 this is a circular argument and an illogical approach. The criticism560 against the judgement of Schmidt is not convincing.561 The criticism shows patent dissatisfaction with the fact that virtually all cases of outsourcing would,

556 See par 6.2.1 supra regarding the different factors to be considered and the weight that

should be attached to them. In Schmidt , the ECJ placed emphasis on the continuation or resumption of the same or similar activities after the transfer.

557 See par 6.2.3.2 infra. 558 See e.g. Kenny v South Manchester College 1993 IRLR 265 (HC) & Porter & Nanyakarra v

Queen’s Medical Centre 1993 IRLR 486 (HC) where the shopping list approach of Dr Sophie and Spijkers was applied to the facts of each case. In these two cases, the Court attached significance to continued activities and accepted that as long as the character of the activity remains essentially the same, a transfer will occur. In Schmidt, however, the shopping list approach was not expressly applied. The ECJ also decided the case without referring it back to the national Court for a factual determination.

559 See also par 6.2.2 supra . 560 See Barnard EC Employment Law 463. Barnard refers to the comment of Rubinstein

(editorial in 1994 IRLR 257) that the reductio ad absurdum of the decision is that the Directive and its national implementing legislation would apply “when I changed the


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after Schmidt, qualify as a transfer in practice. From the viewpoint of employee protection, such policy criticism is, however, not too worrisome. In addition, the criticism regarding the absence of an identifiable economic entity illustrates an “inability to recognise a functional identity in an ancillary activity”.562 6.2.3.2 Ayse Süzen The plaintiff worked as a cleaner at a school in Germany with which her employer (Zehnacker) had a cleaning contract.563 Pending the termination of that contract, the plaintiff was dismissed. The school subsequently awarded the cleaning contract to another cleaning company (Lefarth). In proceedings arising from the dismissal the Court referred to the European Court of Justice, for a preliminary ruling, the question of: • whether in the circumstances (if an undertaking terminates a contract with an outside

undertaking in order to transfer it to another outside undertaking), and given that there had been no transfer of business assets between the two cleaning companies, article 1(1) of the then Directive 77/187/EEC was applicable. The Belgian, French, German and United Kingdom governments as well as the European Commission submitted observations to the Court.

The Advocate-General La Pergola argued that while it would be possible to conclude, on the basis of the existing jurisprudence (citing Schmidt, in particular) that a transfer such as that in question fell within the scope of the Directive, he rejected such option because he contended that contracting out of “services, of whatever nature, which the enterprise needs to another entity, is a choice made in a market economy, which ensures competition between several candidates”. The Advocate-General thus found it difficult to justify why the successful bidder should be obliged to retain the personnel formerly employed by the previous service provider who had not been awarded the contract. The Advocate-General sought to give a more precise technical meaning to the concept of the transfer of an undertaking, identifying the essential elements of the transfer of an undertaking as the transfer of tangible or intangible assets, even though the extent of those assets may be smaller in some areas of activity than others.

contractor who cut my lawn. Absurd or not, there is nothing in Schmidt which provides a basis for concluding that that is not the law.”

561 See supra for the arguments of the German Government and the transferor. 562 In the words of McMullen 1994 ILJ 231. McMullen suggests that this inability was

compounded by the fact that, before contracting out, whether in the public or private sector, many ancillary activities are not run in a commercial way (ibid).

563 Süzen v Zehnacker Gebäudereinigung GmbH Krankenhausservice 1997 IRLR 255 (ECJ).

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The Court decided as follows: • Article 1(1) did not apply where a person terminated a contract with one

undertaking for the cleaning of his/her premises and entered into a contract with a second undertaking for the performance of similar work, if there were no significant tangible or intangible assets transferred or if the new employer did not take over a part of the workforce previously assigned to the work and who constitute the major part of the workforce in terms of the number and skills of the employees taken over.

• The judgement in Spijkers was applied and that, in keeping with the decision in Rygaard v Dansk ArbedjsgiverforeningI,564 an entity cannot be reduced to the activity entrusted to it since other factors such as the workforce, management, resources and working methods are relevant.

• It followed that the loss of a service contract to a competitor cannot, on its own, constitute a transfer, as the transferor does not cease to exist and part of a business cannot be said to have been transferred.

The application of the Directive to outsourcing had indeed become problematic after the judgement of Süzen. The general opinion of commentators was that the decision resulted in the position that the existence of an actual transfer depends on the willingness of the new contractor to take on a major part of the workforce565 in that remaining category of cases where no tangible or intangible assets are transferred.566 The preceding judgement of Schmidt (that the continuation of the identity of the function is the paramount factor) therefore no longer seemed tenable, even though, in Süzen, the European Court of Justice did not expressly disagree with the judgement of Schmidt.567 This was the inference, since, even though the Court accepted that a transfer of assets was not the sine qua non for a transfer, it was one of only two possible preconditions for the finding of a transfer: either significant assets must have gone across or a major part of the workforce must have been taken on by the alleged transferee.568 In Süzen, it seems that the Court aimed to achieve a distinction between the transfer of an “entity” and an “activity”. 6.2.3.3 Comparison of Schmidt and Süzen 564 Acting for Stro Molle 1995 ECR 2745 (ECJ). 565 See the criticism supra regarding the circular nature of such an approach (pars 6.2.2 & 6.2.3). 566 E.g., in cases of labour-intensive service sectors such as cleaning, assets are often not

transferred. These employees, of course, need the most protection as they are often unsophisticated and poorly paid.

567 See Shrubsall V “Competitive tendering, outsourcing and the Acquired Rights Directive” 1998 Modern Law Review 85; Davies P “Taken to the cleaners? Contracting out of services yet again” 1997 ILJ (United Kingdom) 193; Bourn 1998 European Law Review 59; McMullen J “TUPE – Sidestepping Süzen” 1999 ILJ (United Kingdom) 360.

568 Davies 1997 ILJ 193.


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A commercial approach seems to have been adopted in Süzen instead of an essentially labour law approach. The major differences in reasoning and effect between Schmidt and Süzen can be highlighted as follows: • In Schmidt, the Court held that the first-generation contracting out of a cleaning

contract (ie a contract previously done in-house and now let to a contractor) did fall within the definition of a relevant transfer of the Directive on the basis that the activities of the transferor had been taken over by the transferee. The arguments of the German and United Kingdom governments that some assets need to have been transferred as a precondition for a relevant transfer were consequently rejected.

• Schmidt refused to lay down preconditions but rather emphasised that the national Courts had to consider the overall picture as set out in Spijkers. All relevant factors had to be considered to determine whether the business in question had retained its identity.

• Some commentators opine that the overall test was, essentially, a labour law one:569 However, the retention of identity had to be assessed above all “by the actual continuation or resumption by the new employer of the same or similar activities”.570 The test at issue is thus an “activities test” rather than the “economic entity test” of Süzen.

• In Süzen, the Court only referred to Schmidt in saying that the Directive applied to the first-generation contracting out of a cleaning contract. The Court then went on to state that the question in the Süzen case was whether the Directive “also” applied to a second-generation contract. The Court thus drew a distinction between the two situations, ultimately applying stricter/more demanding criteria for instances of second-generation contracting out.

• The Court’s reason for applying stricter criteria to second-generation contracting out was that “the term entity thus refers to an organised grouping of persons and assets facilitating the exercise of an economic activity which pursues a specific objective”.571 Therefore, contrary to what was generally understood after Schmidt, “an entity cannot be reduced to the activity entrusted to it”.572

• In Süzen, the Court emphasised that the one important difference between first-generation and second-generation contracts is that there is no direct contractual

569 E.g. Davies 1997 ILJ 194; Shrubsall 1998 MLR 89. See also Barnard EC Employment Law

464. 570 The British Courts applied the test in Schmidt by asking “is the job previously done by the

employee still in existence?” (e.g. Council of the Isles of Scilly v Brintel Helicopters Ltd 1995 ICR 249 (EAT)). This clearly seems to be a labour law approach.

571 Par 13 citing the case of Rygaard (1995 ECR 2745 (ECJ)). 572 Par 15. The 1997 amendments to the proposal for a Directive amending Directive 77/187

contained a similar distinction between activities and entities, this distinction was deleted after opposition in the European Parliament.

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relationship between transferor and transferee. However, the Court held that this factual difference is not so conclusive as to preclude a finding that a relevant transfer had taken place.

6.2.3.4 Commentary on Schmidt and Süzen and contracting out The European Court of Justice has created a quite unsatisfactory state of legal uncertainty by not properly expounding the differences between Schmidt and Süzen. It is difficult to reconcile Süzen with Schmidt. Even though it may be agreed that the transfer of a mere activity should not be enough to invoke the full force of employment protection standards, it is submitted that the preconditions that Süzen effectively laid down make it all too easy for a transferor and transferee to circumvent the Directive and its applicability. This leaves the question of employee protection up to the old employer and transferee, something which is both undesirable and untenable in principle. The distinction that is drawn between first-generation and second-generation contracts also seems illogical - especially in view of the fact that the European Court of Justice has, on numerous occasions, held that the absence of a contractual link between transferor and transferee is no bar to the applicability of the Directive.573 In the matter of Francisca Sánchez Hidalgo ea v Asociación de Servicios Aser and Sociedad Cooperative Minerva,574 the European Court of Justice held that the mere fact that the service being provided by the old undertaking and the new undertaking in contracting-out circumstances is similar, or that the old and new contract holders are similar, does not per se justify the conclusion that there has been a transfer of an economic entity between the undertakings. The Court again stated that an entity could not be reduced to the activity entrusted to it. Its identity rather emerges from other factors as well. These include its workforce, its management staff, the way in which its work is organised, its operational methods or, where appropriate, the operational resources available to it. In assessing the facts that characterise the transaction in question, the national Court must take into account, among other things, the type of undertaking concerned. It follows that the degree of importance to be attached to each criterion, as provided by the European Court of Justice, will necessarily vary according to the activity carried on in the relevant undertaking, business or part of a business. In particular sectors, where an economic entity is able to function without any significant tangible or intangible assets, the maintenance of its identity following the transaction

573 See chapter 5, par 6.2.1 & par 6.2.2 supra. 574 Case C173/96, 1998 ECR 8237 (ECJ).


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cannot, logically, depend on the transfer of such assets. In these circumstances, the European Court of Justice thus went on to state the following:575

Since, in certain labour-intensive sectors, a group of workers engaged in a joint activity on a permanent basis may constitute an economic entity, it must be recognised that such an entity is capable of maintaining its identity after it has been transferred where the new employer does not merely pursue the activity in question but also takes over a major part, in terms of their numbers and skills, of the employees specially assigned by his predecessor to that task. In those circumstances, the new employer takes over a body of assets enabling him to carry on the activities or certain activities of the transferor undertaking on a regular basis.

This judgement (Hidalgo) unfortunately affirms the fact that the European Court of Justice will seemingly decide whether or not a relevant transfer has occurred by having regard to whether the transferee and transferor have given effect to the main intended consequence of the Directive, namely the transfer of employees. This also means that a transferee can choose to take over some employees selectively in order to prevent a finding that a major part in number and skills of the employees were taken over, thus providing key personnel with continued employment, while the bulk of employees have no hope of any job security. Furthermore, the transferee is now given a legal incentive not to take over the transferor’s employees in situations where it might have been prepared to take over the transferor’s employees, given that offers of such employment might carry the legal risk that the Directive will apply. This, of course, is exactly contrary to the purpose of employment protection.576 It is thus possible for a transferor and transferee to opt to avoid the impact of the Directive. Barnard submits that it might be argued that Süzen has effectively replaced the “same activity test” of Schmidt for two reasons:577 Firstly, the emphasis on “economic entity” has been included in the definition of “transfer”, introduced by amending Directive 98/50. This Directive defined a transfer as “the transfer of an economic entity which 575 Par 32. 576 This was exactly what happened in Betts v Brintel Helicopters Ltd 1997 IRLR 362 (CA)

where KLM did not take over any staff or equipment from Brintel, and moved the Norfolk base from Beccles to Norwich Airport. It was clear that, were there no threat that the TUPE regulations might be applicable, KLM might have taken on some of the Brintel staff. In this case, Brintel provided helicopter services to Shell (United Kingdom) Ltd, transporting men and goods to and from oil rigs in the North Sea. When the contracts between Brintel and Shell expired, one of the contracts (for the southern sector) went to KLM.

577 EC Employment Law 467.

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retains its identity, meaning an organised grouping of resources which has the objective of pursuing an economic activity whether or not that activity is central or ancillary”.578 Secondly, the two judgements Hidalgo and Vidal, reemphasised the “economic entity test”. However, the English Court of Appeal said in ECM v Cox,579 that Süzen did not overrule Schmidt and Spijkers. It required the Court to make an appraisal based on the Spijkers’ criteria.580 The Court of Appeal upheld the Employment Appeal Tribunal’s decision that the purposive approach to the interpretation of the TUPE regulations should be adopted with the result that it “would not be proper for a transferee to be able to control the extent of his obligations by refusing to comply with them in the first place”.581 Hence, while requiring that either assets582 or the major part of the workforce (in terms of numbers and skills) should be transferred, the European Court of Justice does not make it clear in either Süzen or Hidalgo, whether it is actual employment by the transferee that is required or whether offers of employment are included and, if so, what sorts of offers.583 The main complaint against these judgements is thus that this criterion makes the Directive voluntary in many cases of second-generation transfers.584 A prominent labour lawyer, Davies, has criticised the European Court of Justice as “caving in to the ‘big battalions’”.585 Some Member States had pressured for a more narrow definition of the “transfer of a business”. Davies submits that even though this pressure was successfully resisted by the European Parliament on the grounds that it would reduce the level of protection of employees, the Court arrived at a result very close to that proposed by the Commission in its revision of the Directive, as discussed

578 Art 1(b). See also art 1(b) of Directive 2001/23/EC. 579 1999 IRLR 559 (CA). 580 In Betts v Brintel Helicopters 1997 IRLR 361 (CA), the Court had recognised that Süzen

represented “a shift of emphasis”; see Barnard EC Employment Law 467. 581 For other United Kingdom cases that have tried to achieve a degree of withdrawal from the

Süzen approach, see: Cheesman & others v R Brewer Contracts Ltd 2001 IRLR 144 (EAT); Whitewater Leisure Management Ltd v Barnes 2000 IRLR 456 (EAT); Lightways (Contractors) Ltd v Associated Holdings Ltd 2000 IRLR 247, where the Court of Session accepted, as in ECM, that a tribunal may take into account the fact that an employer was deliberately trying to avoid the application of the TUPE regulations when deciding whether there was a “transfer”; RCO Support Services and Aintree Hospital Trust v Unison 2000 IRLR 624 (EAT) concerned a recontracting of cleaning and catering services at two hospitals. The EAT held that it was a TUPE transfer from the old contractor to the new contractor. Lindsay J stated: “There is a real danger were Süzen to be given the unqualified force that has been argued for that in labour-intensive areas of employment such as cleaning and catering where contracting-out is now common and where significant assets are often either unnecessary or unlikely to be moved, an incoming contractor would be able to avoid the Directive by the simple expedient, often an easier achievement, of ensuring that he took on none of the previous contractor’s workforce”.

582 Hidalgo expressly recognised that assets would seldom be transferred in labour-intensive sectors.

583 For a critical discussion, see Davies 1997 ILJ 196-197. 584 Davies 1997 ILJ 196. 585 See Davies 1997 ILJ 197.


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above. Although the Schmidt approach was heavily criticised in both France and Germany, the decision in Schmidt was actually welcomed in some other countries, notably the United Kingdom. The latter based its acceptance of Schmidt on the grounds of employee protection and, even more importantly, legal certainty. It can thus be stated that at European Community level, first-generation and second-generation contracting out are treated differently at present. In the event of first-generation contracting out, the principles of Schmidt still seem to apply. Several factors are therefore considered and the decisive criterion seems to be the actual continuance of the same or similar activities by the new contractor. In second-generation transfers, however, additional requirements are set before finding that a relevant transfer occurred. These relate to the transfer of some tangible or intangible assets and/or the transfer of a major part of the staff (in numbers and skills).586 It has been submitted that this distinction is without foundation and rather illogical, given that the European Court of Justice has, on many occasions, held that no contractual relationship is required between transferor and transferee. Such distinction results in the position that employees involved in the second transfer would have less protection than those involved in the first transfer.587 This also has commercial ramifications as the replacement or second contractor bidding for the new contract is in a much better position than the potentially outgoing contractor as he/she is not bound by transfer provisions and so can save costs that the first contractor could not.588 It is, however, clear that the fixed duration of a contracting-out

586 See also Oy Liikenne AB v Liskojärvi and Juntunen 2001 IRLR 171 (ECJ). In this case, the

ECJ also did not consider the reason why employees do not transfer, thus it failed to consider the issue of deliberate avoidance/evasion of the Directive (see Harvey Harvey on Industrial Relations and Employment Law F/27A). Here the ECJ had to consider whether there had been a relevant transfer when D took over seven bus routes that had previously been operated by C for X. C dismissed all of the drivers on that route on the grounds of redundancy. Two drivers, A and B, among a number of C’s former drivers, were subsequently employed by D on less favourable terms and conditions than they enjoyed with C. The ECJ held that the mere fact that the new contractor, D, carried on a similar service to C would not give rise to an automatic conclusion that there had been a relevant transfer of an economic entity. The ECJ conceded that in certain sectors in which activities are based essentially on manpower, a group of workers engaged in a joint activity on a permanent basis could constitute an economic entity. In casu , however, bus transport required substantial plant and equipment, according to the Court. The fact that D did not take over any of C’s assets was thus a significant factor leading to the conclusion that no economic entity had transferred. It thus seems as if the ECJ elevated this one factor above the others. Harvey comments on this judgement, by stating that the determining issue was that no tangible business assets (the buses) were transferred (in spite of the fact that D continued the same activity as C, presumably serviced the same customers on the same bus routes and engaged 73% of C’s employees to perform the contract) (F/27B).

587 McMullen 1994 ILJ 238. 588 Ibid.

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exercise is not relevant according to the European Court of Justice and will not preclude a finding of a relevant transfer.589 590 6.2.4 The transfer of functions involving public authority As stated above, the Acquired Rights Directive applies to both public and private undertakings.591 However, the European Court of Justice has held that, in certain circumstances, there will be no relevant transfer of an “undertaking, business or part thereof” when there is only a transfer of administrative functions between public administrative authorities. In Henke v Gemeinde Schierke, Verwaltungsgemeinschaft Brocken,592 the municipality at which the appellant was employed as a secretary to the mayor’s office, formed an administrative collectivity (unit) with neighbouring municipalities in Germany. Their administrative functions as public authorities were transferred to this collectivity with a view to the better performance of such functions. Shortly after the formation of the collectivity, the applicant was dismissed by the municipality. She brought proceedings under German law that the dismissal was null and void, having regard to article 613a BGB. The national Court referred a question to the European Court of Justice as to whether there had been “a transfer of an undertaking, business or part of a business” within the meaning of article 1(1) of the Directive. The national Court also asked whether, if the first question were to be answered in the affirmative, the transfer was based on a legal transfer within the meaning of article 1(1) of the Directive, having regard to the fact that the administrative collectivity was formed by a public law agreement. In considering the first question, the Court had regard to the applicant’s argument that the Directive should apply since entities such as the municipality of Schierke carry out, at least to some extent, activities of an economic character. The German government argued that the Directive should not apply on two grounds: Firstly, it argued that municipalities are not “undertakings” or “businesses” within the meaning of the Directive because they do not carry out any economic activity (this was also the view of the European Commission). Secondly, it argued that the creation of a grouping of municipalities does not amount to a “transfer” within the meaning of the Directive, since the municipalities’ activities were not taken over. Instead, a new entity was created to replace the municipalities. The Advocate-General responded by stating that local authorities did carry out some economic activities, such as the sale or renting of land or 589 Rask (discussed in par 6.2.1). 590 For the South African position on outsourcing, refer to par 6.3.4 infra . 591 Par 6.2. 592 1996 ECR 4989 (ECJ).


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housing. He also pointed out that the divisions between public and private activities differed in the Member States and that it would be difficult to say that, at one time, an area of activity was in the public sector and then to say, at another time, that it was now in the private sector. Such arguments as those put forward by the German government would mean that the type of employer or the nature of the employer’s activities are the test for whether a transferrable undertaking exists. The Advocate-General preferred a test stating that “decisive importance should be attached to whether one or more persons had the status of an employee”.593 In the previous case of Rygaard,594 a worker on a construction site performing one specific works contract for a limited period was held to be outside the scope of the Directive. This was because the Court introduced a stability test which stated that the Directive only applied to stable economic entities. However, as was eventually also the case in Henke,595 the Court thus looked to the nature of the employer, rather than to the existence of employees who needed protection as a result of a transfer. In Henke, the Advocate-General stated that the Directive is applicable whenever employees (within the meaning of the national protective provisions) are employed in an undertaking or in an organisational entity. According to the Advocate-General, it is irrelevant whether the undertaking is engaged in the sphere of public administration or in the private sector.

593 This test could, of course, also be problematic, given the constantly changing nature of

employment. See chapter 5, par 5.2.1 supra . 594 See supra ( 1995 ECR 2745 (ECJ)). 595 See supra (1996 ECR 4989 (ECJ)).

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The Court stated that the preamble to the Directive seemed to set out to protect workers against the potential unfavourable consequences for them of changes in the structure of undertakings resulting from economic trends at national and EC level, through, inter alia, transfers of undertakings, businesses or parts of businesses to other employers as a result of transfers or mergers. It consequently held that the reorganisation of public administration structures or the transfer of administrative functions between public and administrative authorities does not constitute the “transfer of an undertaking” within the meaning of the Directive. In casu the transfer related to a transfer carried out between a municipality and an administrative collectivity relating only to activities involving the exercise of public authority. Even if it could be assumed that those activities had aspects of an economic nature, they could only be ancillary, according to the Court. The terms used in most language versions of the Directive therefore supported an interpretation that in casu there was not a transfer of a business, undertaking or part of a business. Thus, the Court did not go on to consider the second question that was referred to it. The judgement of Henke has also been subjected to some criticism. Some scholars have asserted that, in the cases of Süzen and Henke, there appears to have been a reluctance to apply a test that would protect the rights of employees in transfer situations. It has been submitted that alternative tests have, instead, been adopted which both limit the effect of the Directive and cast further doubt on the meaning of the transfer of an undertaking.596 The true problem becomes clear when one considers that public sector employees have traditionally enjoyed certain benefits in many countries, for example, security of employment in return for having to submit to a more restrictive labour law regime than their private law counterparts. However, many functions previously entrusted to state bodies are now performed by the private sector today. These functions could, for example, include the privatisation of activities that may traditionally have been considered as the sole preserve of the state (e.g. privatisation of prisons). In the recent matter of Didier Mayeur v Association Promotion de l’Information Messine (APIM),597 the Court of Justice had to decide whether there was a transfer of a business or undertaking under what was then Directive 77/187/EEC (as amended).598 The amended article 1(1) of the Directive provides that the Directive will apply to public and private undertakings engaged in economic activities, whether or not they are

596 See Sargeant M “New doubts about transfers in the public sector” 1997 ILJ (United

Kingdom) 265 where he submits that a commercial test was adopted in Süzen and a public law one in Henke.

597 Case C175/99, judgement of 26 September 2000 (ECJ). 598 Now replaced by Directive 2001/23/EC.


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operating for gain. Article 1(1), however, also states that an administrative reorganisation of public administrative authorities, or the transfer of administrative functions between public administrative authorities, is not a transfer within the meaning of the Directive. In Mayeur, the French Labour Code was applicable. Article L. 122-12 of the Code du Travail (French Labour Code) provides as follows:

Cessation of an undertaking shall not, except in cases of force majeure, release an employer from his obligation to give notice of dismissal and, where necessary, to pay the compensation prescribed in Article lL. 122-9. If any change arises in the legal situation of the employer, in particular by reason of succession, sale, merger, transformation of business assets or incorporation, all contracts of employment in force on the date of that change shall continue to exist as between the new employer and the workforce of the undertaking.

Mr Mayeur was recruited by APIM as an employee, with effect from 1 September 1989, under a contract of unspecified duration. Under Article 3 of its statute, the object of APIM, a non-profit-making association, was to promote, propagate and make known by all possible means and in all areas the opportunities offered by the City of Metz and its Zone d’Attraction, in order to permit and encourage the development, establishment and creation of a range of activities. To that end, APIM, either directly or through others, published and distributed brochures, magazines and leaflets. As part of this activity, APIM produced a magazine entitled Vivre à Metz. Mr Mayeur was responsible for the publicity activities for APIM. His duties included canvassing traders in the city and advertisers, collecting funds for publishing advertisements in the magazine Vivre à Metz, drawing up contracts and invoices and drafting a monthly account detailing the commitments entered into. Following dissolution of APIM and after its activities had been taken over by the city of Metz, Mr Mayeur was informed, on 16 September 1997, that he had been dismissed for the following economic reason: cessation of APIM and its activities. On 10 February 1998, Mayeur brought proceedings against APIM in a Labour Tribunal for compensation for unfair dismissal. In support of his action, the applicant stated that he was the only employee to lose his job when APIM was dissolved and its activities were taken over by the City of Metz.

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In his action, Mr Mayeur cited the case law of the Cour de Cassation (French Court of Cassation). While the provisions of article L. 122-12 of the Code du Travail are not applicable where an activity carried out by a legal person governed by private law is transferred to a public institution of an administrative nature (which is a legal person established under public law and subject to the rules of public law) those provisions nevertheless do apply where the same activity carried out by a legal person governed by private law is transferred to a legal person established under public law which is subject to the rules of private law and regarded as being a public institution of commercial nature within the meaning of French law.599 Mr Mayeur thus submitted that this case law ran counter to both the letter and objective of the Directive, and requested that the provisions of the Directive be applied to him. The Labour Tribunal noted that article L.122-12 of the Code covers the various situations in which a contract of employment is transferred from one private entity to another, but is silent as to the situation in which such an entity is transferred to a public body. The Labour Tribunal found that under the case law of the Court of Cassation, only employees of undertakings transferred to public institutions of an industrial or commercial nature were covered by the provisions of the Directive. The Labour Tribunal questioned whether such an interpretation did not result in the restricting of the scope of article 1 of the Directive, especially given the fact that the European Court of Justice has given a broad interpretation to the Directive (by requiring contracts of employment to be maintained in circumstances where the transfer is not the result of a merger or a legal transfer and where there is no legal connection between successive operators). According to the Labour Tribunal, the activity performed by Mr Mayeur was a commercial and profit-making activity, which contributed directly to the funding of the magazine Vivre à Metz. Furthermore, it was common ground that the “activity” of APIM was taken over as a whole and continued by the City of Metz, which continued to produce and distribute the magazine in the same form.600 As a result of these circumstances, the Labour Tribunal referred the following questions to the European Court of Justice: • Is the Directive applicable where the activity of a legal person governed by private

law is transferred to a legal person governed by public law? • Must application of the Directive be excluded where the activity that is transferred

to a public service is of an administrative nature? The European Court of Justice declined to define the concept of a public service of an administrative nature, stating that this was a concept of French administrative law over which the Court had no jurisdiction. However, the Court held that the questions essentially concerned the following enquiry: Under what conditions does the Directive 599 Par 16. 600 Par 20.


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apply in the case where a municipality (which is a legal person governed by public law acting within the framework of the specific rules of administrative law) takes over activities concerning publicity and information about the services which it offers to the public, where such activities were previously carried out, in the interests of that municipality, by a nonprofit-making association which was a legal person established under private law? The Court held that, regardless of (and following) Henke, the transfer of an economic activity from a legal person governed by private law to a legal person governed by public law does, in principle, fall within the scope of article 1(1).601 The Court held that article 1(1) does apply, provided that the transferred entity retains its identity. The Court reaffirmed the decisions of Spijkers and Allen and others v Amalgamated Construction.602 In these cases it was held that the Directive applies to any transfer of a stable economic entity, that is to say, an organised grouping of persons and assets facilitating the exercise of an economic activity which pursues a specific object. The Court held that such a concept is independent of the legal status of that entity and the manner in which it is financed.603 The Court expressly held that articles 1(1) and 2(b) of the Directive do not allow the transfer of an economic activity from a legal person governed by private law to a legal person governed by public law to be excluded from the scope of the Directive solely because the person to whom the activity is transferred is a public-law body.604 In casu the transfer of an economic activity took place between two distinct entities, regardless of the fact that APIM was a private nonprofit-making association.605 However, the Court reaffirmed its earlier view in Süzen and Hidalgo that one cannot justifiably conclude that an economic entity has been transferred merely because the activity engaged in by the old employer is similar to that of the new employer. The Court said that the national Court had to take into consideration all the facts that characterised the transaction in question, including the type of undertaking or business, or the similarity of activities carried on before and after the transfer.606 Accordingly, the national Court must decide whether or not a relevant transfer has occurred. This decision should not be influenced by the fact that part of the undertaking was transferred to an entity governed by public law, since the part allegedly being transferred had an economic 601 Par 29. 602 1999 ECR 8643, par 24. 603 Par 32. 604 Par 33. Hidalgo (1998 ECR 8237 (ECJ)) had also held that the Directive will apply where a

public body contracts out a service that does not involve the exercise of public authority. 605 An activity can also not be excluded because it is carried out for a nonprofit-making purpose

or in the public interest. See Redmond Stichting v Bartol 1992 ECR 3189 (ECJ) and Sànchez Hidalgo and others 1998 ECR 8237 (ECJ).

606 Par 52.

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nature and did not only involve the exercising of public authority or the reorganisation of administrative functions. However, the national Court should still observe the proviso in Süzen and Hidalgo that a relevant transfer cannot be said to have occurred only due to the continuance of a similar activity after the transfer.


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The approach of the European Court of Justice as outlined above seems clear. If such an interpretation is applied, employees will be protected if any part of an undertaking that has an economic nature is transferred,607 regardless of the legal status thereof and of whether or not public or private law governs it. In such instances, provided that it is found that the undertaking or part thereof was transferred as a going concern, the contracts of employment will transfer and all the other measures containing safeguards will apply. Where all that takes place is the reorganisation or transfer of purely administrative functions, employees will not enjoy protection under transfer provisions. It is submitted that even if this position is clear enough, its desirability still needs to be considered. The reason for such an exclusion from the scope of the Acquired Rights Directive, before this exclusion was expressly included in article 1 of the Directive, originated from the European Court of Justice as formulated in Henke. The Court had considered the goal of the Directive,608 and had consequently held that the reorganisation of structures of public administration or the transfer of administrative functions between public and administrative authorities did not constitute the “transfer of an undertaking” within the meaning of the Directive. This limitation has the effect that some employees employed by a public employer are entitled to protection in the event of the transfer of a part of the undertaking to which they are assigned to work, while other employees employed by the exact same employer do not enjoy similar protection in the event of the transfer of that part of the undertaking to which they are assigned and which is only concerned with administrative functions. Given the goal of the Directive, the justification for such dissimilar treatment and unequal protection could therefore be disputed. In South Africa, the purpose of section 197 of the Labour Relations Act 66 of 1995 regarding transfer of employment contracts, is improved job security and employment protection in a wide sense.609 It is thus doubtful whether this limitation should be understood to apply in South Africa. It is submitted that, in the absence of an express exclusion in the relevant section,610 such exclusion cannot necessarily be said to exist at present. 607 See par 6.2.5 infra . 608 To protect workers against the potential unfavourable consequences for them of changes in

the structure of undertakings resulting from economic trends at national and European Community level, through, inter alia, transfers of undertakings, businesses or parts of businesses to other employers as a result of transfers or mergers (HBM Abels v The Administrative Board of the Bedrijfsvereniging voor de Metaal Industrie en de Electronische Industrie 1985 ECR 469 (ECJ)).

609 See chapters 1 & 7. 610 Or a closer definition of the term “undertaking”.

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6.2.5 The transfer of non-commercial undertakings/activities At the outset there was some uncertainty as to whether or not the Directive applied to non-commercial activities or undertakings that did not operate for gain. The United Kingdom advocated that the Directive was adopted on the basis of article 94 of the European Community Treaty, which authorised the European Community legislature to issue Directives “for the approximation of such provisions laid down by the law, regulation or administrative action in Member States as directly affect the establishment or functioning of the Common Market ”. According to the United Kingdom government, the scope of the Transfer Directive could not be more extensive than that allowed under the European Community Treaty. Since national rules concerning transfer of undertakings can only affect the establishment or functioning of the Common Market to the extent that they relate to part of the economic activity of the transferor and/or transferee, this view resulted in the exclusion of non-commercial undertakings by the United Kingdom government from the scope of the TUPE regulations. This resulted in the infringement case of Commission v The United Kingdom611 against the United Kingdom government. Here the Commission argued that all undertakings within the meaning of community law fall within the scope of the Directive and that there was no reason why one type of organisation should have a competitive advantage over another merely because it is excluded from the scope of the Directive. It had materialised that the Acquired Rights Directive applies to all undertakings, including those that do not aim to make a profit. This was clear from the decision in Dr Sophie Redmond Stichtung v Hendrikus Bartold et al,612 which concerned a transfer of activities of a foundation financed wholly out of public funds, operating with the principal aim of helping addicts. It was held that an entity could not be excluded from the scope of the Directive because it is carried on for a nonprofit-making purpose or in the public interest.613 In Commission v The United Kingdom, the Commission of the European Union considered the United Kingdom’s criticism of the judgement in Redmond to be unjustified. The activities in that case were of an economic nature, meaning that a profit-making body could just as well have carried on the same type of activity. In his opinion Advocate-General Van Gerven stated that in order for an activity to be described as “economic”, it must be performed for “remuneration”.614 The decisive factors are therefore not the sector within which the activity is performed or the legal provisions under which it is performed. The element of remuneration 611 1994 ECR 2435 (ECJ). 612 1992 ECR 3189 (ECJ). 613 See also Sànchez Hidalgo and others 1998 ECR 8237 (ECJ). 614 See also the judgement in Dona v Mantero 1976 ECR 2121 (ECJ).

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(economic consideration) is rather envisaged, and this does not necessarily presuppose the existence of a profit-making motive.615 The United Kingdom thus had to amend its regulations regarding the transfer of undertakings in order to fulfil its obligations under the Treaty and the Directive. 6.2.6 Atypical transfers Conventionally, a “typical” transfer has been confined to a traditional takeover by way of the transfer of a business from one employer (often corporate) to another employer in exchange for payment.616 However, it is evident that economic activity and the labour market have significantly changed during the last decade or two and “atypical” transfers are now common ways of disposing of operations. Such “atypical” transfers are understood to include contracting out in particular, and, more specifically, first-generation contracting out, the changeover of contractors (second-generation contracting out) and bringing the service back in-house. Although a considerable amount of reluctance was initially shown in accepting that these atypical transfers were also covered by the Directive and the TUPE regulations and other instruments, the European Court of Justice followed a broad approach in terms of which the following “atypical” transfers were included under relevant transfers:617 • A changeover of lessees running a restaurant (Daddy’s Dance Hall); • a reversion of a tavern to the proprietor from a lessee (Ny Mølle Kro); • the forfeiture of a sale of a business under a conditional sale agreement (Besselsen); • the switching by a local authority of a grant from one charitable foundation to

another (Dr Sophie Redmond); • the outsourcing of the management of a canteen facility (Rask); • the outsourcing of the function of cleaning the premises of a branch of a bank

(Schmidt); and • the switching by a motor manufacturer of car dealerships within the same

municipality (Merckx). Throughout these judgements the European Court of Justice had stated that the test of a transfer was to be found in Spijkers v Gebr Abbattoir CV. It is thus clear that the one area where the Directive will not apply is in those circumstances where the economic entity has lost its identity. Even in the case of Schmidt, the principle of an economic

615 The question is what the case will be if these functions are not performed for economic

consideration. See also par 6.2.4. 616 McMullen 1996 ILJ 287. 617 As conveniently listed in McMullen 1996 ILJ 289.


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entity could well be understood to have been used. In the case of Rygaard, the Court did find that the transfer of an individual from one sub-contractor to another (where the purpose of changeover of sub-contractor was to continue and complete the construction of a building, and the identity of the activity in which the sub-contractor’s employees were employed remained the same after transfer) was not a transfer of a stable economic entity whose activity was not limited to performing one specific works contract (as in the case concerned). However, this has generally been viewed as a case that was decided on its own peculiar facts. It is also believed that the Court did not rule out the possibility of a transfer with a view to completing a specific works contract if the transfer enables the transferor undertaking to carry on in a stable way.618 Arguments in favour of a wide interpretation of a relevant transfer include the following: • the unfairness of marginalising one category of workers simply because they are

involved in, for example, a service provision industry where the provision of services tends to be the only component of the entity;

• the possibility of claims for indirect gender discrimination arising from one group of workers (for example, outsourced functions such as cleaning often comprise predominantly female workers);

• not underestimating the important principles of certainty and transparency.619 The European Court of Justice’s reasoning in Süzen and Hidalgo could be criticised for not resulting in such a wide interpretation of a relevant transfer. However, the effect of these cases should be limited to matters involving second-generation contracting out.620 6.2.7 Contracting in In Ny Mølle Kro it was held that the Directive also applies to a transfer that occurs as a result of the repudiation of a contract. Similar views were held in Dr Sophie Redmond and in Rask. In the more recent matter of Vidal,621 the European Court of Justice held that article 1(1) is to be interpreted as meaning that the Directive applies to a situation in which an undertaking which used to entrust the cleaning of its premises to another undertaking decides to terminate its contract with that other undertaking and to carry

618 Refer to the discussion in par 6.2.3 regarding Schmidt & Süzen as well. The latter case did

not preclude the finding of a relevant transfer in instances involving second- generation contracting out, but the judgement did indirectly limit the working of the Directive, as two “preconditions” (the transfer of assets and/or employees) for it being applicable were stated. See the evaluation of this case supra in par 6.2.3.3.

619 For a critical discussion, see McMullen 1996 ILJ 293-295. 620 As discussed in par 6.2.3 supra . 621 1998 ECR 8179 (ECJ), joint cases C 127/96, C 229/96 and C 74/97.

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out the cleaning work itself in future, provided that the operation is accompanied by the transfer of an economic entity between the two undertakings. However, having regard to the discussions about the meaning of the transfer of a business, trade or undertaking or part thereof, a cautionary comment is apposite: there is no justification for the conclusion that the transfer of an “economic entity” has occurred simply because the work carried out first by the cleaning firm, and then by the undertaking owning the premises, is similar.622 6.2.8 Transfers within a group Employees are increasingly employed within complex employment structures. The scope for manipulation of employment law is thus potentially greater in these legal entities.623 In company law, there has never been immense support for the treatment of groups of companies as a single economic entity. The principle of separate corporate personality is generally presumed, unless special facts indicate otherwise. However, the European Court of Justice has begun to adopt a broader approach for the purposes of competition law of the European Union, holding in a number of cases that groupings of more than one legal entity can be viewed as a single whole.624 The decision in Dr Sophie Redmond makes an important contribution in this regard. In this case, it was held that a legally binding agreement between transferor and transferee is not necessary for a relevant transfer to occur.625 In a matter where an employee was employed by X to work on Y’s business and Y transferred that business to Z, the Employment Appeal Tribunal in the United Kingdom has held that:626

Industrial tribunals will be astute to ensure that the provisions of the Regulations [TUPE] are not evaded by devices such as service companies, or by complicated group structures, which conceal the true position. Thus it may well be possible to say, in any given case, that if the person always and only works on Y’s business, then X was employing him on behalf of and as an agent for Y. Alternatively, there may be circumstances in which X may be regarded as a party to the transfer, even if not expressly named in the contract of sale. Or, on the other hand, it may be that the

622 See the discussion in par 6.2.1 supra regarding the transfer of an economic entity. 623 See also chapter 5, par 5.2 supra . 624 See ICI v EC Commission 1972 CMLR 557 (ECJ). 625 Consequently, the fact that an employee works for more than one subsidiary or alternates

between two or more such entities, should not preclude a finding of continuous employment resulting from a relevant transfer only because of the lack of a formal agreement.

626 Duncan Web Offset (Maidstone) Ltd v Cooper 1995 IRLR 633 (EAT).


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employee remained employed by X who had other work for him to do.

Thus, in circumstances of fanciful employment structures, the lifting of the corporate veil and the principle of agency could be used to assist employees.627 The critical factor is that a purposive approach must be adopted, taking into account the purpose of the Directive. A Court should thus scrutinise a situation to ensure that the employment protection provisions are not evaded. In Allen and Others v Amalgamated Construction Co Ltd,628 the European Court of Justice considered transfers within a group. It held that the Acquired Rights Directive can apply in circumstances where there is a transfer between two companies in the same group, each having the same ownership, management and premises and each being engaged in the same work. The Directive therefore applies to a situation in which a company belonging to a group decides to subcontract to another company in the same group, an activity (for example, for driveage work in mines), and the transaction involves the transfer of an economic entity between the two companies. The European Court of Justice reaffirmed that the term “economic entity” refers to an organised grouping of persons and assets facilitating the exercise of an economic activity that pursues a specific objective.629 6.3 The legal position in South Africa 6.3.1 The transfer of a business, trade or undertaking (or part thereof) as a

going concern The notion of a “going concern” has been considered by the South-Eastern division of the Cape High Court in the matter of General Motors SA (Pty) Ltd v Besta Auto Component Manufacturing (Pty) Ltd & another630 in 1982.631 The Court considered the phrase during an interpleader application in a contractual dispute brought in terms of Rule 58 of the Uniform Rules of Court. The Court started its enquiry by

627 In this regard refer to chapter 5 supra , par 5.2, regarding the question of whose contracts are

transferred. 628 1999 ECR 0000, case C234/98. 629 See also par 6.2.1 supra . 630 1982 2 SA 653. 631 Even though these judgements may be helpful when attempting to attach further

significance to the notion of “a going concern”, it is again cautioned that they are not wholly appropriate as they were delivered in a context outside the field of labour law and employment protection. In this regard, see also the judgement in Schutte discussed infra, where the same warning was issued.

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referring to the definition accorded to the phrase “a going concern” in the Shorter Oxford English Dictionary (1978), which defines it as “one in actual operation”.632 The learned judge then turned to two Australian cases for further clarity and quoted from Ferne v Wilson:633

The words “as a going concern” are merely intended to mean that the shop is being kept open instead of being closed up, and that the customers are being kept together so that if the purchaser wishes to keep on the business he can do so; that … the vendors only propose to sell the stock and fixtures, and they leave it to the person who buys to decide whether he will carry on the business or not; and that meanwhile, lest the purchaser should care to carry on the business, they keep it open till he takes his choice. In some cases they shut up the shop prior to the sale; in other cases they keep it “going” so that the trade may not be broken and dispersed.

In Reference under Electricity Commission (Balmain Electric Light Co Purchase) Act 1950634 the Australian Court had the following to say:

To describe an undertaking as a “going concern” imports no more than that, at the point of time to which the description applies, its doors are open for business; that it is then active and operating, and perhaps also that it has all the plant, etc which is necessary to keep it in operation, as distinct from its being only an inert aggregation of plant.

In General Motors, the business sold was engaged in the manufacture of components for motorcars. Part of its operation was the manufacture, under contract, of toolings and components for the applicant, and it was bought as a business that was “active and operating”. The Court therefore concluded that it was sold “as a going concern” so that “the trade may not be broken up or dispersed”. 635 The Court stated that it was bought as one “in actual operation”.

632 657. 633 657C-E; 1900 26 VLR 422 at 437 by Madden CJ (as referred to in Words and Phrases Legally

Defined 2nd ed vol 2 at 323). 634 1957 SR (NSW) 100 at 131 Sugerman J as quoted by Kannemeyer J at 657 F-G. 635 657G-H.


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The term “a going concern” was not utilised by the Labour Courts under the Labour Relations Act of 1956, as it was not applicable to a dispensation where there was no statutory employment protection in the event of transfer of undertakings.

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6.3.2 The jurisprudence of the Labour Court and Labour Appeal Court Since the Labour Relations Act 66 of 1995 contains no definitions of the relevant concepts contained in section 197 of the Act, it was left to our Courts to interpret the meaning of, inter alia, the “transfer of a business, trade or undertaking” as “a going concern”. This necessitates a fairly casuistic approach but some guidelines (rather than preconditions) have materialised to date. One quite unsatisfactory approach that has materialised lies in the fact that the Courts clearly do not approach this issue in a principled and chronological way. As described earlier,636 the distinct stages of the enquiry are not kept separate and the effect of a relevant transfer is sometimes even used to preclude a finding of a relevant transfer. This is clearly illogical and theoretically unsound.637 The first case to pay any significant attention to the content of these notions under consideration was Schutte v Powerplus Performance (Pty) Ltd.638 Reasons for the decision were handed down on 27 November 1998. The Labour Court held that there had indeed been a transfer of a business, trade or undertaking as a going concern. Furthermore, the provisions of section 197(2)(a) therefore applied. This case concerned the contracting out of services (namely the service of vehicles) from the first respondent (their core business being the rental of vehicles) to the second respondent.639 The applicants alleged that there was a transfer of a part of the business as a going concern, whereas the respondents alleged that there was actually a closure of its workshops and outsourcing640 of its service and maintenance work. The Court stated that section 197 must be interpreted in a way that complies with the Constitution and gives effect to the primary objects of the Act.641 The Court also stated that it is regrettable that its provisions are so terse, having regard to the fact that section 197 addresses an area of fundamental conflict of interest between commercial interests and social policy for employees.642 The Court then reviewed the European law in this regard and also referred to some decisions of the European Court of Justice. The Court concluded that an approach for determining whether a business has been transferred as a going concern could be distilled from the said sources. This is an approach that:643

636 See chapter 5, par 5.1 and par 6.1 supra . 637 See the comment on the approach of the Labour Courts in par 6.3.3 infra . 638 1999 20 ILJ 655 (LC). 639 Hence a case of first generation contracting out. 640 See the discussion on outsourcing in the South African context in par 6.3.4 infra. 641 Par 25. 642 Pars 30-31. 643 Par 42. This was also the judgement of the ECJ in Spijkers.


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… examines substance and not form; that weighs the factors that are indicative of a transfer … against those that are not; that makes an overall assessment of the facts, not treating any one as conclusive in itself.

Applying this approach to the facts, the Court held that there was indeed a transfer of a going concern. The interesting (though very problematic) question of whether outsourcing of an activity or service is in itself sufficient to constitute a transfer of a business as a going concern, was not applicable since there were several other factors that the Court found indicative of a relevant transfer.644 The Court, inter alia, considered the following factors as indicative of a transfer of a going concern: • The transfer was contractually foreseen; • stock was to be taken over; • the new employer was to use the same premises; • there was almost no interruption in the continuation of the workshop activities by the

new employer; • there was a limited transfer of management to the new employer; and • a close relationship existed between the old and new employer, in the sense that the

old shareholder held 50 per cent of the shares in the new employer. Regarding the vexing problem as to whether or not a “going concern” has been transferred, the Labour Court in Manning v Metro Nissan - a Division of Venture Motor Holdings Ltd,645 also accepted that an automatic transfer of a contract of employment follows once there has been compliance with the requirements set out in section 197. However, the judge in Schutte held that the Manning decision is of limited assistance in determining the issue of what constitutes a “going concern”, since it arose in the context of a sale agreement and not in the broader range of circumstances contemplated by the provisions of section 197. The judge stated that the phrase “as a going concern” was traditionally adopted to distinguish the sale of a business from the sale of assets or the sale of shares. This is, of course, correct and section 197 does not cover either of these two events (the sale of assets or shares). 646

644 See the discussion of Nehawu & others v University of Cape Town 1997 BLLR 803 (LC)

regarding outsourcing infra . 645 1998 ILJ 1181 (LC). 646 It should be evident that the range of circumstances envisaged in s 197, as referred to by the

Court, pertains to the question of whether or not there has been a “transfer”. The consideration of whether or not it was only assets that were transferred, does pertain to the question regarding the transfer of an undertaking “as a going concern”.


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It must be highlighted that the Court did not really refer to the well-established content of the terms “business or undertaking” and “transfer” as laid down by the European Court of Justice. More importantly in this context, the Court did not expressly utilise the test developed by the European Court of Justice regarding the transfer of a going concern - the transfer of an economic entity retaining its identity, as shown, inter alia, by the actual continuation of the same or similar activities before and after the transfer. It could be argued that the approach of the Court, having regard to substance and not form as stated above, would eventually have the same result. It is, however, submitted that the Court needs to make more guidelines available for the sake of legal certainty and that the well-entrenched test utilised at European Community level is at least more specific than the approach adopted in casu, even if this is ultimately an equitable approach. In Miriam Kgethe & others v L.M.K. Manufacturing (Pty) Ltd & another647 the respondents alleged that there was only a sale of all or part of the assets of the first respondent and not the sale of a business as a going concern. The Court a quo interpreted the appellants’ papers as regards the disclosure of information that what was being sought was information, which related, firstly, to the retrenchment or termination of the services of the appellants and, secondly, to an alleged duty to comply with section 197 of the Act in so far as there was a sale or transfer of the business of the first respondent. It was held that section 197 was not applicable and that any dispute about the disclosure of information in terms of section 189, regarding the termination of services, had to be referred to conciliation and arbitration. The Labour Appeal Court held that evidence placed before the Court a quo relating to when an agreement had in fact been concluded and what the effect of the agreement was, was secondary evidence. In the absence of an acceptable explanation for the non-submission of the written agreement itself, the matter should have proceeded on the basis that the true nature of the agreement had not been disclosed. The Court then stated that there were a number of reasons why the appellants legitimately believed that the agreement concluded between the first and second respondent might in fact have had the effect of a transfer of the business or a part thereof as a going concern. These reasons included that: • despite clear statements at times that the effect of the agreement was not to bring

about such a transfer, various descriptions were applied to the agreement, on a number of occasions, the effect of which could have been quite appropriate if a transfer as a going concern had in fact taken place;

647 Supra .

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• the second respondent immediately commenced business at the same premises where the first respondent had conducted operations and utilised the same telephone number; and

• the first respondent remained coy about disclosing the full terms of the agreement and information concerning its liabilities.

The Court thus ordered disclosure of the agreement of sale as the rights of the appellants were dependent on the precise nature and effect of the agreement concluded, read together with the applicable statutory provisions. The Commission for Conciliation, Mediation and Arbitration (CCMA) has also held that section 197 applies whenever there is the transfer of a business as a going concern, as determined by the nature of the transaction and not the intention of the parties.648 This necessitates an investigation into the true nature of the transaction. It is submitted that this also implies a right to the disclosure of information. In Tekwini Security Services CC v Mavana649 (the facts of this case were discussed supra)650 the Court held that there had indeed been a transfer of a going concern even though there was no evidence of an agreement between the member of Protector (the transferor) and the members of Tekwini Security Services (the transferee). The Court had regard to the facts that: • the same clients were taken over; • the whole workforce was taken over; • the same business was continued; and • it operated from the same premises as Protector had previously. The Court endorsed the broad approach of the European Court of Justice,651 saying that the decisive criterion is whether the business in question retains its identity as would be indicated, in particular, by the fact that its operation was actually continued or resumed. In order to decide this question, it is necessary to consider all the factual circumstances surrounding the transaction (see the discussion supra). In this instance, the Court thus expressly endorsed the entrenched test of the European Court of Justice regarding an economic entity retaining its identity after the transfer. It is clear that an operational undertaking must exist before an alleged transfer occurs if there is to be a finding that a going concern has been transferred. In Maloba v Minaco

648 Hugo v Shandelier Hotel Group CC (in liquidation) & others 2000 ILJ 1884 (CCMA). 649 1999 20 ILJ 2721 (LC). 650 Refer to chapter 5. 651 Spijkers v Gebroeders Benedik Abattoir CV 1986 CMLR 296 (ECJ).


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Stone Germiston (Pty) Ltd and another,652 the Marlin Group of Companies, to which both the respondents belonged, decided in October 1988 to close the operating divisions of the first respondent. The decision was taken in conjunction with the recognised trade union. The assets of the first respondent were consequently sold off to various companies in the group and its premises were sublet. Once the factory was closed, a few staff members remained to dispose of its final contract, but the most of the employees were retrenched. The applicant, a time clerk and industrial relations officer at the first respondent, failed to indicate to the respondent whether he would accept relocation to the second respondent, ultimately resulting in the tender of a retrenchment package to the applicant by the first respondent. A dispute was first referred to the CCMA regarding an alleged unfair dismissal. The respondent realised that the purported dismissal was faulty and offered unconditional reinstatement. However, the applicant refused such offer on the basis that he wanted to be transferred to the second respondent. A certificate of non-resolution indicated that the dispute concerned an alleged unfair retrenchment. The applicant’s employment was terminated on one month’s notice. The applicant alleged in the Labour Court that he had been offered and had accepted a position with the second respondent and asked, to be transferred to the second respondent if he paid back the retrenchment package he had already received. (Alternatively, he alleged that his contract of employment with the first respondent had been transferred to the second respondent, in terms of section 197, as part of the transfer of the first respondent’s business as a going concern to the second respondent.) The Court did not hesitate to find that, following the rationalisation of first respondent’s business, it could not (while remaining a corporate entity) realistically be described as a concern which was still “going”.653 The Court based this conclusion on the following factors: • The operating divisions had been closed; • its machinery, including the gang saws which were fundamental to its core activities,

had been sold; • a portion of its premises had been sub-let; • most of the workforce were retrenched, save what was in essence a skeleton staff

of five; • the place where people worked before the alleged transfer ceased to be the place

where they were working thereafter; and • in the perception of the applicant himself, the first respondent had, to all intents and

purposes, ceased to exist.

652 2000 21 ILJ 1795 (LC). 653 1805C-E.

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The Court thus found that even though the second respondent’s operations (maintained at that time for only one customer) were basically the same as those previously conducted by the first respondent, the factual situation negated the suggestion that the business of the second respondent was acquired as a going concern from the first respondent. The Court came to this conclusion by having regard to the substance rather than the form of the transaction. This decision could, however, have unintended results and will be discussed further infra.654 The Labour Court followed its earlier decision of Schutte in Fourie & another v Iscor Limited.655 The Court stated that it was necessary to determine whether the respondent, in selling the ITI Division as a going concern to AST, transferred part of its business, trade or undertaking as a going concern. The Court had regard to the following factors:656 • The parties specifically referred to the transaction as a sale of a business as a going

concern; • the ITI business was effectively carried on by AST in the same manner as it was by

the respondent; • all the assets of the division were transferred; • its goodwill and trademarks were transferred; • Iscor undertook not to compete with the business; and • the majority of employees in the division were transferred. The Court expressly concluded that the fact that the transferee purported not to recognise past service in terms of the AST offer made to the employees, did not change the nature of the transaction but rather invalidated the transferee’s attempt not to recognise past service.657 The Court also held that the intention of the parties was irrelevant.658 The CCMA has also determined several matters under the scope of section 197 of the Labour Relations Act. In Hugo v Shandelier Hotel Group,659 it was common cause that the liquidators transferred the hotel. However, the commissioner did emphasise that the true nature of the transaction is imperative when considering whether the preconditions of section 197 were met. In NUMSA obo Riba & others v Filvent

654 See par 6.3.3. 655 2000 21 ILJ 2018 (LC). 656 2031I-2032B. 657 2032C. 658 2032D-F. 659 2000 21 ILJ 1884 (CCMA).


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(Pty) Ltd660 the employees had worked for some years for Rovos Aircleaners (Pty) Ltd (starting between 1986 and 1988). This company was placed in provisional liquidation and a company that was dormant, called J.G. Mcdougall and Associates (Pty) Ltd, bought the assets of Rovos Aircleaners Pty Ltd. This company then changed its name to Filvent (Pty) Ltd. After the purchase of the assets of Rovos Aircleaners, the new company moved to new premises where Filvent operated its business. The respondent alleged that Filvent employed the applicant employees in 1991 as new employees and that the employees were informed that they were being employed by a new company. The employees, however, denied this. The commissioner had regard to the fact that Rovos Aircleaners was liquidated in 1990 and that the assets of that company were only acquired in 1991 (according to the commissioner). In the dispute proceedings, the commissioner held that “assets” included fixed assets, trademarks and logos, but certainly not employees, and that the employees therefore had not been in ten continuous years of service with Filvent. The employees testified that there were no changes in their employment, but that the employer moved to new premises during the course of their employment and a different name appeared on their payslips when they moved to the new premises. It is clear that the commissioner only had regard to one of the factors in the “basket of factors” advanced in Spijkers and adopted as relevant criteria by the Labour Court in Schutte and Maloba. The transfer of assets is but one of the factors to be considered; the similarity between activities before and after the transfer and the taking over of employees are other very important factors that should have been considered but were not. In addition the fact that there might have been a short period during which the activities were not immediately continued, does not necessarily preclude a finding of a relevant transfer. In another matter, Watson & Greenblatt v Burman Katz Attorneys,661 the commissioner had to consider a transfer that involved a partnership. The facts of this matter were remarkable. Mr Burman, the respondent party, practised as a partner in a variety of firms under a variety of names over a period of many years. Mrs Watson was employed as a conveyancing secretary in 1983 and Mrs Greenblatt as a general legal secretary in 1983. Although the partnerships dissolved and reconstituted on several occasions, the services of the two applicants were retained over the years by the newly constituted partnerships. In 1996, two partners left and the respondent (Mr Burman), Mr Van Vollenhoven and Mrs Zeiss started practising as partners under the name Burman Katz. The partnership agreement, which was in place at the time, provided that although the partnership would terminate on, inter alia, the resignation of a partner, the remaining partners were automatically deemed to have acquired the share of the leaving

660 Case No. MP11799, arbitration award of 24 November 1999. 661 2000 21 ILJ 2337 (CCMA).

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partner and would continue with the right to all files, etc. The leaving partner was also to be released of all suretyships. In April 1998, Mr Burman decided to resign. He gave three months’ notice, called the staff together and told them that he had resigned. (Mrs Watson disputed knowledge of Mr Burman's resignation.) Mrs Greenblatt was not at the meeting and Mr Burman phoned her to inform her thereof. Mr Van Vollenhoven and Mrs Zeiss would acquire the firm and they had to release Mr Burman of surety. Mr Burman said he wanted to go his own way. The remaining partners could not carry the whole of the practice and a subsequent agreement was concluded that the partnership would dissolve. The partnership, Burman Katz, terminated with effect from 31 July 1998 and each of the partners went off, taking their own files and clients. The Law Society was notified and the books were closed off on 31 July 1998. They also tried to sell the premises, but without success. Mr Burman and Mr Katz had a 74% shareholding in the trust which owned the building and Mr Burman therefore remained in the building. Mr Katz, who was only a consultant at the time, decided to stay on with Mr Burman and he had two secretaries over the years. One was the first applicant, Mrs Watson. It is common cause that Mr Burman “asked them to come with (him)” along with his own secretaries. Mrs Greenblatt submitted that Mr Burman had phoned her and informed her that he was dissolving the partnership and that the other partners would go their own way and asked whether she would be staying with him, to which she responded that she would stay with him. Mr Burman denied this and said that there was no reason for him to have asked her to come with him because she never worked for him and he had no work for her. Mr Burman also pointed out that the two of them did not get on with each other in an office environment. In an attempt to accommodate Mrs Greenblatt, he spoke to another firm in the building about the possibility of sharing the services of Mrs Greenblatt. However, they wanted a full-day worker. Mrs Greenblatt was not anxious to work a full day. She was also concerned about the fact that she would be paid by another firm. Furthermore, according to her, there was no formal work offer from the other firm and on 14 July 1998, Mrs Greenblatt addressed the following letter to Mr Burman:

I have been employed by Burman Katz for a period of 26 years. During this time I have seen many partners come and go, the last occasion being only two short years ago when Louis Schoeman left. I have tried a few times to speak to you about the future, but we have never really sat down once and discussed the matter. What I need to know is the following:


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a) Will my employment with Burman Katz continue in the same manner if we move to Michael White's offices? b) If yes, please confirm that I will lose no benefits whatsoever, i.e. leave, hours of work, pension, medical aid, birthday bonus, etc. c) If no, who will employ me (i.e. who is paying my salary) and on what terms and conditions? Will my present benefits be transferred, i.e. years of service, leave, hours of work, pension, medical aid and birthday bonus, etc. I understand that you are busy and that you have a lot on your mind, but as it is already the 14th of July and only two weeks to go before this partnership dissolves, your urgent attention to the above questions would be appreciated. I cannot speak for the other girls on the staff, but I am sure that many of them have similar concerns to me.

In a response to a later letter from Mrs Greenblatt’s attorneys, a letter was returned stating that there was an arrangement with the other firm to accommodate her and that she had not been retrenched or given notice of termination at the time. The letter also referred to the possibility of her being employed by Mr Saks, the person for whom she had worked previously, and that he (Mr Burman) would be prepared to facilitate arrangements with Mr Saks to employ her. None of these options materialised for a variety of reasons and Mr Burman also kept Mrs Greenblatt on until 31 August 1999 (about a year later) when the services of both the applicants were terminated. Mr Burman suggested that they only worked for him since the dissolution of the partnerships on 31 July 1998 and he paid them one week’s wages as severance pay. Mrs Greenblatt refused to accept the payment. The commissioner found, quite rightly, that section 41(2) of the Basic Conditions of Employment Act 75 of 1997 requires continuous employment662 with the employer and that section 197 was meant, inter alia, to protect the rights of an employee during certain processes of business restructuring. The commissioner referred with approval to the approach of the Labour Court when interpreting section 197 (examining substance rather than form and assessing all the facts, not treating any one as conclusive in itself) as illustrated by Schutte, Ndima, and Kgethe. He thus held that whether there had been a transfer of a going concern or not is ultimately a question of fact. The commissioner found that there were several factors that indicated that a transfer as contemplated in section 197(1) of the Act had occurred:

662 In casu there was mention of a partnership, which must play a role. See chapter 12 infra .

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• Firstly, the respondent conceded that an agreement was concluded in terms of which each partner of the firm would go his/her separate way and each of them would take their own computers, desks, etc and whatever secretaries they wanted to go with them. Mr Burman took Mr Katz’s two secretaries (Mrs Watson was one of them) and his own two secretaries, all of whom went with him.

• Secondly, the credit balance of the trust account was split in three according to the files and clients that each partner kept. This was seen as an indication that some files were still open and had to be attended to. They also split the overdraft of the business account.

• Thirdly, Mr Burman commenced practicing for his own account on 1 August 1998, immediately after the dissolution of the partnership. He retained the name of the partnership, Burman Katz. He also conceded that he and Mr Katz commenced to practice law as before. He did so by utilising the share that he had taken over. Mrs Watson and Mrs Greenblatt assisted him.

• Furthermore, the information on the UIF card and the leave forms also indicated that the applicant’s years of service with the various partnerships were considered as continuous service.

• There was also no evidence that their contracts of employment were terminated at any point in time.

The commissioner thus found that the evidence did not support the allegation that the operations of the partnership ceased. Furthermore, he went on to say that even if he had to accept that the operations of the firm ceased to exist on 31 July 1998, this boiled down to nothing more than the fact that the operations ceased to be controlled by the partnership. The operations continued, but were controlled by the “new employers” the very next day. Thus, so the commissioner argued, only the status of the old employer as a partnership was terminated, i.e. only the old employer ceased to exist. The commissioner held that the status of the previous employer and of the new owner is of no consequence and the question of whether the transfer was as a result of a sale, exchange, donation, agreement or merger, also did not take the matter any further. Making an overall assessment of the relevant factors, and without treating any single factor as decisive, he concluded that a part of the business of the partnership was transferred to the respondent as a going concern as contemplated in section 197(1)(a) and that the provisions of subsection (4) applied. Thus, the employee’s continuity of employment remained intact. In the circumstances, the commissioner was of the view that the evidence showed that although there were changes in the identity of the employers over the years prior to 1996 (when section 197 came into operation), the “new employers” took over the


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contracts of employment of the two applicants with their consent and that the periods of employment with the dissolved partnerships were and should be recognised as continuous service.663 6.3.3 Evaluation of South African case law on the transfer of a business,

trade or undertaking (or part thereof) as a going concern Introduction Our Labour Court has not yet attached a substantive definition to the concept of “a going concern”. The approach has rather been one of “you’ll know it when you see it”.664 Much emphasis has been placed on considering all the relevant factual circumstances. At least the Court has been consistent in its approach to determining whether what it sees on the facts before it constitutes a relevant transfer. Some guidelines can thus be extracted from judgements in South Africa to date. However, it is submitted that, all in all, a clear theoretical and analytical approach is still absent in our Courts’ jurisprudence. Current approach As the Courts have indicated, the starting point in this enquiry is that there must be a business, trade or undertaking or part thereof in actual operation before the transfer.665 Such a business, trade or undertaking or part thereof must continue to be in operation after the transfer, even though there might have been a short close-down. However, the same or similar activities must be continued after the transfer.666 South African Courts have adopted an approach similar to that followed by the European Court of Justice in its landmark judgement of Spijkers. The Labour Court has thus endorsed, in Schutte,

663 See the reasoning in Ntuli v Hazelmore on the assumption of responsibility by a transferee

towards employees as discussed in chapter 4 supra. The Labour Court did not agree with this aspect of the award (see Burman Katz Attorneys v Brand NO & others 2001 22 ILJ 128 (LC)). The Court held that employment by a partnership with different partners over years involves, in law, a series of contracts of employment entered into tacitly with different employers. Thus, the period of service of the employee in the event of the business of a partnership being transferred to one partner as a going concern, can only commence on the date of the transfer. This judgement of the Court deals with the effect of a relevant transfer and not with the first and second enquiries into whether the transfer of a business, trade or undertaking as a going concern occurred.

664 Much like the old truth that it may be hard to describe an elephant, but it certainly is not difficult to recognise one when you see it.

665 See General Motors v Besta and the case of Maloba discussed supra . 666 A commercial test, rather than a labour law test. In terms of a labour test, it is enough if the

jobs the employees occupied before the transfer still exist after the transfer. See the discussion supra in par 6.2.1.

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an approach that examines substance and not form and that makes an overall assessment of all the facts pertaining to a case without treating any particular one as conclusive.667 This could be likened to the dominant impression test for determining whether a person is an employee or an independent contractor.668 The true nature of the agreement/transaction between the transferor and transferee must thus be investigated, together with all relevant surrounding circumstances (including the intention of the parties, a factor which is not conclusive).669 It is also clear that the Labour Appeal Court and Labour Court will not hesitate to order disclosure of an agreement if the true nature of the transaction can be determined from this. The Labour Appeal Court has even stated that unnecessary coyness regarding the contents of an agreement can actually be considered as a relevant factor in the basket of factors, when assessing whether the transfer of a going concern had taken place or not.670 In Tekwini Security Services, it was considered that the absence of an agreement between the transferor and transferee did not necessarily prevent a conclusion that there had been a transfer of a going concern.671 Although the Courts have not expressly considered the factors laid down by the European Court of Justice in Spijkers in all their cases, their approaches have essentially involved the consideration of similar factors. The main factors to which the Courts have attached weight have included the following: • Assets (stock, machinery etc) being taken over; • the new employer using the same premises; • there being almost no interruption in the continuation of the activities by the new

employer; • there being a limited transfer of management to the new employer; • a close relationship existing between the old and new employer; • the parties’ descriptions applied to the agreement in terms of which the transfer

occurs; • the parties being coy about disclosing the full terms of the agreement and

information concerning its liabilities; • the same clients being taken over; • the whole or a substantial part of the workforce being taken over; • the same business being continued (that is the business is effectively carried on in the

same manner by the transferee as it was before by the transferor);

667 Also endorsed in the judgement of Tewkini. 668 See SABC v McKenzie 1999 20 ILJ 585 (LAC). 669 Accepted in Schutte, Kgethe, Fourie, Hugo & Burman Katz. 670 Kgethe. 671 See also Dr Sophie Remond Stichting v Bartol 1992 IRLR 366 (ECJ). It is submitted that this

factor is more relevant when determining whether a transfer occurred. See chapter 5 supra .


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• goodwill and trademarks being transferred; and • information on the UIF cards and the leave forms of employees indicating

continuous service. Possible gaps in the current approach It is important that the Courts and the CCMA assess every situation in its entirety, not treating some of the factors that have been identified in this chapter as indicative of a transfer without considering other relevant factors.672 In this regard it would be prudent if the Court could give some general, albeit flexible, guidelines regarding the factors to which more weight should be attached than others. It is submitted that, in this enquiry, the question to be answered should be whether there was a transfer of an economic entity retaining its identity. As argued earlier, it is better, for the sake of legal certainty, that a test of some kind be adopted, rather than utilising a purely casuistic approach. In accordance with the interpretation given to the Acquired Rights Directive, section 197 should apply where the transfer of a going concern results in a change in the legal or natural person who is responsible for carrying on the business and who, by virtue of that fact, incurs the obligations of an employer vis-à-vis the employees of the undertaking, regardless of whether or not ownership of the undertaking is transferred, due to the fact that the entity transferred retains its identity.673 However, this test involves several stages. It must be recognised that it is not sound to confuse the different concepts in section 197 and to fail to consider them separately and in a set chronological order.

672 See the matter of Filvent discussed in par 6.3.2 supra : it could certainly be argued that the

commissioner did not consider all the relevant factors in making an overall assessment. 673 In Burman Katz, the commissioner was satisfied as to the irrelevance of the fact that the

operations continued under the control of someone else as the partnership, since the status of the old/new employer does not assist in determining whether a going concern had been transferred (and neither does the kind of transaction that effected the transfer). The fact remained that there had been a change in the identity of the old employer.

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Suggested approach A Court first has to decide whether a transfer occurred.674 Secondly, the Court has to consider whether what was transferred was a business, trade or undertaking or part thereof and whether it was transferred as a going concern. If these enquiries are answered in the affirmative, the Court must consider the legal consequences or effect of such a relevant transfer. Regarding the second stage of the enquiry, the notions “business, trade or undertaking or part thereof” must be considered separately. At European Community level the well-established meaning of these concepts refers to the concept of:

an economic unit or economic entity which refers to an organised whole consisting of persons and (tangible and/or intangible) assets by means of which an economic activity is carried on having an objective of its own, albeit one that is ancillary to the objects of the undertaking; a whole which, moreover, can be part of an even larger corporate whole.

It is clear that no distinction per se is made between public and private undertakings, undertakings operating for gain or not, undertakings that operate as a whole and undertakings that are severable, etc. When enquiring into the applicability of transfer provisions, it is submitted that a purely casuistic approach must be avoided. The Courts must develop certain guidelines: for example, the factors that are considered relevant should be identified675 and given some comparative weight; and a general test to be satisfied should be adopted, even if this has to be a flexible one. There must thus be a framework within which parties can measure their transaction to evaluate the applicability of section 197. On a cautionary note, a Court or commissioner dealing with this enquiry should follow a purposive approach. Sham transactions should not be condoned. The factual circumstances of a case676 should be probed to determine whether there was, for example, indeed a shut down to such an extent that the employer could say that no going concern had been transferred. The “hiving down” practice in the United Kingdom and other inventive actions of alleged transferors have shown that employees might

674 See chapter 5 in this regard. 675 E.g. in Spijkers. 676 E.g. Maloba .


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easily be subjected to a denial of employment protection without the Court’s intervention. Whenever an identifiable economic entity is transferred so that its identity is retained, transfer of employment contract provisions should apply. This is, therefore, the substantive core of the notion of the “transfer of an undertaking as a going concern”. This should be the case even if it is only a part of a business, trade or undertaking that is transferred as a going concern.677 The core factor of the notion also remains whether or not the parties intended such a transfer and regardless of whether the finding will lead to unintended results. If it is believed that the scope of transfer provisions must be limited, this should be done by means of an express exclusion. The conceptual notions involved should also not be interpreted in a limiting way to try and achieve the same restrictive result.678 To summarise, after it has been found that a transfer has occurred, one has to determine whether this transfer involved the transfer of a business, trade or undertaking or part thereof as a going concern. Two closely connected factors are important: • An identifiable economic entity by means of which an economic activity is carried on

(having an objective of its own) must be transferred; and • this entity must be transferred in such a way that the economic entity retains its

identity (meaning that it must be transferred as a going concern). 6.3.4 Contracting out/Outsourcing679 6.3.4.1 Nehawu v UCT The only relevant case in this context at present is Nehawu v University of Cape Town & others.680 The judgement of Mlambo J thus needs to be evaluated critically. It is apparent that the judge did not follow a purposive approach and did not have a broad view regarding the interpretation and application of section 197 to contracting out/outsourcing.681 The applicants asked for a declaratory order to the effect that the outsourcing of gardening, sportsground maintenance, cleaning and related non-core 677 E.g. even one employee assigned to such a part of the business, trade or undertaking should

then be enough to satisfy the requirements for a relevant transfer to have occurred. 678 It is especially in the context of contracting out that our Labour Court has seemingly

decided to ignore the general principles that apply. See par 6.3.4 infra . 679 See par 6.2.3 supra for a comparative perspective. 680 2000 21 ILJ 1618 (LC). 681 This is submitted to be the case, even in the presence of an express statement to the effect

that in interpreting s 197, the Court should adopt a purposive approach consistent with the purposes of the Act and the Constitution of South Africa (1623I).

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activities (“the outsourced services”) by the first respondent (“the University”) to the second to fifth respondents was a transfer of a part of the University’s business, trade or undertaking as a going concern in terms of section 197(1)(a) of the Labour Relations Act. Consequently, they asked for an order that the employment contracts in existence between the University and those of its employees who received notices of termination of employment pursuant to the resolution of the Council of the University of 26 August 1999, were transferred automatically to either the second, third, fourth or fifth respondents in terms of section 197(2)(a) and that the notices of termination referred to above thus contravened section 197(2)(a) of the Act. The alternative plea is not relevant to this discussion.

The Court had regard to the Strategic Planning Framework that the Council of the University approved and adopted in December 1997. The Framework, inter alia, stated that the University is an institution of learning and that the core business of the University is that of learning. This covers the conventional division of university activities into the three categories of teaching, research and extension. The framework also stated that the University needed to consider its role, its shape and its size and that the University needed to allocate its limited resources strategically in a process where it is obliged to set priorities and make choices. The council of the University eventually adopted a decision to outsource all tasks associated with cleaning, gardening, sportsground maintenance and non-core activities usually combined with cleaning tasks in the faculties, such as photocopying, messenger services and tea making; the disestablishment of posts affected by the outsourcing; and the termination of employment of employees affected by the outsourcing. Pursuant to the Council Resolution of 26 August 1999, and on 31 August 1999, about 267 employees were handed notices terminating their services. This notice stated, inter alia :

You are hereby given notice that your employment with the University of Cape Town will be terminated on 30 September 1999 due to operational requirements. The month of September will constitute your contractual notice period. Your services are being terminated on a no fault basis.

The notices terminating their services also notified the affected employees that they had until 07 September 1999 to apply for a limited number of vacancies within the University and until 30 September to apply for employment with the second to fifth respondents.


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The University argued that the outsourcing engaged by it did not amount to a transfer within the contemplation of section 197. The second respondent682 also opposed the application. Its opposition can be summarised as follows: In terms of section 197, when the whole or any part of a business, trade or undertaking is transferred as a going concern, the contracts of employment of the employees engaged in that business, or part thereof, and the rights and obligations arising from those contracts, are transferred only if the transferor and transferee agree that the transfer of the business will involve a transfer of employees. In this event, this was not the case. The second basis of opposition by the second respondent was that, even if section 197 did provide for an “automatic” transfer of employees’ contracts, the present case did not fall within the ambit of section 197(1)(a) because the work outsourced was not a business, trade or undertaking and it had not been transferred as a going concern. The judgement essentially deals with three issues: • the purpose and effect of section 197; • what constitutes a “transfer”; and • whether the outsourced services in casu constituted the transfer of “a part of a

business, trade or undertaking” as “a going concern”. The Court stated that in interpreting section 197, the Court should: adopt a purposive approach consistent with the purpose of the Act and the Constitution of South Africa;683 examine the substance of the transaction and not the form; and should also adopt a multifactorial approach to the analysis of the transaction, i.e. not attach more emphasis or importance to one factor over others.684 The Court then considered the judgment of Seady AJ in Schutte v Powerplus Performance. Seady AJ came to the conclusion that the sale of the workshops to the first respondent in that matter was a transfer as contemplated by section 197 and that the employees’ employment contracts were automatically transferred to the first respondent. Seady AJ found that section 197 provides protection to employees whose jobs are affected by the transfer of the business or part thereof as a going concern. The Court accepted that in Foodgro v Keil,685 the Labour Appeal Court, by means of Froneman DJP, confirmed the views of Seady AJ that section 197 was an employee protection provision.686 However, the learned judge then continued to “analyse

682 Supercare Cleaning (Pty) Ltd. 683 108 of 1996. 684 1623I-1624A. 685 1999 20 ILJ 2521 (LAC). 686 1625A-H.

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section 197 properly” in order to show the Court’s diverging view of the purpose and effect of section 197.687 Before reviewing this reasoning, it is apposite to state that the Court eventually noted that section 197 only becomes applicable where the transfer of employment contracts without the consent of the employees is contemplated. Thus, the Court did not agree with the view of Seady AJ in the Schutte case that section 197(1)(a) provides for the automatic transfer of employment contracts where a business or part thereof is transferred as a going concern.688 This being so, the judge had to acknowledge that the decision of Foodgro v Keil is “a different kettle of fish”. It is a decision of the Labour Appeal Court, which is a decision of a Court superior and thus binding on the Court in casu. Although reluctantly, the Court thus continued to investigate outsourcing as the transfer of a part of a business, trade or undertaking as contemplated by section 197.689 The Court considered two cases of the European Court of Justice: Schmidt v Spar-und Leihkasse and Süzen v Zehnacker.690 The test adopted by the European Court of Justice in determining whether the transfer of a part of a business as a going concern had occurred (as considered in Spijkers v Gebroeders Benedik Abbattoir CV) was also referred to by the Court.691 The Court came to the conclusion that in considering the European Court of Justice’s decisions, it had found a uniform approach to be elusive.692 It is not entirely clear whether the Court considered the notion of “a transfer” or, perhaps rather, the notion of a “going concern”. It is submitted that the Court, firstly, had regard to whether or not there had been “a transfer” as contemplated in section 197. Later in the judgement, the issue of whether a “going concern” had in actual fact been transferred, if a relevant transfer did occur, was addressed briefly. In the view of the Court, the sale of a business, the legal transfer thereof to another employer or a merger is markedly different to outsourcing.693 The Court argued that outsourcing involves:694

687 1625I. 688 See chapter 7 supra regarding the effect of transfer provisions. 689 In casu , it was an instance of first-generation contracting out (as was also the case in

Schutte). 690 See the discussion of these two cases and the comment thereon in par 6.2.3 supra . 691 However, the Court referred to the test in Spijkers in the context of whether or not “a

transfer of a part of a business has occurred” (1630G) and not for determining whether a transfer of a business or part thereof as a going concern had occurred (as the test in Spijkers was intended).

692 1631D. 693 1631G-1632A. 694 1631G-H.


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… the putting out to tender of certain services for a fee. The contractor performs the outsourced services and in return is paid a fee for its troubles by the employer. Where outsourcing occurs the employer pays the contractor a fee to render the services outsourced as opposed to paying salaries or wages to a group of employees to render the outsourced service. An outsourcing transaction is usually for a fixed period of time at the end of which it again goes to tender and the existing contractor could lose the contract to another contractor.

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According to the Court, the sale of a business or part thereof leads to consequences different to those arising from outsourcing. In the case of a sale or legal transfer, the business or part thereof changes hands permanently and the transferring or selling entity receives a consideration for the business that is transferred. The situation is different when it comes to outsourcing. The outsourcing party retains some control over the outsourced services, for example, the standard of performance or service delivery must meet certain criteria set by the outsourcing party. At the end of the contract period, the outsourcing party could decide to perform the services itself and not invite further tenders. These differences in the nature of the transactions gave the learned judge “a fundamental problem to equate outsourcing to a legal transfer or sale”.695 If outsourcing is a transfer of a business in terms of section 197, the Court opined that it could not see how the contractor who loses the contract can transfer its employees to the successful contractor as it has no say in who gets the contract. That decision remains vested in the outsourcing party. Conversely, the Court did not see how the outsourcing party could force the successful contractor to take over the employees of the outgoing contractor. It therefore seems as if the Court encountered difficulty in satisfying the first enquiry, namely whether “a transfer” had occurred. This was because of perceived differences between outsourcing and a legal transfer or sale.696 In this regard, the Court was willing to consider that it is possible that some outsourcing exercises could be of a permanent nature, and that this type could then amount to the transfer of a business. Each case must be considered on its own merits. According to the Court, an outsourcing exercise of a permanent nature that also involves the transfer of assets, is more akin to a transfer of business than one that is not. It also seemed to the Court that an outsourcing transaction where the outsourcing party relinquishes the control over the outsourced services and the power to dictate standards is more akin to a transfer of a business or part thereof. In casu the University did not, for instance, simply outsource all cleaning functions. Some cleaning functions and other related functions, such as photocopying and messenger services, were retained, whereas others were outsourced. Furthermore, managerial and senior supervisory responsibility in the cleaning section, in particular, was retained by the University. The University had therefore retained a measure of control over the outsourced services. It is correct, too, that the University had not outsourced all functions relating to any of the services that were outsourced. As stated, the University had retained some cleaning responsibilities while outsourcing others. The Court therefore concluded that the situation before it was not the outsourcing of each service as a whole but some parts of each. In the circumstances of this case, the Court would thus not find that the outsourcing done by

695 1631I. 696 See the comment on Nehawu v UCT in par 6.3.4.2 infra.


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the University amounted to a transfer of a business or part thereof as contemplated in section 197(1)(a).697 The following led to this conclusion: • In the end, the outsourced services (whilst capable of being identified as identifiable

economic entities) shared that identity with the services not outsourced by the University.

• The outsourcing was not permanent. • The university had retained some control over the outsourced services and these

combined factors militated against a conclusion that a transfer had taken place as contemplated by section 197(1)(a).698

The Court continued that, even if one were to consider the phrase “going concern” as part of the scenario, the phrase means nothing more than “continue in actual operation”. The Court referred to the earlier decision of the High Court in General Motors SA (Pty) Ltd v Besta Auto Component Manufacturing (Pty) Ltd & Another.699 In this case, the fact that the University retained control over the outsourced services and that the transaction was for a fixed period, resulted in the transaction not being a transfer as contemplated by section 197(1)(a). 6.3.4.2 Comment on Nehawu v UCT It is submitted that there were several statements and findings made in this judgement that are cause for concern. The first fundamental flaw in the Court’s reasoning is the simple fact that it did not follow a sound methodology when approaching the matter. The four stages of enquiry into the possible transfer of employment contracts were not recognised.700 The second cause for concern is the apparent dissatisfaction of the Court with the Labour Appeal Court’s stated interpretation of the purpose and effect of section 197.701 Even though the indisputably poor drafting of section 197 is the main cause for possible conflicting interpretations, it is unfortunate that this debate should be continued even in the light of a unanimous decision of the Labour Appeal Court on the matter. Several judges in the Labour Court have also endorsed and followed the interpretation that section 197 is an employee protection measure and that it results in the automatic transfer of employment contracts whenever a transfer of a going concern

697 The Court was thus not willing to recognise that there was an economic entity with an

economic objective of its own, and capable of being transferred, in casu . 698 1632A-1633D. 699 See discussion of this case above. The Court did not voice a caveat regarding the foreign

context within which this judgement was delivered. 700 In this regard see par 6.1 supra ; also refer to par 6.3.3. 701 As set out in the matter of Foodgro v Carol Keil.

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takes place.702 No cognisance was taken by the Court in casu of the placement of section 197 in chapter 8 of the Labour Relations Act dealing with unfair dismissals or of the explanatory memorandum accompanying the Act. The obvious similarities of section 197 with other international instruments, whose purpose and effect have been quite clear for several decades, were also not considered. It is therefore submitted, with respect, that the sentiments expressed by the learned judge are unfortunate and not good for either legal certainty or the legitimacy of the Labour Court. The Court experienced fundamental difficulties in equating the consequences of a sale or legal transfer with that of outsourcing and thus came to the conclusion that outsourcing could not constitute “a transfer”, with some exceptions, as contemplated in section 197. It is necessary to consider why the Court held that most instances of outsourcing would not qualify as the transfer of a business, trade or undertaking or part thereof and, also, which instances of outsourcing could, according to the judge, qualify as such. • The Court considered that outsourcing could not qualify as a relevant transfer

because the transaction is not permanent, even if it is for consideration, and since the contractor who subsequently loses the contract has no say in who gets the contract and cannot therefore transfer its employees to the new contractor or force the new contractor to take over the employees of the outgoing contractor. Furthermore, the outsourcing party generally retains some measure of control of the outsourced service. The Court also stated that the fact that only parts of services are outsourced, for example cleaning, and not the whole service, mitigates against a finding of a relevant transfer.

• The Court was of the opinion that, if an outsourcing exercise was permanent and not for a fixed period of time, if some assets were transferred and if the outsourcing party relinquished control, the transfer of a part of a business could be deemed to have taken place. Each case has to be considered on its own merits.

It is clear that the above considerations do not separately take different concepts contained in section 197 into account. An overall consideration seems to be made of a number of different issues. It is regrettable that the concepts of “transfer”, “business, trade or undertaking or part thereof” and of “going concern” are not tackled in a principled manner by our Courts. It has been shown that the concept of “a transfer” should be given a broad interpretation,703 and that the European Court of Justice has interpreted it to mean that there is a change in the natural or legal person who carries on the business in question, regardless of the type of transaction, for example a sale or a lease, that caused the transfer. The Labour Court in South Africa has endorsed a wide 702 See e.g. Schutte, Tekwini, Carol Keil and Kgethe as discussed supra . 703 See chapter 5 supra .


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and purposive interpretation and has accepted that the legislator envisaged more possibilities than an uncomplicated sale.704 The Labour Court has also held that no agreement is required between the transferor and transferee,705 and this seems to strengthen the interpretation that nothing in section 197 prevents a transfer from being effected by a series of two or more transactions. Furthermore, it has been shown that the notion of an “undertaking, business or part of a business” within the meaning of the Directive is underpinned by the concept of an economic unit, which refers to “an organised whole consisting of persons and tangible and/or intangible assets by means of which an economic activity is carried on having an objective of its own, albeit one that is ancillary to the objects of the undertaking”.706 If one then turns to analysing the arguments presented by the Court in casu, several problematic strands of reasoning can be identified. The Court argued that the sale of a business or the legal transfer thereof to another employer is markedly different to outsourcing. However, the Court then went on to compare the consequences of the sale of a business or part thereof with that of outsourcing. The Court did not take the matter any further with this limited comparison, as section 197 expressly holds that there must be “a transfer by the old employer”. The section thus encompasses much more than an ordinary sale, as held by our Labour Court on several occasions. The Court then continued that in the event of “a sale, or legal transfer”707 the business or part thereof changes hands permanently and a consideration is received in return for this. In the event of outsourcing, the standard of performance or service delivery must also meet certain criteria set by the outsourcing party. The Court thus held that if, in a legal transfer or sale, there is a permanent transfer of a business or part thereof, it must mean that, in outsourcing, what is transferred is nothing more than the opportunity to perform the so-called outsourced services.708 It is, with respect, unclear how the judge came to this conclusion. It is also unclear whether the Court was evaluating whether a “transfer” had indeed occurred709 or whether “a business, trade or undertaking or part thereof” had been transferred.710

704 Schutte. 705 As held in the matter of Tekwini. 706 See chapter 6, par 6.1. 707 1631I. The Court’s late reference to this concept (legal transfer) further confuses the issue

as it is not clear whether the Court equates a sale with a legal transfer, which the Court surely could not have intended.

708 1632A. 709 The first enquiry into the applicability of transfer provisions: whether a transfer resulted in a

change in the legal or natural person who is responsible for carrying on the business and who, by virtue of that fact, incurs the obligations of an employer vis-à-vis employees of the undertaking, regardless of whether or not ownership of the undertaking is transferred.

710 The second enquiry into the applicability of transfer provisions encompasses two stages: firstly, whether or not a business, trade or undertaking or part thereof was transferred and, secondly, whether it was transferred as a going concern.

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If one assumes that the Court was still considering the issue of whether or not outsourcing constitutes “a transfer”, it is difficult to understand why the questions posed by the Court should be relevant at this stage (i.e. how the contractor who loses the contract can transfer its employees to the successful contractor and how the outsourcing party can force the successful contractor to take over the employees of the outgoing contractor). These questions only become relevant once it is decided that a transfer has in fact occurred. It is submitted that the only relevant question at this stage is whether or not the outsourcing party has transferred a part of its undertaking to another employer. Only when this answer is yes, only after it has been established that it was transferred as a going concern and only when the outsourcing party puts the contract out for tender again, does the matter of the transfer of employees between the outgoing and new contractors become relevant.711 The Court does not state when it would consider that a transaction constitutes a transfer. It does not formulate any general or specific guidelines to determine the same. It is therefore submitted, having regard to earlier Labour Court judgements, that the following should be asked: was there a change in the natural or legal person who carries on the business or part thereof in question? It is clear that there was indeed such a change, and that there will be one in most instances of outsourcing. However, one still has to determine whether or not a part of a business, trade or undertaking was transferred in such a way as to qualify as the transfer of the same as a going concern. As our Courts have not laid down any guidelines in this regard either, one could ask: was an organised whole transferred, consisting of persons and (tangible and/or intangible) assets by means of which an economic activity is carried on and having an objective of its own (albeit one that is ancillary to the objects of the undertaking)? And, did this entity retain its identity after the transfer? In this regard, every case must indeed be evaluated on its own merits. One should have regard to which parts were transferred, whether or not assets and staff were also transferred, whether the services delivered were identifiable, whether it had an economic nature, and whether it could be said to have an objective of its own. One also needs to know whether the same or similar activities are present before and after the transfer.712 713

711 In this regard, it has been stated in chapter 5 that, prima facie, nothing prevents a transfer

from occurring in a series of transactions. For example, a transfer from the outgoing contractor to the outsourcing party and then from the outsourcing party to the new contractor. Furthermore, this transaction could also be viewed as a single transaction from the outgoing contractor to the new contractor.

712 See the discussion on contracting out from a comparative perspective in par 6.2.6. 713 It is submitted that, in pure service contracts, the factors stipulated in Spijkers, and also by

the Labour Court in South Africa, may have a different comparable weight attached to each. This is due to the fact that in these instances, the human capacity to provide such service is far more important than any assets utilised to do so. It is submitted that the existence of the


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same or similar activities after the transfer should carry far more weight in this instance than, e.g. the transfer of tangible assets. The transfer of the employees cannot weigh much as this is a circular and illogical approach. The transfer of the employees is the result of a relevant transfer; it should not be the most important of the indicia of the same.

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The outsourcing of parts of services in casu, was held to have led to a situation where, even though they were capable of being identified as identifiable economic entities, they shared that identity with the services not outsourced by the University. Together with the fact that the outsourcing was not permanent and the fact that the university retained some control, this resulted in the outsourcing transaction not being a transfer as contemplated by section 197(1)(a).714 It is submitted that not too much weight should be attached to the factor of whether the outsourcing is of a permanent nature or not. This seems to be the case for at least four reasons. Firstly, it is often impossible to know beforehand whether a specific outsourcing exercise will be of a permanent nature or not. Whether or not employment protection becomes applicable will thus depend purely on how the parties frame their agreement. This is clearly untenable. Secondly, it seems artificial to draw a distinction between certain types of transfers and others, which if in the form of an outsourcing transaction, must then be accompanied by the transfer of assets and the relinquishing of control. Thirdly, if a transfer can take place in a series of transactions and even without an agreement between transferor and transferee, there is no reason why the fixed or indefinite period of such a transaction should be relevant. Lastly, section 197 itself does not seem to limit its effect and application to transactions of a permanent nature as all that is required is “a transfer by the old employer”. It seems inappropriate to limit unduly the application of these protective rules in view of our Constitution and the right to fair labour practices. The other factors that resulted in the finding that no transfer was applicable in terms of section 197(1)(a) also seem unsound: • The transfer of assets is one of many in the basket of factors to be taken into

account when considering whether the business or part thereof was transferred (as a going concern). It should not be given such importance that it limits the application of transfer provisions, since such transfer of assets is only one of the indicia to be considered. It is submitted that it would be better if this factor were considered when deciding whether the transfer of a going concern had taken place.

• The fact that the university retained control over the outsourced services also seems to be over-emphasised. Employment protection provisions such as the Acquired Rights Directive and section 197 are designed, by nature, to ensure that a change in the identity of who carries on the work has as little impact as possible on the employees. The fact is that the job that existed before the transfer still exists after it. The fact that the old employer still retains control over these services seems to

714 1632D-1633A.


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strengthen the employees’ case for job security. Certainly, an employee could rightly feel aggrieved if, while the old employer still exercises control over the services, the “new employer” can bring in new people to do the old job. However, if all control is relinquished, this should not count against a relevant transfer, since even though ownership might or might not be retained, the identity of the party carrying on the activities has changed, while the job has remained intact. It can also be argued that even where the old employer retains control over the standard of performance, this is irrelevant, since this right to control pertains to the contractor and not to the employees performing the activities. The outsourcing party is not in the position to discipline the contractor’s employees and it is the contractor who has to address any problems that might exist in the field of service delivery.

• Finally, it must be mentioned that it should, in principle, be possible to transfer part of an undertaking even though the whole activity (for example cleaning) is not transferred. Any other position would result in the parties being able to prevent a relevant transfer from taking place by retaining a few of the activities associated with a specific service that is being outsourced.

The new contractor is not saddled with life-long employees. If the new employer wants to streamline the business, he/she can do so by dismissing employees for operational reasons or by reaching an agreement. However, the correct procedures and so forth should be complied with. 715 Under section 197 the new employer will be liable for costs incurred, and this should be negotiated as part of the selling price of the business or as part of the fee for performing the functions in question. It is thus submitted that nothing prevents outsourcing per se from constituting a transfer of a business, trade or undertaking or part thereof.716 However, consideration still needs to be given to the further qualification for section 197 to apply, namely the transfer of the same as a going concern.717 To hold otherwise will mean the severe 715 See chapter 12 infra. 716 The ECJ unequivocally held in Rask AO v ISSS 1993 IRLR 133 (ECJ) that the transfer of a

service to be provided at a fixed fee may constitute the transfer of an undertaking (pars 17 & 20).

717 In Schmidt v Spar und Leihkasse 1994 IRLR 302 the ECJ suggested that in the case of contracting out, mere continuation of the same activity at the same location would often suffice, as the central question is whether the business retained its identity. The Court held that the retention of such identity is indicated inter alia by the actual continuation or resumption by the new employer of the same or similar activities. Other factors that the Court attached significance to in determining whether an economic entity has been transferred included: its workforce, its management staff, the way in which its work is organised, its operating methods and the operational resources available to it. It has been accepted that since, in certain labour-intensive sectors, a group of wo rkers engaged in a joint activity on a permanent basis may constitute an economic entity, it must be recognised that such an entity is capable of maintaining its identity after it has been transferred where the new employer does not merely pursue the activity in question but also takes over a major part, in terms of their numbers and skills, of the employees assigned to that task

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curtailment of employee protection. The transfer of an undertaking by means of a majority share transfer (which is already excluded from the scope of transfer provisions) will not be the only aspect that falls outside the scope of transfer provisions. The popular and increasingly common method of streamlining and changing the legal identity responsible for an undertaking, namely contracting out, will also fall outside the scope of these provisions. 6.3 Concluding remarks718 It must be reiterated that our Labour Court has not yet attached a substantive definition to the concept of “a going concern”. Factual circumstances have played a pivotal role in determining if the transfer of a going concern has taken place. Although the Courts have not expressly considered the factors laid down by the European Court of Justice in Spijkers in each case heard by them, their approaches have essentially involved the consideration of similar factors. A business, trade or undertaking or part thereof must have been in actual operation before any alleged relevant transfer.719 Such a business, trade or undertaking or part thereof must continue to be in operation after the transfer, even though there might have been a short shutdown. Emphasis is generally placed on whether or not the same or similar activities were continued after the transfer. South African Courts have adopted an approach similar to that followed by the European Court of Justice in its groundbreaking judgement of Spijkers. In Schutte, the Labour Court thus endorsed an approach that examines substance and not form and that makes an overall assessment of all the facts pertaining to a case without treating any one as conclusive in itself. Effect should be given to the true agreement, rather than the formal agreement between parties and the Courts should not hesitate to order disclosure of an agreement if the true nature of the transaction can be determined from it. A purposive approach needs be adopted. It has been emphasised that every transfer should be judged in its entirety, not treating some of the factors identified in this chapter as indicative of a transfer without considering other relevant factors. In this regard it would be prudent if the Court could give some general, albeit flexible, guidelines regarding which factors it considers to carry more weight than others. The transfer of an economic entity retaining its identity has been promoted as a helpful criterion in determining the transfer of an undertaking as a

(Blanpain European Labour Law (2000) 394-395). For comments on this judgement see par 6.2.3 supra.

718 See also pars 6.3.3 & 6.3.4.2 supra . 719 See General Motors v Besta and the case of Maloba discussed supra .


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going concern. The transfer of ownership is not of crucial importance. The essential factor is rather the change in the legal or natural person who is responsible for carrying on the business and who, by virtue of that fact, incurs the obligations of an employer vis-à-vis the employees of the undertaking. It has been shown that the concept of a “transfer” should be given a broad interpretation,720 and that the European Court of Justice has interpreted it to mean that there is a change in the natural or legal person who carries on the business in question, regardless of the type of transaction (for example a sale or a lease) that caused the transfer. The notions of “business, trade or undertaking or part thereof” have a well-established meaning at European Community level, i.e., an economic unit or economic entity which refers to an organised whole consisting of persons and (tangible and/or intangible) assets by means of which an economic activity is carried on having an objective of its own, albeit one that is ancillary to the objects of the undertaking; a whole which, moreover, can be part of an even larger corporate whole.721 The approach that would seem to be the most theoretically sound one to implement involves a Court first having to decide whether a transfer occurred. Secondly, the Court has to consider whether what was transferred was a business, trade or undertaking or part thereof, and whether it was transferred as a going concern. If these enquiries are answered in the affirmative, the Court must then consider the legal consequences or effect of such a relevant transfer. Whenever an identifiable economic entity is transferred so that its identity is retained, transfer of employment contract provisions should apply. This, then, is the substantive core of the notion of the “transfer of an undertaking as a going concern”.

720 See chapter 5 supra . 721 In instances of outsourcing, these criteria should still be satisfied. It is arguable that no

additional requirements should be made applicable in these circumstances.

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CHAPTER SEVEN

THE EFFECT OF TRANSFER PROVISIONS AND THE POWER TO OBJECT

7.1 General In South Africa, the vexing question of the exact legal effect of section 197 of the Labour Relations Act 66 of 1995 has been answered by many with numerous, conflicting solutions. Even though one would prima facie like to accept that the purpose of these kinds of provisions is the automatic transfer of employment contracts, the peculiar wording of section 197 has resulted in the contesting of even this basic premise in South Africa. However, as will be shown infra, if it is to be accepted that section 197 does result in an automatic transfer of contracts whenever an undertaking or part thereof is transferred as a going concern, it follows that if a certain set of facts are found to fall within the scope of application of the transfer of contract provisions, the next enquiry is whether or not the employees employed in the transferred undertaking are obliged to transfer to the transferee or whether they have a right to object to the transfer of their contracts. Furthermore, consideration should also be given to what the consequences of such power to object are, if one does in fact exist, for the old employer, new employer and the employees. The power to object should not be confused with an agreement to vary certain or all rights and obligations connected with a contract of employment. The first (objection to transfer), involves the rejection of the transfer of the employment contract to another employer by the affected employee. The latter (a contrary agreement) involves the transfer and possible amendment of rights and obligations connected to such a contract of employment that is being transferred.722 7.2 A comparative perspective on the effect of transfer provisions Article 3(1) of the Acquired Rights Directive provides that the transferor’s rights and obligations arising from a contract of employment or from an employment relationship existing on the date of a transfer within the meaning of article 1(1) must, by reason of such transfer, be transferred to the transferee. The consent of the transferee to such a transfer is irrelevant. It is apparent that the employment contract or the employment

722 In this regard see chapters 8, 9 & 10.


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relationship must be in existence on the date of the transfer.723 This fact must be established on the basis of the rules of national law, subject to observance of the mandatory provisions of the Directive, particularly article 4(1) thereof concerning protection of employees against dismissal by the transferor or the transferee owing to the transfer. In the cases of Harry Berg and Johannes Theodorus Maria Busschers v Ivo Martin Besselsen,724 the European Court of Justice had to consider the question of whether the Directive provides for an automatic release of the transferor from obligations arising from the contract of employment, even in cases where the employees object thereto. The Court answered in the affirmative. This is the case as article 3(1) provides for the automatic transfer from the transferor to the transferee of the employer’s obligations, subject to the right of Member States to provide for joint liability in terms of article 3(2) of the Directive.725 In Rotsart de Hertaing v J Benoidt SA & IGC Housing Service SA,726 the employee worked as a receptionist for HS from 1 March, 1987. On 19 November, 1993 the company changed its name to JB and went into liquidation. A newly created company, IGC, then carried out the activities of JB. On 23 November, 1993 the employee was given six months’ notice of dismissal by JB, but on 22 December, she was summarily dismissed by the liquidator on grounds of serious misconduct. The employee brought a claim against JB, the liquidator and IGC. IGC argued that it had never employed the employee or dismissed her. The Belgium Labour Court referred a number of questions to the European Court of Justice on the application of the Acquired Rights Directive, including whether the Directive operated to transfer staff automatically, regardless of the transferee’s refusal to comply with his/her obligations. The European Court of Justice held that the Directive means that employment contracts existing on the date of the transfer are automatically transferred by the simple fact of the transfer, regardless of the transferor’s or transferee’s contrary intention or the transferee’s refusal to comply with his/her obligations. Where there is a transfer of an undertaking, employment contracts may not be maintained by the transferor and are automatically continued by the transferee. The transfer of employment contracts takes place on the date of the transfer of the undertaking. To allow the transferor or transferee to choose the date for transferring employment contracts, would allow employers to derogate from the provisions of the Directive.727 It must, however, be stated at this early stage that the European Court of

723 See chapter 5, par 5.2 supra . 724 Cases 144 and 145/87, 1988 ECR 2559 (ECJ). 725 This view was confirmed in joined cases C132/91, C138/91 and C 139/91 Grigorios Katsikas

et al v Angelo Konstantinidis et al 1992 ECR 6577 (ECJ). 726 1997 IRLR 127 (ECJ). 727 This decision thus confirmed that, e.g., the judgement in Photostatic Copies v Okuda 1995

IRLR 11 (EAT), stating that an employee did not transfer where he or she was unaware of the transfer, could not be correct. Regarding the date of the transfer, it seems that Manning v Metro Nissan – a Division of Venture Motor Holdings Ltd & another 1998 ILJ 1181 (LC)

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Justice has held that employees are entitled to object to the transfer of their employment contracts.728 The legal effect of this objection is, however, a matter for each Member State to determine. Under the law of the United Kingdom, an automatic transfer of employment contracts is effected.729 Originally, regulation 5 of the Transfer of Undertakings Protection of Employment Regulations (TUPE) provided that where there was a transfer of a business or part of a business, employees’ contracts of employment were automatically transferred to the new employer, regardless of the employees’ agreement. Of course, the employee could leave if he/she did not want to be transferred, but then he/she would not qualify for any statutory compensation. This position was later amended by the introduction of subparagraphs 4A and 4B.730 These paragraphs now stipulate that an employee’s contract may not be transferred if the employee informs the transferor or the transferee that he/she objects to becoming employed by the transferee.731 Under German law, the employment relationship that exists at the time of a relevant transfer in terms of article 613a of the Civil Code, is also supposed to transfer automatically to the new owner. However, according to the Federal Labour Court’s jurisprudence, the employee may opt to remain employed by the old employer.732 This right has been derived from the employee’s right of personality as guaranteed in article 2(1) of the Constitution. It is apparent that here too the consent of the transferee to the transfer of employment contracts is irrelevant. The result of the Federal Labour Court’s jurisprudence is that the employee who objects to transferring remains with his/her old employer. Even though a dismissal for operational requirements may still be on the cards, German unfair dismissal law contains several substantive and procedural safeguards in this regard.733 It is submitted that this option appears to be the most sensible regulation of the power to object.

implied that the effective date need not be the date of the actual signing of the deed of transfer, as the mutual decision to transfer could predate the official conclusion of the sale.

728 See Katsikas v Konstantinidis 1993 IRLR 179 (ECJ). 729 Reg 5(1). 730 Introduced by s 33 of the Trade Union Reform and Employment Rights Act 1993 (TURERA). 731 Reg 5(4A). This problematic issue will be discussed further infra. Reg 5(4B) provides that

“where an employee so objects, the transfer shall operate so as to terminate his/her contract of employment with the transferor but he/she shall not be treated, for any purpose, as having been dismissed by the transferor”. Reg 5(5) relates to the position of the employee when there is a substantial change in his/her working conditions due to the transfer, and the possibility of a constructive dismissal claim in such a case where he/she terminates the contract.

732 Judgements of 2 October 1974 in DB 1975 601 and of 30 October 1986 in RdA 1987 63. 733 See chapter 12 infra.


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It can thus be stated that the Acquired Rights Directive, the TUPE regulations in the United Kingdom and article 613a of the German Civil Code provide for the automatic transfer of employment contracts whenever there is a relevant transfer of a business, trade or undertaking or part thereof, subject only to the employee’s right to object to such transfer.734 This is in keeping with the purpose of employee protection measures in the event of the transfer of undertakings. If these provisions provided otherwise (for example, making the transfer of employment contracts conditional on the transferee’s acceptance), they would be unable to attain their goal of better job security. In these circumstances, the party with a definite interest in starting with a clean sheet would be left with the decision of whether or not the employment contracts are transferred or not.735 The automatic transfer of employment relationships to the transferee does not prevent the Member States from providing for joint liability of the transferor and transferee.736 The Directive states that Member States may provide that, after the date of transfer, the transferor and the transferee will be jointly and severally liable in respect of obligations, which arose before the date of transfer, from a contract of employment or an employment relationship that existed on the date of the transfer.737 Article 613a(1) of the German Civil Code provides that the transferee becomes the new employer and is consequently liable for fulfilment of all obligations that arise after the transfer. Obligations that arose before the transfer and that were not already fulfilled by the transferor are also for the transferee’s account, but the employee has to bring his/her claim within one year of the transfer if the transferee is to be liable.738 Article 613a(2) also provides for joint liability of the transferor and transferee in respect of obligations that came into existence before the transfer and which will become due within one year after the transfer. If, however, such obligations become due only after the date of the transfer, the transferor is liable only for that part of the period that had expired at the time of the transfer. This joint liability is compulsory and, accordingly, the transferor and transferee cannot dispose of this liability in the transfer agreement.

734 See also Blanpain European Labour Law 400: “The rule of thumb is that the rights and

obligations of the employee arising from his contract of employment in the case of a transfer are automatically transferred” (own emphasis).

735 One aspect of this situation that still needs to be considered lies in a particular problem that could arise for a transferee. If employee and transferor agree that the employee will object to being transferred and will remain with the transferor, what might a disgruntled transferee do if the “star” employee does not come across to it? It is also possible that the transferor may not be involved and that a possible transferee may demand that certain key personnel should transfer or else the whole transfer could be threatened.

736 Blanpain European Labour Law 401. 737 Art 3(1). 738 See chapter 3.

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Under the TUPE regulations, regulation 5(2)(b) has the effect that liability is passed to the transferee for anything done before the transfer by the transferor.739

739 However, see e.g. Allan and Others v Stirling District Council 1994 IRLR 208 (EAT) where

the EAT, sitting in Scotland, held that reg 5(2) does not release the transferor from its liabilities (e.g. for unfair dismissal) that it would otherwise have to bear had there been no transfer of an undertaking.


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The provisions of regulation 5(2) read as follows: … on completion of a relevant transfer – (a) all the transferor’s rights, powers, duties and liabilities under

or in connection with any such contract, shall be transferred by virtue of this Regulation to the transferee; and

(b) anything done before the transfer is completed by or in relation to the transferor in respect of that contract or a person employed in that undertaking or part shall be deemed to have been done by or in relation to the transferee.

Therefore, since all rights and obligations that exist on the date of the transfer get transferred to the transferee,740 the transferor, “after the date of the transfer and by virtue of the transfer alone is discharged from all obligations arising under the contract of employment … even if the workers employed in the undertaking do not consent or if they object”.741 It is therefore argued that unless Member States avail themselves of the possibility of joint liability of the transferor and transferee, the transferor is released from his/her obligations as an employer solely because of the transfer and this legal consequence is not conditional on the consent of the employees concerned.742 Where Member States provide for joint liability of the transferor and transferee, this means that an employee can look to either of the parties to satisfy existing outstanding claims. However, this joint liability may be limited to liabilities prior to the transfer (for the transferor) or to liabilities arising within a certain period after the transfer (for the transferee). 7.3 The legal effect of section 197 of the Labour Relations Act 66 of 1995 Before considering the issue of the employee’s right to object, one first has to determine whether section 197 (assuming that the employees are in favour of such transfer) does in fact entail an automatic transfer of employment contracts in the event of the transfer of a business, trade or undertaking or part thereof as a going concern. Stated otherwise, one first needs to determine whether transfer provisions, in general, provide for the automatic transfer of employment contracts in South Africa.

740 Art 3(1) of the Acquired Rights Directive. 741 Blanpain European Labour Law 401. 742 Ibid.

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7.3.1 Jurisprudence in favour of an automatic transfer of employment contracts

Since the promulgation of the Labour Relations Act 66 of 1995 there have been conflicting opinions regarding the effect of section 197. Some writers have argued against an automatic transfer of contract743 and others have argued for an automatic transfer (based on a comparative evaluation of similar provisions found abroad, the stated purpose of the section as well as the location thereof in a chapter that deals with protection against unfair dismissal).744 The Labour Court has, by and large, been reluctant to enter into this debate where it was not absolutely necessary to do so. However, in the case of Schutte & others v Powerplus Performance (Pty) Ltd and another745 the latter approach (i.e. in favour of an automatic transfer of contracts of employment) was explicitly endorsed by the Court. Before the case of Schutte, the Labour Appeal Court also had an opportunity to hear a matter regarding the applicability of section 197. In Miriam Kgethe & others v L.M.K. Manufacturing (Pty) Ltd & another746 the Labour Appeal Court held that the rights of the appellants would depend on the precise nature and effect of the agreement concluded between the respondents, read together with the applicable statutory provisions. The following important dictum reflects the thinking of the Court:747

If in fact a transfer as a going concern had been effected, the appellants would be entitled to the benefits accorded to them in terms of section 197, and they would be entitled to reject any other benefits which either of the respondents sought to accord them in lieu thereof.

The matter of Carol Keil v Foodgro748 was a judgement of 26 June 1998. The applicant was employed by MacRib as National PRO and Marketing Manager from 1 February 1993.749 On 1 January 1997 the business was transferred to the respondent

743 See e.g. Le Roux PAK “Transferring contracts of employment. Implications surrounding the

sale of a business under the new LRA” 1996 Contemp orary Labour Law 11. 744 See Smit N “Word werksekuriteit gewaarborg in die lig van artikel 197 van die Wet op

Arbeidsverhoudinge 66 van 1995?” 1997 TSAR 548; Olivier MP “Transfer of undertakings and insolvent employers: a comparative enquiry and implications for South African labour law” 1995 ILJ 737.

745 1999 20 ILJ 655 (LC); 1999 2 BLLR 169 (LC). 746 1998 19 ILJ 524 (LAC). 747 Par 37. 748 1998 ILJ 524 (LC). 749 The facts described here will also be of some relevance in chapter 8 infra.

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as a going concern. The applicant continued in employment until she was dismissed for operational reasons on 30 June 1997. The Court held that the respondent used the last-in-first-out method as its selection criterion. The reason why the applicant was selected was that her service was shorter than that of another manager. This position was based on the contention that when MacRib was acquired, a new contract of employment was concluded with the applicant, which effectively wiped out her previous length of service with MacRib. The Court held that it is possible for parties to agree otherwise in terms of section 197(2)(a) and (b) with regard to the automatic transfer of a contract of employment in the event of the transfer of a going concern. However, such agreement must be clear and unambiguous. It must therefore be clear as to the new terms and conditions agreed upon and it must not be ambiguous about the parties’ agreement on those terms and conditions. It is also important, the Court stated, that such agreement be clear and unambiguous as it must be apparent which terms or conditions under the old employer survive and which are new. At the Labour Appeal Court stage,750 the Court held that even though the parties could agree otherwise as to the terms and conditions of employment, section 197(2)(a) does not allow for the contracting out of the transfer of the contract or for the interruption of continuity of employment. The Court held that the provisions of section 197 are primarily aimed at the further protection of employees and that, even after automatic transfer of contracts of employment under section 197, employees may still unilaterally resign from employment without attracting additional sanction under the Act (sic!). Employers, the Court stated, only have the ordinary contractual remedies against them.751 The Labour Appeal Court stated the following:752

Section 197(1)(a) and (b) provides for the automatic transfer of an employee’s contract of employment upon transfer of the business, trade or undertaking in the circumstances set out in the section. Section 197(2)(b) allows for the contracting out of the transfer of the contract of employment itself, but section 197(2)(a) does not.

It is clear that the Labour Appeal Court endorsed an approach that there is an automatic transfer of contracts, unless otherwise agreed, in the event of section 197(2)(b) cases.753 This approach is commendable as it was held that there is indeed 750 Foodgro, a Division of Leisurenet Ltd v Keil 1999 20 ILJ 2521 (LAC) 2528I-2529A. 751 2525D-G. 752 2528I, majority judgement delivered by Froneman DJP; Nicholson JA concurred and

Conradie JA delivered a separate judgement, arriving at the same conclusion. 753 Therefore, the LAC interpreted the section to allow “a power to object” only in the event of

a transfer that takes place in insolvency-related circumstances. In the event of the transfer of a solvent undertaking as a going concern, no power to object was acknowledged to exist.


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an automatic transfer. The finding that the parties mentioned in section 197(3) can contract out of the transfer of employment contracts will, however, be discussed infra.754 In the event of a section 197(2)(a) transfer,755 the Court thus endorsed an interpretation resulting in the automatic transfer of contracts, without this transfer being subject to a right to object.756 In the recent matter of Hugo v Shandelier Hotel Group CC (in liquidation) & others,757 the commissioner, after referring to the relevant case law (including Schutte, Foodgro and NEHAWU), felt bound by the decision of the Labour Appeal Court, preferring that court’s interpretation to the interpretation in Nehawu v UCT. The commissioner thus held that section 197 of the Labour Relations Act provides for the automatic transfer of contracts of employment whenever the transfer of a going concern takes place. It is regrettable that our Courts have favoured such a literal interpretation of section 197 to date. This approach must be criticised and cannot be accepted as correct.758 7.3.2 Jurisprudence believing that the transfer of employment contacts is

conditional on agreement of the transferor and transferee to such transfer, in the absence of agreement by the employees

Even these findings of the Labour Appeal Court and Labour Court enumerated above could not, however, result in section 197 being left alone. In Nehawu v UCT & others,759 the Court’s analysis read as follows: The subject matter of section 197 is the transfer of a contract of employment as opposed to the transfer of a business or part thereof. The first part of section 197 is in keeping with the common law, that a contract of employment may not be transferred without the employee’s consent. From there, section 197 then makes a break from the common-law position by providing that a

Thus, according to the Court, contracts of employment transfer automatically and are not subject to a right to object in s 197(1)(a) &(2)(a) cases.

754 It seems that the legislator and Courts do not properly distinguish between a right to object to the transfer of one’s contract and the right to agree to the amendment of rights and obligations connected thereto. These two situations are quite dissimilar and different considerations are applicable (e.g., the parties to exercise such a right).

755 The transfer of a solvent undertaking as a going concern. 756 See the criticism of similar reasoning regarding automatic transfer of contracts without a

right to object in Nehawu v UCT infra . However, in Nehawu the Court felt that this automatic transfer only kicks in once the old employer and new employer agree that they want to transfer the contracts in the absence of agreement by the employees.

757 2000 21 ILJ 1884 (CCMA). 758 See par 7.3.4 infra for an evaluation of this approach. 759 2000 21 ILJ 1618 (LC).

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contract of employment may be transferred without the employee’s consent if the business (of the transferring employer) or part thereof is transferred as a going concern. Even though the view was taken in Schutte v Powerplus that where a business or part thereof is transferred as a going concern, the employment contracts (affected by such transfer) are automatically transferred, the judge in casu did not agree that section 197 provides blanket protection of jobs when businesses are transferred.760 According to Mlambo J, the section prohibits the transfer of employment contracts without the consent of the employees concerned. The section, however, provides that an employer may transfer employment contracts without the consent of the employees concerned where he/she transfers his/her business or part thereof as a going concern. In other words, the provisions of section 197 become relevant where the transfer of the employment contracts is contemplated without consent. The employee protection alluded to by Seady AJ (in Schutte) and Froneman DJP (in Foodgro) is only relevant where employment contracts are transferred without the employee’s consent. In these cases, the legislature would protect the interests of employees whose contracts are transferred to another employer without their consent. According to the Court, the legislature has done this in section 197(2)(a) and the logical reason for this protection is that the employees concerned have had no say in the transfer of their contracts of employment.761 In terms of section 197(2)(a), the old terms and conditions are thus preserved, unless agreed otherwise. The Court continued that it is thus clear from section 197(2)(a) that parties are at liberty to agree on whatever terms and conditions they may choose. This means that where the transfer of a contract of employment, as envisaged in section 197(1)(a),762 occurs, parties are not compelled to maintain the old terms and conditions if they agree on other terms and conditions. The compulsion to maintain these terms and conditions applies where there is no agreement between the parties and, importantly, where the contracts of employment are transferred without the consent of the affected employees. It follows that in the view of the learned judge, section 197 does not compel the automatic transfer of contracts of employment in cases of the transfer of a business or a part thereof as a going concern. What the section does is to permit the transfer of a contract of employment without the consent of the employees concerned.763 The judge stated that if the legislature had meant to compel employers to transfer contracts of employment in all cases of transfers of businesses, the

760 1626C. 761 1626D-E. 762 I.e. the transfer of a solvent undertaking or part thereof as a going concern. 763 See par 7.4 infra.


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provisions of the Act would and should have specified this much, such as is the case in section 197(2)(b).764 The plain meaning of section 197, according to the Court, is that an employer is permitted to transfer an employment contract without the consent of the employees concerned only if the business is transferred as a going concern.765 On the other hand, section 197(2)(a) appears, at first glance, to provide that if a business or part thereof is indeed transferred as a going concern (in terms of subsection 1(a)), then all employment contracts at the time of the transfer are also automatically transferred. However, the key to the interpretation of this subsection is found in its link with section 197(1)(a). To the learned judge, section 197(2)(a) meant no more than that, when a contract of employment is transferred with a business or part thereof (which is transferred as a going concern), all rights and obligations in existence at the time of the transfer are preserved. In other words, section 197(2)(a) deals with the consequences of the transfer of a contract of employment without the employees’ consent, which is the subject matter of section 197(1)(a). In a nutshell, the Court concluded, section 197(1)(a) and 197(2)(a) do not (and cannot) provide for the same thing (i.e. the transfer of a contract of employment). If this were so, the two subsections would be contradictory in that section 197(1)(a) would provide for permissible transfers and section 197(2)(a) would provide for automatic (compulsory) transfers of employment contracts. In the Court’s view, employment contracts are automatically transferred in the case of section 197(2)(b). A careful reading of sections 197(2)(a) and 197(2)(b) should show that they provide for different scenarios. Section 197(2)(a) provides for the preservation of rights and obligations during the transfer of a business as a going concern. Section 197(2)(b) provides for the automatic transfer of contracts of employment in instances where a business or part thereof is transferred as a going concern in insolvent circumstances.766 Thus, an employer in the process of transferring his/her solvent business or part thereof also has the choice of whether or not to transfer the contracts of employment attached to that business. If he/she decides to transfer the contract without the consent of the employee, section 197 kicks in. The Court acknowledged that it might be argued that the views expressed in this judgement would allow employers to do as they pleased in circumstances where they

764 I.e. the transfer of, inter alia, an insolvent undertaking or part thereof as a going concern.

The judge thus accepted that, in insolvent circumstances, the transfer of an undertaking as a going concern results in the automatic transfer of employment contracts.

765 See par 7.4.3 infra regarding the power to object in South Africa. 766 For criticism of this interpretation see pars 7.3.3 & 7.4.3 infra .

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transfer their businesses.767 However, the Court stated that, in its view, the vast majority of cases where transfers or outsourcing of businesses take place, restructuring is usually the basis of these transfers or outsourcing exercises. Employers engage in restructuring exercises to improve productivity, viability and, generally, to streamline their businesses. This is no different to what trade unions do in their pursuit of improved terms and conditions for their members. Restructuring and improved terms and conditions are thus issues of mutual interest to both business and labour. The Court opined that the ability of labour to counter spurious restructuring processes and sham retrenchments could be viewed as ineffectual since this depend on section 189. The situation would, he believed, look much better had the right to strike been open to employees even against restructuring processes that inevitably lead to job losses. The Court stated that the same right should be open to employees whose employer transfers his/her business and elects to retrench rather than redeploy or transfer their contracts of employment. The learned judge thus preferred to see that the employees concerned should prevail on their employer to do what in their opinion is in their best interest, and, where no agreement is achieved, to be allowed to strike to force the employer’s hand. 7.3.3 Evaluation of the approach of the South African Labour Courts

regarding the automatic transfer of employment contracts It is submitted that a purposive approach should be adopted when interpreting section 197 of the Labour Relations Act 66 of 1995.768 According to section 3 of the Labour Relations Act, the Act must be interpreted by having regard to the primary objects of the Act, compatibility with our Constitution and international obligations. This means that regard must thus be had to the common law, the history of our labour laws in this regard and to the intention of the legislature as indicated by various external factors. Even though it is not impossible to conceive of the interpretation attached to section 197(1) and 197(2)(a) and (b) by the Labour Court in Nehawu v UCT, having regard only to the wording of the section, it is respectfully submitted that, in the broader scheme of our labour law and having regard to our constitutional framework, this interpretation should not be accepted.769

767 1628B-F. 768 See also Anderman S “The interpretation of protective employment statutes and contracts

of employment” 2000 ILJ (United Kingdom) 223. 769 See also NEHAWU v University of Cape Town & others (unreported LAC case, no. CA

12/00 dated 7 February 2002). Here the question was whether the contracts of the members of NEHAWU transferred automatically to the contractors, despite the fact that neither UCT nor the contractors had agreed that they would. This issue split the LAC as Van Dijkhorst AJA (Comrie AJA concurring) held that Judge Mlambo erred when he found that he was bound by Foodgro . According to the majority judgment in UCT, Foodgro was not concerned at all with whether there was an automatic transfer of the employee’s contract,


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It is submitted that in section 197(1) the legislator could not have intended to enforce upon an employee the obligation to work for a new employer, without that employee consenting thereto.770 Such an interpretation would result in the provision being unconstitutional - being in conflict with the right against forced labour, the right to engage freely in economic activities, the right to fair labour practices and the right to human dignity as provided for in the Bill of Rights.771 Even though slavery is believed to be an historical problem, overcome by an enlightened civil society governed by rule of law, various forms of slavery unfortunately remain at the end of the twentieth century.772 It is submitted that, in a modern civil society, the definition of slavery and more specifically, forced labour, is ever evolving. A definition for slavery first appeared in an international agreement in the League of Nations’ Slavery, Servititude, Forced Labour and Similar Institutions and Practices

because the employers in that case had agreed that Ms Keil’s contract would be transferred. According to Van Dijkhorst AJA’s interpretation of section 197 the common law rule that the contracts of employments cannot be transferred from one employer to another without the employees’ consent is confirmed in the opening paragraph of s 197. In sub-section (1)(a) that rule is done away with if a business is transferred “as a going concern”. As sub-section (1), and the rest of the section, is silent on whether the employers must agree to such transfers and since under the common law, employers were free to transfer businesses without also transferring their employees it follows, according to the judge, that the legislature must have intended to leave intact the right of employers to negotiate transfers of businesses without including employees. Thus the judge reasoned that when employers negotiate transfers of businesses without including the employees of the transferor, it could not be said that the business is transferred “as a going concern”. Since the NEHAWU-members was not transferred but could only apply for position with the transferee, the majority thus held that there was no further case to be heard. Other cases regarding the purpose and effect of section 197 (e.g. Schutte v Powerplus 1999 20 ILJ 655 (LC)) was not considered by the majority. Zondo JP, however, interpreted s 197 quite differently. In a dissenting judgment, the Judge President took the view that the majority’s interpretation of s 197 ignored the constitutional right to fair labour practices and the objectives of the LRA. He disagreed with the majority’s view that a business cannot be said to be transferred “as a going concern” if its workforce is not transferred with it. According to the Judge President, to establish whether a business was transferred as a going concern is a matter for “objective determination”. The transfer of the affected employees might be relevant in this determination but it was not a necessary condition. The judge-president accepted that the purpose of section 197 is to protect employees when the business for which they have worked is transferred. The section had to be interpreted in the light of that purpose. The minority judgement is now expressly given effect to in the pro posed s 197 of the Labour Relations Amendment Bill of 2001.

770 Such a regulation would be contrary to the ius cogens, our common law and our constitutional principles.

771 The right of an employee to object to the transfer of his/her contract of employment will be discussed fully in par 7.4 infra .

772 Dottridge M & Weissbrodt D “Review of the implementation of a follow-up to the Convention on Slavery” 1999 German Yearbook of International Law 243. Slavery has existed since ancient times; the 1815 Declaration Relative to the Universal Abolition of the Slave Trade was the first international instrument to condemn it. The predecessor of the United Nations, the League of Nations, was very active in this field and, as a result “it is now a well-established principle of international law that the ‘prohibition against slavery and slavery related practices’ have achieved the level of customary international law and have attained jus cogens status” (Dottridge & Weissbrodt 1999 GYIL 243).

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Convention of 1926.773 The Convention distinguished forced labour, stipulating “forced labour may only be exacted for public purposes” and requiring State parties “to prevent compulsory or forced labour from developing into conditions analogous to slavery”.774 It is evident that the phenomenon of forced labour will lead to violations of other fundamental rights. These rights, on the international front, have been identified as the liberty to be treated with humanity and the right not to be subjected to cruel, inhuman or degrading treatment.775 The rights to liberty of movement and freedom to choose your residence are also included as relevant.776 The International Labour Organisation (ILO) has adopted the Forced Labour Convention No. 29 of 1930 in this regard. In the definition of forced labour, no mention is made of ownership. Instead, forced labour is defined as “all work or services which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily”.777 Both this Convention and the later Convention No. 105 of 1957 (ILO Abolition of Forced Labour Convention) are the most important instruments concerning freedom of labour and the abolition of forced labour.778 Since the nineteenth century, the English Courts have been reluctant to order specific performance of the employment contract and South African Courts followed their example for many years.779 Several reasons for this position existed, most of them relating to social policy.780 The Courts relied on a number of reasons for refusing to grant an order enforcing an employment contract:781 firstly, that it is inadvisable to compel one person to employ another whom he does not trust in a position that imports a close relationship, and secondly, that the order would lack mutuality, since they would

773 Ibid 244. 774 Art 5. 775 Dottridge & Weissbrodt 1999 GYIL 249. 776 Ibid 250. 777 Art 2(1). In the event of the transfer of an undertaking, an employee who has no choice but

to transfer to the transferee does not offer his/her services voluntarily. If he/she should refuse, the penalty is the loss of his/her job and thus his/her livelihood.

778 See also art 8(3)(a) of the Civil and Political Covenant that stipulates that “no one shall be required to perform forced or compulsory labour”. The European Convention for the Protection of Human Rights also forbids forced or compulsory labour in art 4(2). Dottridge & Weissbrodt show that even though this convention does not define compulsory labour, two elements can be distilled from the case law of the European Commission of Human Rights: firstly, that the work be performed against the complainant’s will and, secondly, that the work entail unavoidable hardship to the complainant (1999 GYIL 254-255).

779 See Brassey M “Specific performance – a new stage for labour’s lost love” 1981 ILJ 57. 780 In Stewart Wrightson (Pty) Ltd v Thorpe 1977 2 SA 943 (A) the Appellate Division held that

a fundamental breach of an employment contract does not per se end the contract, but serves only to give the innocent party the choice either to stand by the contract or to terminate it.

781 See Brassey 1981 ILJ 65 and authority referred to there.


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not order an employee to work faithfully and diligently for the employer.782 The close personal relationship and the fiduciary nature of an employment relationship thus mitigated against an order of specific performance in these circumstances. These considerations must receive attention in the event of the transfer of an undertaking.783 It is strongly advocated that a literal interpretation of section 197’s wording should be avoided. Even though the wording thereof is regrettably vague and misleading, it is proposed that it can still be interpreted in such a way so as to achieve employment protection if a purposive approach is utilised.784 It is submitted that section 197(1) tries to establish, as a general rule, the existing common-law rule that contracts of employment may not be transferred without the agreement of the old employer, new employer and the employee concerned. However, section 197(1)(a) and (b) then provides that, in certain circumstances, when an undertaking or part thereof is transferred as a going concern (whether the undertaking is solvent or insolvent), the common-law rule proper no longer applies. In the circumstances mentioned in subsections 197(1)(a) and (b), the common-law rule is changed by the provisions of section 197(2)(a) and (b). Sections 197(1)(a) and (b) and 197(2)(a) and (b) do not, therefore, deal with the same subject matter. Section 197(1) states that the common law rule generally applies but that, in two circumstances, it is varied by statutory provisions provided for in section 197(2) and further. Section 197(2) then goes on to provide for an innovative regulation of this matter in a way that differs from the previous common-law position. Section 197(2)(a) deals with the transfer of a solvent undertaking or part thereof as a going concern. In this case, all the rights and obligations between the old employer and every employee at the time of the transfer remain in force between the new employer and every employee, unless otherwise agreed. This necessarily encompasses the transfer of not only rights and duties in a vacuum, but also of the contracts of employment connected thereto785 and from which the rights and obligations originate.

782 Regarding the argument pertaining to mutuality and granting an order of specific

performance, Freedland M The Contract of Employment (Clarendon Press 1976) 276 states that to treat the two arguments as if they stood or fell together, is to impose a purely formal equality between the parties, which has little to do with the realities of the employment relationship.

783 See the matters of Millican v Sullivan 1888 4 TLR 203 at 204 where the Court held that it would be “monstrous” to compel the employee to work in terms of an order; in Whitwood Chemical Company v Hardman 1891 2 Ch 416 it was held that “it would be quite impossible to make a man work, and therefore the Court never attempts to do it”.

784 The proposed s 197 in the Labour Relations Amendment Bill, 2000 (see also the Labour Relations Amendment Bill, 2001) will negate the need to try and construct such a purposive interpretation, as this proposed section 197 clearly provides for the automatic transfer of employment contracts. See chapter 14 infra.

785 Regulated in s 197(1)(a).

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Section 197(2)(b) expressly provides that where an undertaking or part thereof is transferred as a going concern in certain circumstances pertaining to the insolvency of the undertaking, the contracts of all employees existing at that time are transferred to the new employer, but the old rights and obligations between the old employer and every employee remain with the old employer, unless otherwise agreed. This is clearly meant to make the undertaking more attractive for potential buyers. Even though the undertaking must be taken over together with the existing personnel, the previous rights and obligations can be negotiated afresh by the new employer. This position is already prejudicial to the employees employed in that undertaking, owing to the poor protection afforded them in terms of insolvency law.786 Subsection 197(4) provides that continuity of service is not interrupted. It is hence submitted that the contracts of employment of an undertaking that is transferred as a going concern must transfer to the new employer, either with all existing rights and obligations unchanged (in solvent undertakings) or without them (in insolvent undertakings), unless otherwise agreed. An interpretation that allows parties to contract out of such a transfer under section 197(2)(b) does not seem to be what the legislator intended, even if the wording of section 197 is so unfortunate as to imply such an interpretation. This will result in some undertakings being treated less favourably than others. This, in turn, results in the danger that employers may engage in sham transactions (for example, voluntary liquidation) in order to escape the more strenuous provisions of section 197(2)(a). It is submitted that the fact that terms and conditions can be negotiated afresh is sufficient to balance the sometimes conflicting interests of the undertaking, the transferee and the employees. The interpretation of the Court in Nehawu v UCT will also result in the axiomatic position that employees in an insolvent undertaking will enjoy a greater measure of protection than those employed by a solvent undertaking,787 which seems to be totally illogical, considering the economic merits of such peculiar regulation. It is quite clear from international experience that the transfer of employment contracts with existing rights and duties and continuity of employment cannot depend on the acceptance by the new transferee of such transfer or on the condition that the transferee and transferor negotiate that the transferee will take over the employees. This viewpoint has been advanced on occasion788 and does not have any regard to the purpose of section 197, namely that it is an employee protection measure.

786 See the discussion in chapter 13 of the often precarious position of employees in this regard. 787 As only these employees will enjoy the benefit of an automatic transfer of their contracts

according to the judgement. 788 E.g. see Nehawu v UCT.


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It appears that, in view of unsatisfactory and conflicting judgements, the legislator will have to amend the statutory provision to indicate clearly the legal effect of a transfer of an undertaking as a going concern. The other option, that our Courts may endorse a purposive approach in their interpretation, does not seem a viable or realistic probability at this stage.789 In this regard it is submitted that an automatic transfer of contracts should be effected in cases of both section 197(1)(a) and (b).790 The question of arriving at a contrary agreement and/or the power to object will now be considered.791

789 The LAC did follow such a purposive approach in Foodgro v Keil, but unfortunately the

judgement does not recognise the inherent power of an employee to object to the transfer of his/her contract in the event of the transfer of a solvent undertaking.

790 I.e. in transfers of undertakings in both solvent and insolvent circumstances. 791 See also chapter 8 on the amendment of existing rights and duties.

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7.4 The power to object 7.4.1 The existence of a right to object or a position where a worker is not

prevented from refusing to transfer On the international front, the interpretation of the Acquired Rights Directive792 was clouded by a political and legal controversy regarding the rights of workers whose employer decides (or perhaps is compelled by government policy) to contract out the provision of services, previously provided in-house, to an outside employer.793 The European Court of Justice delivered two very important judgements in this regard. The first of these was Katsikas Konstantinidis, and Skreg and Schroll v PCO Stauereibetrieb Paetz & Co Nachfolger Gmbh.794 This judgement was later followed by the judgement of Albert Merckx and Patrick Neuhuys v Ford Motors Belgium SA and others.795 The case of Katsikas illustrated the present problem very clearly: did the Directive compel an employee to transfer when the employing enterprise was sold or did the Directive merely create an option for the employee to transfer? In Katsikas the Court held that the Directive did not require the employee to take advantage of the transfer provisions if he/she felt that it was not in his/her best interest to do so. In Katsikas, in both the cases joined, the employees had refused to transfer to the new employer. The facts in this case were, briefly, that Mr Konstantinidis transferred his restaurant business to Mr Mitossis, but Mr Katsikas, a chef, refused to transfer and was dismissed by Mr Konstantinidis, against whom an action was then brought in the national Court. In the second case, the defendant company had transferred its cargo loading and unloading business to another company, but the plaintiff employees refused to transfer to the new employers and were dismissed by the transferor. The relevant national legislation was article 613a of the Civil Code, Germany. As shown earlier, the Federal Labour Court had interpreted article 613 (though silent on the point) as permitting the employee to object to the transfer of the contract to the transferee, resulting in the contract continuing with the transferor.796 Davies identifies two arguments put forward to support the decisions of the Federal Labour Court:797

792 Directive 2001/23/EC. 793 This matter was the subject of two articles by Davies P “Transfers again: contracting out

and the employee’s option” 1998 ILJ (United Kingdom) 151 and “Opting out of transfers” 1996 ILJ (United Kingdom) 247.

794 1993 IRLR 179 (ECJ). 795 1996 IRLR 467 (ECJ). 796 See par 7.2 supra. 797 Davies 1993 ILJ 158-159.


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• The first was that the interpretation of the German Court constituted a more favourable provision within the context of what was then article 7 of Directive 77/187/EEC,798 which provides that Member States may “apply or introduce laws, regulations or administrative provisions which are more favourable to employees”.

• The second was that article 3(1) of the Directive did not require an employee who was opposed to the transfer to have his/her contract transferred with the business.

The European Court of Justice accepted the second argument in a bold approach to ensure that other national jurisdictions had to reconsider their interpretation of and legal rulings on article 3 of the Directive.799 Davies opines that it is essentially a matter of choice versus protection. 800 Is an employee better protected by legal measures, which are mandatory and cannot be contracted out of, or must the law respect the employee’s freedom to choose? The commentator states that the former approach may either be regarded as paternalistic or as a proper expression of public policy, whilst the latter may be regarded as showing respect for the autonomy of the individual or as permitting the exploitation of the worker. Ultimately, this depends on one’s point of view and is therefore a highly political question. The former approach is, of course, fiercely criticised as it can amount to forcing the worker to work for someone he or she has not freely chosen.801 This leaves the Court with the dilemma of having to decide how far employees’ freedom of choice can be limited in order to protect them. In the Mikkelsen case,802 the European Court of Justice had held that “the protection which the Directive is intended to guarantee is however redundant where the person concerned decides of his/her own accord not to continue the employment relationship with the new employer after the transfer ...” and so resigns or

798 Now art 8 of Directive 2001/23/EC. 799 The Court had, seemingly, in the earlier case of Berg and Busschers v Besselsen 1988 ECR

2559 (ECJ), found that it was compulsory for an employee to transfer. In that case there had been a transfer of a bar from the defendant to a partnership, but the partnership failed to pay the plaintiffs’ salaries and so they attempted to hold the defendant liable for payments, even though these related to the period after the transfer. One way to attempt to do so was to allege that the transfer had taken place without their consent and that they had remained in the employ of the transferor. The Advocate-General stated that such an argument would frustrate the purpose of facilitating the mobility of undertakings while protecting the rights of their staff, if it was necessary to obtain the consent of all the employees concerned. In Katisikas this decision was viewed narrowly as one where the employees were not opposed to the transfer of their contracts but simply to the transfer of the contractual obligations that the transferor had undertaken towards them before the date of the transfer. In the Besselsen case the employees actually attempted to have their cake and eat it by holding both the transferee and the transferor liable.

800 1993 ILJ 159-160. 801 In this regard, see again Nokes v Doncaster Amalgamated Collieries Ltd 1940 AC 1014

(HL). See also par 7.3.4 supra . 802 1985 ECR 2639 (ECJ).

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terminates the employment by agreement before/from the date of the transfer. The European Court of Justice had also held in D’Urso803 that a collective decision to contract out of the Directive was not binding on individual employees who subsequently wished to transfer. Thus, where a union negotiated a favourable package for those employees whom the transferee did not want to take on and who, it was agreed, should remain with the transferor, the individual workers as plaintiffs, were held to be entitled to assert their right to transfer. The European Court of Justice based this finding on the argument that the implementation of the rights conferred on the employees by the Directive could not be dependent on the consent, either of the transferor, or of the transferee, or of the employees themselves, with the only exception that, as far as the employees were concerned, the possibility was open to them to make a decision (freely arrived at) not to continue the employment relationship with the new employer. Mikkelsen thus approached the issue from an individualistic point of view (i.e. the employee has to decide whether he/she wants to transfer or not) and d’Urso approached the issue on the basis that the protection conferred by the Directive could not be subject to the agreement of any of the parties involved, except for a decision freely arrived at by the employee.804 In Katsikas the Court favoured the individualistic approach and stated that an obligation imposed on the employee to work for the transferee “would cast doubt on the fundamental rights of the employee who must be free to choose the employer and who may not be compelled to work for an employer who has not been freely chosen”.805 This individualistic approach can, of course, lead to unintended results as the risks of the worker bargaining away his/her right to transfer for an inadequate consideration is surely greater in the case of bargaining by an individual than in the case of collective bargaining by a collective representative. Nevertheless, it is submitted that, having regard to the very personal choice that has to be made, this issue must of necessity be approached in an individualistic manner. It is perhaps also important to note that the European Court of Justice did not frame the finding as a positive right not to transfer; rather, it found that article 3 does not prevent a worker from refusing to transfer. The other relevant matter, that of Merckx and Neuhuys, involved two workers employed as salesmen by Anfo Motors, which held the Ford dealership for certain areas around Brussels. Anfo decided to close down and Ford assigned the dealership to Novarobel, an existing dealer in cars. Novarobel offered to take on fourteen of Anfo’s sixty-four employees, but the plaintiffs, who were among the fourteen, did not

803 D’Urso v Ercoli Marelli Elettromeccanica 1991 ECR 4105 (ECJ). 804 Davies opines that D’Urso followed a paternalistic approach (1993 ILJ 159-160). 805 Par 32.


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wish to transfer. Although they were to transfer on the same contractual terms, their actual remuneration depended on commission earned on sales and they did not believe that Novarobel would achieve the same level of turnover as Anfo had done. They thus refused to transfer and Anfo refused to provide them with work, resulting in an action for breach of contract, unlawful termination and various other issues regarding payments. It is interesting to note that, in this case, the employees argued in favour of a narrow interpretation of “a transfer” whilst the employer argued in favour of a broad one, so it could be rid of its troublesome employees. The Court upheld the employee’s refusal but did not compromise on the meaning of a transfer. The Court therefore acknowledged the employee’s power to object to the transfer of their contracts but did not limit its jurisprudence on the meaning of a relevant transfer as required in article 3. The Court accepted that such factual detriment may be sufficient cause to invoke the principles of article 4(2) regarding the substantial change of working terms to the detriment of the employee, resulting in the termination of the contract by the employer and not by the employee. 7.4.2 Consequences of a decision not to transfer The crucial issue to consider is, of course, the position of the worker who chooses not to transfer. This will more often be the case, it is submitted, when part of an undertaking is transferred. Since the European Court of Justice’s judgements were quite limited in scope, it does seem that the choice is not as simple as deciding to stay with the transferor or to go to the transferee. Since Member States are not obliged, in terms of the Court’s interpretation of article 3, to provide that the transferor continues the contract of employment or employment relationship, employees should be aware of the consequences of their choices.806 The position in the European Community can thus be described as follows:807

The directive does [not], in view of the fundamental freedom of labour the employee enjoys, require Member States to provide that the contract of employment or the employment relationship should be maintained with the transferor, in the event of the employee freely deciding not to continue the contract of employment with the transferee. Neither does the directive preclude it. In such a case , it is for Member States to determine the fate of the contract of

806 As no substantive right to object can be construed to exist on the basis of the ECJ’s

judgements. 807 Blanpain European Labour Law (2000) 402.

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employment or the employment relationship with the transferor. This means that, in cases that national law does not provide otherwise, the employee deciding not to continue the employment relationship with the transferee may still be bound by an employment contract with the transferor.

Three possibilities arise: the contract can simply continue with the transferor; the refusal to transfer can be regarded as a termination of the contract by the employer; or the refusal to transfer can be regarded as a termination of the contract by the employee. Most countries have opted for the third possibility, giving the employee the choice of going over to the transferee or resigning from employment.808 This state of affairs is not ideal and the employee who refuses is in the same helpless position as employees of an employer whose business is transferred by a purchase of shares in the employing company.809 However, in Merckx and Neuhuys, the European Court of Justice found in favour of the employees810 and based its decision on its interpretation of article 4(2) of the Directive. This article states that the employer will be regarded as having been responsible for the termination of the contract where the contract is terminated because the transfer involves a substantial change in the working conditions to the detriment of the employee. This decision meant that the position of an employee who objected to transferring had to be reconsidered. However, most Member States did not alter the legal regulation of such employees’ contracts that existed before Merckx and Neuhuys. The United Kingdom, for example, did not alter regulation 5(4B) that was enacted after Katsikas. Thus, where an employee objects to the transfer so that his/her contract is not transferred, that objection does not operate in such a way that the employee can be treated, for any purpose, as having been dismissed by the transferor.811 The employee can make his refusal known to either the transferor or transferee.812 813 808 E.g. the United Kingdom. 809 This has resulted in Davies raising the question of whether, if the right to refuse to transfer

does not entail the right to remain with the transferor, the employee’s right to refuse on the transfer of a business is not perhaps merely illusory, and whether the employee is, in reality, no better off than the worker who sees the employing company bought over his/her head (1993 ILJ 163).

810 See par 7.4.1 supra . 811 McMullen Business Transfers 6/17 states that “[t]he effect of an objection per se (without

ground on the part of the employee) is draconian.” 812 Reg 4(1). There is no particular method that must be used to inform either the transferor or

transferee of the objection to transfer. There is also no provision that an employee must be informed of the consequences of his/her objection.

813 In Senior Heat Treatment Ltd v Bell 1997 IRLR 614 (EAT) employees who were liable to be transferred were offered alternatives, which they accepted, and received redundancy payments from the old employer. The transfer took place and the individuals who had received redundancy payments immediately commenced new employment with the transferee. In a subsequent claim for unfair dismissal/redundancy payment with the new


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Germany, where the Katsikas matter originated, continued with the legal regulation that objection by an employee results in the contract remaining with the transferor. The contract is thus legally unaffected by the transfer. Since article 613a of the German Civil Code is silent on this issue, there is no need for an express declaration by the employee and it is thus often unclear whether the employee has objected or not. The objection can also be made towards either the transferor or transferee. It is furthermore uncertain whether the employee is entitled to exert the right to object after the transfer and this raises the question as to the stage at which the employee loses his/her right to object. These two diverging positions both have benefits and disadvantages. The United Kingdom position makes it clear that an employee/union can negotiate some consideration from the employers involved in the transfer, in exchange for the employees’ agreement to object to their transfer.814 This, however, does not add protection to the employee who objects and who would have been free to resign from his/her employer in any event, even if the principle of compulsory transfer had applied. The German position results in the objecting employee’s contract continuing with the transferor. In many instances, however, the transferor, now without the transferred business, will have no need for the employee concerned and dismissal based on economic grounds will thus often follow. At this stage, what the labour laws of the country concerned stipulate regarding dismissal is naturally of some importance. Unless the law on dismissal for operational requirements protects such employee from adverse selection, the German position will also be less than ideal.815 By interpreting and implementing article 4(2) in this quite wide manner, the European Court of Justice struck a balance between legal protection that might provide too much or too little protection to the objecting employee.816 It is submitted that, as a general

employer, the transferee tried to argue that the continuity of employment had been broken as they had objected to the transfer within the meaning of reg 5(4A). The EAT, however, refused to accept this argument, pointing out that if the individual entered into a contract of employment with the transferee to take effect immediately after the transfer, this was inconsistent with an objection to being employed by the transferee.

814 See Davies 1995 ILJ 253. 815 This could lead to unintended results. In Germany, an employer has to take social factors

into consideration when dismissing on economic grounds (e.g. family status, length of service, etc). This could result in the situation where an employee who objected to his/her contract being transferred (because of the social factors), could remain with the employer, while another employee who did not have the option of being transferred (e.g. not having been employed in the part that was transferred) is retrenched. Davies (1995 ILJ 253) remarks that this undesirable result has led to the Federal Labour Court restricting the access of objecting employees to the protection of the law relating to selection of employees for dismissal having regard to social factors, by insisting that the objector must have good grounds for the objection (Davies refers to a decision of the Court of 7 April 1993, 1993 Neue Zeitschrift für Arbeits- und Sozialrecht 796).

816 See also reg 5(5) of the TUPE regulations.

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rule, the reason for the employee’s objection to transfer will be relevant. In Merckx and Neuhuys, the European Court of Justice accepted the factual harm/detriment that the employees would suffer as a result of a reduction of commission, as sufficient to trigger the operation of article 4(2). The European Court of Justice considered that a change in the level of remuneration awarded to an employee is a substantial change in working conditions, even where the remuneration depends, in particular, on the turnover achieved. Hence, it can be concluded that the most beneficial outcome for employees would be where the legal result of an employee exercising his/her power to object is that the contract remains unaffected with the transferor. However, where this is not the case, the power to object, exercised due to a significant change in the employee’s working conditions to his/her detriment, should be interpreted widely so as to ensure that the objection is at least treated as a constructive dismissal and not as a resignation. If an objection to transfer817 is treated as a resignation, as is the case in the United Kingdom, the inherent nature of an employee’s power to object, being a personal choice with intrinsic value to the employee, is not recognised and adequate employee protection is not attained. 7.4.3 The power to object in South Africa As premise for this discussion, it is argued that the Constitution818 should be the starting point and not section 197 of the Labour Relations Act. This is not only because the Constitution is the supreme law of the country, but also because of the unfortunate wording of section 197 of the Act. Section 23 of the Bill of Rights guarantees every person the right to fair labour practices. The impact of this fundamental right on labour law cannot be overstated. Section 13 guarantees the right not to be subjected to slavery, servitude or forced labour.819 There is also a fundamental right contained in section 22 of freedom of trade, occupation and profession.820

817 Regardless of the ground for such objection. 818 Constitution of the Republic of South Africa 108 of 1996. 819 Devenish Commentary on the South African Bill of Rights 131-134 concludes that although

both servitude and forced labour are proscribed in most international human rights instruments, they are not defined in these instruments. He submits that although forced labour can take a variety of manifestations, it in essence involves work done without consent and without fair and just compensation. See par 7.3.4 supra for definitions of the concept of “forced labour”.

820 This right is conferred on citizens only (see Devenish Commentary on the South African Bill of Rights 303).


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As discussed earlier,821 it has been accepted for many decades that an employee does have an interest in the person for whom he/she works. This fact has been held to constitute the major difference between a servant and a serf.822 Our constitutional framework reinforces this idea by guaranteeing that all workers have a fundamental right to engage in gainful economic activity that is free and fair. It is submitted that a statutory provision that attempts to limit, unreasonably, an employee’s right to engage in such economic activity for the person of his/her choosing, would be unconstitutional. The only possible exception would be if the limitation could be shown to be contained in a law of general application and to be reasonable and justifiable in an open democratic society based on human freedom, dignity and equality.823 In the event of transfer provisions, the nature of these provisions makes it very difficult to accept that compulsory continued employment824 can be justified under section 36. These provisions are aimed at the protection of employees.825 The employee should therefore be free to choose to object to the transfer of his/her contract of employment to the transferee, if he/she feels that this is in his/her best interests. The consequences of such objection are another issue to be decided. It is thus submitted that compulsory transfer provisions, without the possibility for an employee of opting out, are unconstitutional, as they fail the essential requirement of being reasonable and justifiable.826 Investigation of whether the South African regulation of transfer of employment contracts is in conformity with our Constitution is therefore important. Section 197(1) provides that an employment contract may not be transferred from one employer to another employer without the employee’s consent, unless this occurs in the circumstances envisaged in section 197(1)(a) or (b). These circumstances pertain to the transfer of an undertaking or part thereof as a going concern. However, the section does not stop at that. Section 197(2) then provides that if an undertaking is transferred

821 See chapters 1 & 4. 822 According to Nokes v Doncaster. 823 S 36 of the Bill of Rights, the general limitation clause. 824 See the discussion in par 7.3.4 supra . 825 See chapter 1 and Foodgro, A Division of Leisurenet v Keil (LAC). 826 It has, for a long time, been accepted that a Court could not order specific performance of a

contract of employment. This was because of two reasons in particular (see Jordaan B & Rycroft A Handleiding tot die Suid-Afrikaanse Arbeidsreg (Juta 1994) 106-108; Rycroft & Jordaan A Guide to South African Labour Law (Juta 1992) 101-103), namely the absence of mutuality and, more importantly, “the inadvisability of compelling one person to employ another whom he does not trust in a position which imports a close relationship” (Schierhout v Minister of Justice 1926 AD 99 153). However, this position worked in favour of the employer as a dismissal could thus terminate employment albeit unfairly (see Brassey 1981 ILJ 57 discussed in par 7.3.4 supra). The refusal to order specific performance in most instances meant that an employee could not claim reinstatement or re-employment. It was later held that specific performance of a contract of employment was possible, on par with other contracts (Stewart Wrightson (Pty) Ltd v Thorpe 1977 2 SA 943 (A); NUTW v Stag Packings (Pty) Ltd & another 1982 4 SA 151 (T)). It is important to note that these judgements thus added to the protection of employees.

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under the circumstances described in subsections (1)(a) and (b), certain legal consequences follow, including the transfer of employment contracts with or without existing rights and obligations. This is the case unless otherwise agreed. An agreement to the contrary must be concluded with the suitable party, as indicated in section 189(1) of the Act. Depending on the interpretation of sections 197(1) and (2), it would seem that various possibilities arise: • If an interpretation similar to that of Nehawu v UCT is accepted,827 the potential

contrary agreement in section 197(2)(a) would pertain to whether or not the existing rights and obligations are transferred or not, and not to the transfer of the contract itself. Section 197(1)(b) and (2)(b) would then leave open the possibility that an agreement to the contrary can be reached, regarding not only the transfer of rights and obligations, but also regarding the transfer of the employment contract itself. This would thus mean that employees employed by a solvent undertaking, which is transferred as a going concern, would not have a right to object, whilst employees employed by an insolvent undertaking, or an undertaking under a scheme of arrangement etc., would have such a right to object.828 However, since the parties in section 189(1) of the Act are mutually exclusive (i.e. in the absence of a collective agreement if there is a workplace forum, consultation must take place with this forum rather than with the registered union, for example) the situation could exist where an individual employee who would like to object to the transfer of his/her contract under section 197(2)(b) would not be able to do so, as the registered union had agreed to the transfer of all contracts of employment. Even if the section is read to imply that the parties in section 189(1) are only mutually exclusive as far as an agreement to the contrary is concluded, this still leads to a potentially undesirable situation. In the event that a union agrees not to transfer, it seems that the individual employee who chooses not to exercise his/her right to object will be in the dilemma that the union’s agreement enjoys preference over his/her choice to continue with the transferee.829

827 S 197(1)(a) and (2)(a) results in the transfer of employment contracts, without the consent of

the employees, when the transferor and transferee so agree and all previous rights and obligations then continue.

828 This being the case on the supposition that there is indeed an automatic transfer of contracts.

829 This is possible because of the possibility of extending collective agreements in terms of s 23 and 32 of the LRA. It seems that, in Germany, neither a works agreement between a works council and the transferor, nor a collective agreement, can dispose of the automatic transfer of contracts. Even in the case of a trilateral agreement between the transferor, the transferee and the employee, the Federal Labour Court subjects such agreements to judicial scrutiny.


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• The second possible interpretation is similar to that in Foodgro v Keil.830 On this reading of section 197, section 197(2)(b) allows for the contracting out of the transfer of the contract of employment itself, but section 197(2)(a) does not. Under section 197(2)(a), the relevant parties may alter the terms of the transferred contract, but they cannot escape the fact of its existence.831 No right to object is therefore recognised under section 197(2)(a) for solvent undertakings, while the right to contract out of the transfer is allowed under section 197(2)(b). However, the nature of the regulation of parties envisaged in section 189(1) results in the same problematic conflict materialising, as discussed supra under the first model of interpretation.

• It thus follows that in South Africa the right to object is almost non-existent, no matter what interpretation is given to the effect of section 197. Hence, in the event of the transfer of a solvent undertaking, the position is the same as that which existed under the TUPE regulations before its amendment: automatic transfer of contracts with no right to object.

• Of course, the disgruntled employee can resign from the transferor before the transfer, but this results in absolutely no protection or compensation being available to him/her.

• In the event of the transfer of an insolvent undertaking, according to the Courts, there is an automatic transfer of employment contracts subject to an agreement to the contrary. This has been interpreted to imply the right to object as well.832 However, the consequences of such “right to object”, if not agreed upon by the employee and the transferor/transferee, are not currently regulated under South African law.

• It is submitted that the interpretations of the Courts to date are not correct. They are also not in conformity with our common law or with international or supranational law. It is further submitted that, when interpreting a statutory provision, it should be accepted that the common law should not be eroded more than necessary. Our common law position is clear in this respect – the consent of all three parties is necessary for the transfer of a contract.833 To accept a transfer of an employment contract without the consent of the employee and against his/her will, goes too far. A position where the consent of the new employer is negated is

830 Where it was held that an automatic transfer of contracts is foreseen in the event of a s 197

transfer (i.e. a transfer of a going concern), and the transferor and transferee cannot opt out of such transfer without the consent of the employees, except for s 197(1)(b) transfers.

831 1999 20 ILJ 2521 (LAC) 2528I-J. Conradie JA, in a separate judgement, held that the purchaser of the going concern is permitted to enter into entirely new employment contracts, destroying an affected employee’s continuity of employment under s 197(2)(b) (2531A).

832 It has been argued that such interpretation is regrettable. S 197(2)(b) refers to a contrary agreement regarding the transfer of rights and obligations.

833 Refer to chapter 4 supra for the common-law position.

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justifiable because of the inherent unequal relationship between the parties to the employment relationship and the protective nature of transfer provisions.834 Current case law of our Labour Courts does not properly appreciate the specific framework within which these protective provisions operate.

To date, our Labour Court and Labour Appeal Court have remained faithful to this unfortunate interpretation of the right to object under section 197, without considering the constitutionality of such an interpretation of the same.835 Reference can be made to only a few cases where the Court dealt with this matter.836 In some instances our Labour Court has had some interesting interpretations to offer. In Manning v Metro Nissan and others,837 the Labour Court held that the Act does make provision, in subsection 2(a) of section 197, for the parties (the seller and the purchaser) to contract out of the consequences of section 197 by the use of the phrase “unless otherwise agreed”.838 The Court stated that this would mean that there would have to be a specific agreement between the purchaser of a business, trade or undertaking as a going concern and a seller that the contracts of individual employees are not being transferred to the purchaser. The result of such an agreement, according to the Court, would be that the individual employees are dismissed by the seller, in which event the seller will be obliged to comply with the provisions of the Act to ensure that the dismissals are both procedurally and substantively fair.839 In the matter of SACWU v Engen Petroleum Ltd and another,840 the Labour Court had to consider a prayer for a declaratory order that the members of the applicant, who at that stage 834 See chapter 1 supra . 835 However, see Mirriam Kgethe & others v LMK Manufacturing (Pty) Ltd 1997 10 BLLR 1303

(LC) where Landman J said that he did not have to deal with the constitutionality of the exception in s 197(1) (acknowledging that there might be a constitutional problem with the particular provision of the LRA). In the appeal of this matter (1998 3 BLLR 248 (LAC)) the LAC did state at par 38 that “[I]f on the other hand no transfer as a going concern was effected, but the effect of all that transpired was a transfer of the contracts of employment of the appellants without their consent – and on the evidence that possibility cannot be excluded – such transfer would have fallen foul of the provisions of section 197. Again, if need be, the appellants could approach the Labour Court for the appropriate declarator.” Therefore, it seems that if no going concern had been transferred, consent is necessary to transfer employment contracts. However, the Court did not indicate what the position would be if a going concern had been transferred and no consent for transferring the contracts existed.

836 The approach of the LC and LAC in Nehawu v UCT and Foodgro, A Division of Leisurenet v Keil will not be discussed again. See par 7.3 supra . In Kissopersad Rugnath v A Timber Freight (Pty) Ltd & another Case No D 345/97, judgement of 22 May 1998, the LC implicitly accepted that contracts of employment can transfer in terms of s 197 without the employees even being aware of such transfer (par 3).

837 1998 19 ILJ 1181 (LC). 838 Par 43. 839 The Court did not consider that the reference to “unless otherwise agreed” in s 197(2)

envisages an agreement between the transferor/transferee and one of the parties in s 189(1), which will generally be the employees or their representatives.

840 1999 1 BLLR 37 (LC).


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were employed by the second respondent and who had been transferred in terms of an agreement reached between the first and second respondent, were entitled to the same redundancy benefits which formed part of their conditions of employment while still employed by the first respondent. The Court stated that:

I will assume that section 197(1) of the Act applies to this case even though a transfer of the contracts of employment took place with the consent of the affected employees.841

This dictum clearly indicates that the Labour Court considers section 197(1) to allow a transfer without the consent of the employees. In Fourie and another v Iscor Ltd842 the Labour Court held that:

Respondent could have compelled the applicants to transfer against their consent [sic]. Be that as it may respondent chose not to do so. It chose to give the applicants a choice to continue to be employed.… Respondent did, however, suggest that if an employee chooses not to transfer in these circumstances it would amount to a resignation.843

However, with regard to the consequences of such a refusal, the Labour Court did note that:

The Lifegro decision was a decision in terms of the old unfair labour practice jurisdiction and I do not believe it would be applicable to the new legislation. It may be correct that where an employee refuses to transfer to a new employer in terms of section 197 that the dismissal will not amount to a redundancy. However, I do not accept that it would amount to a resignation. It may amount to a refusal to work entitling an employer to dismiss.844

Section 210 of the Labour Relations Act provides that the Act will generally enjoy preference in the event of an apparent conflict between the provisions of the Act and another Act. Hence, in the event of conflict between section 197 of the Labour

841 Par 9. 842 2000 21 ILJ 2018 (LC). 843 2032I-2033A. 844 2033B. The Court referred to Young & another v Lifegro Insurance Ltd 1991 12 ILJ 1256

(LAC). In casu, there was no such problem as the applicants were specifically given a choice to transfer or to stay and face redundancy.

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Relations Act and the provision of any other law, section 197 will prevail – on account of section 210 of the Act. It was consequently held by the Labour Court that it was not necessary for a local council to obtain the consent of the employees concerned before transferring them to companies registered and incorporated by the council, even though the provision of the specific law applicable to local governments845 required the consent of employees in the event of a transfer.846 It is rather disappointing that, on several occasions, the Labour Court and Labour Appeal Court have considered the power to object and found, on the inopportune wording of section 197, that no such right/power exists.847 The Courts found this to be the legal position without referring to the constitutionality of the statutory provision interpreted in this way.848 7.5 Concluding remarks Provisions pertaining to the transfer of employment contracts and accompanying rights and obligations in the event of the transfer of an undertaking as a going concern, result in the automatic transfer of such contracts. An interpretation in terms of which such transfer is dependant on the consent of the transferor and transferee is untenable, having regard to the purpose and nature of these provisions. An issue such as the right to object shows the utmost importance of recognising the true purpose and nature of

845 S 17E of the Promotion of Local Government Affairs Act 91 of 1983. 846 IMATU & others v Greater Johannesburg Metropolitan Council & others ILJ 2037 (LC),

where it was held that s 210 prevails if there is conflict between the LRA and any other law. A section of the Promotion of Local Government Affairs Act 91 of 1983 was thus held to be inapplicable and the Labour Court held that the consent of the employees to the transfer was consequently not required (sic) and that the transfer was valid in terms of s 197.

847 See, however, the judgement of the LAC in Mzeku & others v Volkswagen S.A. (Pty) Ltd 1 st Respondent & others (Case no PA3/01, Port Elizabeth) where the Court considered the question (see par 74): why would the Labour Court or the arbitrator deem it appropriate to order reinstatement in a situation such as the one contemplated by this paragraph [s 193(2)(a) regarding reinstatement as competent remedy]? In the cases contemplated by each one of the three paragraphs, the LAC held that there does not appear to be any reason why the LC or an arbitrator could wish to order reinstatement. For example, par (a) is a situation where the employee does not wish to be reinstated or re-employed. The LAC held that “[i]n such a case the Labour Court or the arbitrator would be acting in a grossly unreasonable manner if it ordered reinstatement”. The LAC concluded that there was, accordingly, no reason to think that the legis lature would have intended to give the LC or an arbitrator a discretion to order reinstatement in a case where the employee does not wish to be reinstated.

848 The Labour Relations Amendment Bill, 2000, proposed a substantially new s 197, which contains no reference to the term “without the employee’s consent” that appears in the current s 197 (See also the amended s 197 in the Labour Relations Amendment Bill 2001). This might help the Courts to recognise the inherent right of every employee to object to transfer. The Labour Relations Amendment Bills of 2000 and 2001 are discussed in chapters 13 & 14 infra.


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provisions regulating transfer of employment contracts such as section 197 of the Labour Relations Act. As recognised by our Labour Appeal Court in Foodgro v Keil, the provisions of section 197 are primarily aimed at the further protection of employees.849 This being the case, it should be apparent that where an employee does not want to make use of this offered protection, he/she should, as a matter of public policy, not be forced to continue working for a person or an institution that he/she finds undesirable to work for. This is also the only way to approach statutory regulation of job security within our constitutional framework. The fundamental rights to fair labour practices, to freely exercise a trade, occupation or profession and the right against forced labour, strongly mitigate against the compulsory transfer of a personal contract such as an employment contract. Furthermore, an approach that disregards the consent or refusal of an employee to the transfer of his/her contract of employment, deviates from the common-law position more than necessary.850 However, certain conditions could be set within which an employee must exercise his/her choice. For example, it could be required that this option be exercised before the transfer takes place and that the employee must make his/her choice known to the transferor in writing (who must then inform the transferee). The consequences of an employee’s choice to object to the transfer of his/her contract to the transferee was the next issue to be considered. As discussed supra, there are many possible ways to regulate such objection. It could be treated as: • a resignation (then the employee would not be entitled to claim severance benefits,

since there has been no dismissal);851 • a dismissal (thus a constructive dismissal) if there was a good or reasonable reason

for the employee’s objection or even in the event of any objection, reasonable or otherwise.852 853 or

• the contract could continue unaffected with the transferor.

849 1999 20 ILJ 2521 (LAC) 2525D. 850 It is proposed that general principles of interpretation of statutes are applicable in this

regard. The rule that specific legislation, generally, goes ahead of general legislation, should also be considered more closely by our Labour Courts (see e.g. the judgement of IMATU).

851 See s 41 of the BCEA 75 of 1997. However, see chapter 12 infra in this regard. 852 See s 186(e) of the LRA. 853 See the proposed s 186 in the Labour Relations Amendment Bill, 2001, where the proposed s

186(f) stipulates that a dismissal also includes the circumstances where “an employee terminated a contract of employment with or without notice because the new employer after a transfer in terms of section 197 or section 197A provided the employee with conditions of work that are substantially less favourable to the employee than those provided by the old employer”. This still leaves unanswered the question of what happens to the contract of an employee who objects to transfer to the transferee because of such reduced terms and conditions, but who does not terminate his/her contract of employment.

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The possibility of a constructive dismissal would probably not be available due to the mere fact of the transfer of the employee’s contract.854 However, there may be good grounds for an employee to refuse to transfer. This could, for example, include the transfer of an undertaking to another undertaking known to be on the verge of insolvency. A more problematic example could be where the transfer would imply that the employee would have to transfer to another part of the country due to reorganisation planned by the transferee. This last example illustrates how difficult it is to evaluate the consequences of a power to object since, for example, the unfair labour practice definition in item 7 of Schedule 7 of the Labour Relations Act does not include transfer of employees to other locations within its scope. It is submitted that the Labour Court will need to develop even more precise criteria on when a constructive dismissal can be said to have occurred.855 Legislative reform might, alternatively, be necessary. If not, an employee will be uncertain about the consequences of his/her decision to exercise a right to object. In the Merckx case the employees retained all their contractual rights and the method of payment remained the same despite the transfer. Nevertheless, the European Court of Justice looked beyond the formal situation and concentrated on the practical effects of the transfer. In this case the organisational arrangements were such that it was likely that the employees would not receive the same levels of commission as before, and this was deemed sufficient for the application of article 4(2) of the Directive, despite the fact that there had been no formal change in the employment contracts concerned. The transferor could thus be deemed to have dismissed them. Be that as it may, as a first step, South Africa has to reach a principled policy and legal decision that an employee cannot be compelled to transfer his/her contract of employment to a transferee without his/her consent. Furthermore, the right to continue with the transferor (submitted as a preferable consequence of a refusal to transfer) or the right to object, should be the decision of the affected individual and not of some other party listed in section 189(1) of the Act. That hierarchical list of potential parties to an agreement might be suitable in the context of collective dismissals or dismissal for operational requirements, but it is submitted that it is utterly unsuitable for deciding on the issue of continued employment with a transferor.

854 A compromise of the principle enunciated in Nokes as to enable a regulation of job security,

which is fair to transferors and employees within an economic climate. 855 Our Courts and s 186(e) of the LRA require that continued employment must have been

made intolerable and not necessarily that the emp loyer must have breached the contract. See Unilong Freight Distributors (Pty) Ltd v Muller 1998 ILJ 229 (LAC); Pretoria Society for the Care of the Retarded v Loots 1997 ILJ 981 (LAC).


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Finally, attention must once again be drawn to the fact that a substantive right to object need not necessarily be found to exist.856 Still, it is submitted that constitutional principles will result in the fact that a worker who has recourse to refuse to transfer has essentially the same effect as if a right to the same did indeed exist. Certainly, a position where such objection is treated as a resignation should not suffice. South African law does not generally allow for the unlimited termination of employment contracts.857 Employers are, however, entitled to dismiss for operational requirements. Consequently, if it had not been for the transfer of his/her undertaking, a transferor would not have been able to get rid of employees without having a fair reason and following a fair procedure. If it is accepted that employees have an interest in whom they work for, and thus a power to object to the transfer of their contracts to a new employer, such employees should be entitled to remain with the transferor. This is the case until the employer terminates the relationship in accordance with general principles of the law of unfair dismissal.858 In the final analysis, it could thus be concluded that an employee who objects to his/her contract being transferred to the transferee, should be able to remain with the transferor for policy reasons as well as for the sake of legal certainty.859 If the objection is made on reasonable grounds, which have a wider scope than just foreseen breach of contract by the transferee,860 and the objection is treated as a constructive dismissal, the reasonableness of the objection would have to be evaluated. This can naturally be problematic and would result in much legal uncertainty. It thus seems more prudent to treat all objections, reasonable or otherwise, in a similar manner. It is submitted that it is altogether unsuitable to treat an objection as a resignation.

856 The existence of a right to object would definitely mitigate against a position where an

objection is treated as a resignation. 857 See s 188 of the LRA. 858 However, the employer will first have to try and accommodate the employee elsewhere, etc

(s 189). 859 It is, after all, the transferor who makes the decision (in most instances) to transfer the

undertaking. 860 This will result in employees being able, at least potentially, to object to a transfer due to

lesser pension arrangements, etc. even though the pension arrangements of the transferor need not be transferred to or continued by the transferee according to most instruments (e.g. the TUPE regulations & art 613a BGB). Thus, e.g., where an employee enjoys membership of a financially sound closed pension fund due to his/her employment with the transferor and employment with the transferee will not allow him/her membership of that fund, this position could be sufficient to qualify as substantial detriment and a constructive dismissal could thus be found to be present. See also chapter 10, par 10.3 infra.

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CHAPTER EIGHT

AMENDMENT OF EXISTING RIGHTS AND OBLIGATIONS AND WAIVERS

8.1 General The transfer of an undertaking as a going concern can result in employees being confronted with a new employer who prefers to do things differently than before. Work practices can be different than before and the conditions of employment of the transferee’s existing employees can be different from those of the transferred employees. Since an employment relationship is based on an employment contract, the legal ramifications of these differences and the possibility of agreeing to new terms and conditions of employment must be considered. Even though it is a principle of the law of contract that any contract can be varied by agreement between the parties, most legal provisions regulating transfer of employment contracts limit this seemingly wide-sweeping rule. This is because most provisions drafted on the same basis as, for example, the Acquired Rights Directive,861 entail the automatic transfer of rights and obligations that existed prior to the transfer to the transferee. This position, naturally, safeguards the rights of employees in the event of a change in the person or institution responsible for carrying on the undertaking. It follows that one needs to establish which rights, duties, obligations and liabilities are transferred in the event of a relevant transfer. The traditional legal rules pertaining to the variation of a contract of employment, can be set out as follows. Since a contract of employment is a contract like any other, one party to the contract cannot impose changes without the consent of the other party. Thus, if an employer wishes to bring about a variation, either the consent of the employee must be obtained, or the existing contract must be terminated subject to the period of notice required. After this, new terms can be offered, to commence immediately after the notice expires. Such is the common-law rule. If the employer indeed sought to impose a unilateral variation, the employee was afforded further protection in terms of common law and legislation, which could culminate in an action for breach of contract or an action for unfair dismissal. South African law prohibits unilateral amendments to employment contracts and also provides for the dismissal of an employee owing to the employee’s refusal to accept a

861 2001/23/EC.


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demand of an employer as being automatically unfair.862 Different options are available when regulating the transfer of employment contracts in this regard: • The first option is to prohibit all changes (whether these are connected to the

transfer or not) to the transferred employment contracts after the transfer for a certain period of time. However, this seems to limit, unduly, the fundamental principle of freedom of contract.

• A second option is to allow changes if not connected to the transfer, in other words to prohibit only those changes occasioned by a transfer.

• A third option is to allow all changes, including those prompted by the transfer, if agreement exists.

In the last scenario, it must be decided who the parties are between whom such an agreement should be reached. It must also be considered whether to allow all agreements or whether the beneficial or prejudicial effect thereof should play a role. It should again be cautioned that the amendment of existing rights and obligations connected to the employment relationship is a separate and distinct subject matter from the right to object to the transfer of one’s contract to a transferee. The latter has already been dealt with in this thesis.863 The amendment of existing rights and obligations and waivers must be decided as a matter of law and policy, and the rest of this chapter will approach the issue on this basis. The issue of what rights are transferred will first be considered. Secondly, the option of no amendments after a transfer will be considered. A distinction will be made between circumstances in which no amendments are allowed at all, and one in which no amendments connected to the transfer, are allowed. Thirdly, the possibility of allowing all amendments will be considered. Here a distinction will be made between amendments connected (or not connected) to the transfer, the occurrence of unrestricted amendments or amendments allowed only after the lapse of a certain period. The issue of less beneficial arrangements must also be addressed. A comparative perspective will be included. 8.2 What individual rights and obligations are transferred? The Acquired Rights Directive 2001/23/EC provides that the transferor’s rights and obligations arising from a contract of employment or from an employment 862 See s 64(4) & s 187(1)(c) of the LRA 66 of 1995. 863 See chapter 7 supra .

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relationship existing on the date of a transfer,864 are automatically transferred to the transferee.865 Hence, at European Community level “all rights, powers, duties or liabilities under or in connection with the contracts” are transferred.866 This not only includes common law contractual rights but also statutory rights that apply as a result of the employment relationship.867 As far as collective agreements are concerned, it is only the normative part of such an agreement that transfers.868 As the transferee becomes liable for anything done prior to the transfer by the transferor, it thus results in the transferee being liable in relation to liabilities incurred years earlier, subject to any normal prescription period that may apply.869 This is accordingly also the position in the United Kingdom and Germany and individual and statutory rights, which have become effective against the transferor before the transfer, are transferred to the transferee.870 For example, if prior to a transfer, the transferor dismisses a person under German law, contrary to the Act on Protection against Dismissal, the statutory rights (including compensation, etc) resulting from the dismissal transfer to the transferee. However, if the transferee dismisses an employee after the transfer and the transferee is not covered by the Act on Protection against Dismissal, for instance if only three employees are employed by the transferee, the employee will have no claim against the transferee. In the United Kingdom the following matters are believed to transfer to a transferee:871

864 Foreningen af Arbejdsledere I Danmark v Danmols Inventar 1985 ECR 2639 (ECJ). 865 Art 3(1). However, provision may be made for joint and several liability of the transferor and

transferee. In Berg and Busschers v Besselsen 1988 ECR 2559 (ECJ) the Court stated that: “Art 3(1) of Directive 77/187 … must be interpreted as meaning that after the date of transfer, and by virtue of the transfer alone, the transferor is discharged from his obligations arising from the contract of employment or the employment relationship … subject however to the power of the Member States to determine that the transferor and transferee should be severally liable after the transfer”. Under reg 5 of the TUPE reglations, the Court of Session in Allan v Stirling District Council 1995 IRLR 301 held that it could not be said that the transferor was jointly liable with the transferee.

866 Elias & Bowers Transfer of Undertakings 43. 867 Regarding liability for dismissals prior to the transfer, see chapter 5, par 5.2 supra & chapter

12 infra. 868 See chapter 9 infra. See also Barnard EC Employment Law 480-481. 869 See Barnard EC Employment Law 476-478. 870 Reg 5(2)(a) of the TUPE regulations provides that the transferee inherits all the transferor’s

“rights, powers, duties and liabilities under or in connection with” the contracts of employment. Reg 5(2)(b) makes it clear that anything done by the transferor in respect of a contract is deemed to have been done by or in relation to the transferee. In Bernadone v Pall Mall Services Group & others 1999 IRLR 617 the High Court held that it was irrelevant whether the liability arose out of contract, tort or breach of statutory duty, as reg 5(2) is wide enough to cover the transfer of all such liabilities. The CA went further and held that in circumstances where the transferor has effected an employer’s liability insurance policy, the insured employer’s right to indemnity under the insurance policy was also transferred to the transferee. Criminal liability does not transfer (see reg 5(4)). See also chapter 10, par 10.2.4 infra.

871 McMullen Business Transfers and Employee Rights 7/34.


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• All contractual liabilities in relation to employees arising under or in connection with the contract of employment;872

• most statutory employment rights;873 • liability to an employee for personal injury; • possibly, liability to an employee for non-payment of a protective award under the

Trade Union and Labour Relations (Consolidation) Act, 1992 (TULR(C)A);874 • credit for an amount paid on account of redundancy within the meaning of the

Employment Rights Act, 1996 (ERA) s 122(4);875 and • the benefit of a trial period promised by a transferor in respect of new employment

with the transferee. It should be added at this stage, that:

an employee cannot waive the rights conferred upon him by mandatory provisions of Directive 77/187 [as it then was] even if the disadvantages resulting from his waiver are offset by such benefits that, taking the matter as a whole, he is not placed in a worse position.876

In South Africa, section 197 applies the transfer principle to all “rights and obligations between the old employer and employee at the time of the transfer”.877 All rights (and obligations) that can be found in the contract of employment are therefore certainly covered.878 It is clear that seniority rights are not affected by a transfer, as section

872 This would include normal terms and conditions of employment, so-called “golden

parachute” clauses in senior executives’ contracts (e.g. for compensation on dismissal etc), contractually enhanced severance or redundancy payments (where these entitlements are contractual, i.e., where an employee had expected to receive enhanced payments but he/she was not contractually entitled to them, the transferee did not have to make the enhanced payments, see Quinn v Calder Industrial Materials Ltd 1996 IRLR 126 (EAT)).

873 Including accrued redundancy service, continuity of employment, eligibility for sex and race discrimination protection and the right to return to work after maternity leave under the ERA 1996 – McMullen Business Transfers 7/36. Harvey (Harvey on Industrial Relations and Employment Law F/69) shows that even though continuity of employment is “neither a right in the employee nor a liability in the employer”, it is “a calculation, nothing more”. However, even if the regulations are not effective to preserve continuity, then continuity will be preserved in terms of the ERA, 1996 s 218.

874 McMullen Business Transfers 7/37. 875 McMullen Business Transfers 7/37-7/38 states that “this may reduce a basic award for

unfair dismissal for which a transferee is liable, the transferor taking the benefit as it were, of the previous payment made by the transferor”.

876 See Grigorios Katsikas et al v Angelo Konstantinidis et al 1992 ECR 6577 (ECJ) & Blanpain European Labour Law (2000) 402. See also Nielsen European Labour Law 335.

877 That is to say if it is a solvent undertaking that is being transferred, s 197(2)(a) LRA. 878 It is arguable that it is only terms and conditions of employment (and not work practices)

that are relevant under s 197’s scope. The essential nature of a job is determined by the terms and conditions of employment and not necessarily by work practices (that is, the method of performing work - see A Mauchle (Pty) Ltd t/a Precision Tools v National Union

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197(4) states that a transfer referred to in section 197(1) does not interrupt the employee’s continuity of employment: that employment continues with the new employer as if with the old employer.879 Furthermore, rights that are deemed to be part of the contract are also included.880 The Basic Conditions of Employment Act 75 of 1997 incorporates certain provisions regarding terms and conditions of employment into every contract of employment of every worker in South Africa.881 This Act provides that a basic condition of employment constitutes a term of any contract of employment except to the extent that:882 • any other law provides a term that is more favourable to the employees; • the basic condition of employment has been replaced, varied, or excluded in

accordance with the provisions of the Act; or • a term of the contract of employment is more favourable to the employee than the

basic condition of employment. Section 5 patently states that the Act is not affected by agreements883 and takes precedence over any agreement, whether entered into before or after the commencement of the Act. Variation of terms is allowed by means of individual contracts of employment,884 collective agreements885 and bargaining council

of Metalworkers of SA 1995 ILJ 349 (LAC)). Where a change did not constitute an alteration of employees’ contractual rights, such as where a discretionary bonus was granted, it has been found not to constitute a unilateral amendment of the contract of employment (NUMSA v Iscor 1992 ILJ 1190 (IC)).

879 See also FAWU v Royal Salt (Pty) Ltd 1997 BLLR 434 (CCMA), Deppe v Bauhaus Confectionary 1997 ILJ 818 (CCMA) & Foodgro, a Division of Leisurenet Ltd v Keil 1999 ILJ 2521 (LAC).

880 See s 23(3) LRA & s 4 BCEA. See also SACWU v Engen Petroleum Ltd 1998 ILJ 1568 (LC) 1572A-B.

881 S 3 excludes the following employees from the BCEA’s scope: members of the National Defence Force, the National Intelligence Agency and the South African Secret Service, and unpaid volunteers working for an organisation serving a charitable purpose.

882 S 4. 883 Three possibilities exist: an individual agreement, a collective agreement at plant level, or a

bargaining council or statutory council agreement. S 1 of the BCEA provides that “agreement” includes a collective agreement.

884 S 49(3). See Olivier MP “Die grense van die dienskontrak verken: die ordening van arbeids- en sosiale sekerheidsreg” 1999 TSAR 754 761-763. See also Olivier MP “The regulation of labour flexibility and the employment relationship: paradigm shifts on the horizon?” 1998 TSAR 536 543 where he states “[t]he premise on which the act is based, is that a statutory minimum floor of rights is provided for by the act. Deviations are in many instances possible, although in some respects the permissible ambit of these deviations is statutorily prescribed. A closer reading of the new Basic Conditions of Employment Act reveals that the individual employer’s power or prerogative to introduce these arrangements unilaterally is almost non-existent (see s 49(3), read with the limited number of provisions of the act which allow for deviation through an agreement between the individual employer and employee)”.

885 S 49(2). A collective agreement is defined in s 213 of the LRA (see chapter 9 infra). Collective agreements concluded at plant level are subject to the provisions of a collective agreement concluded in a bargaining council (see s 49(4)) and may only replace or exclude a basic condition of employment to the extent permitted by the BCEA.


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agreements.886 Some terms can only be varied by the Minister of Labour.887 In all these instances the Act proscribes certain limitations on the extent of variation,888 and the appropriate body entitled to vary specific rights.889 It thus seems that all rights connected to the employment relationship are transferred, as no requirement is posed that these rights and obligations must originate in the employment contract.890 The transfer of collective rights and obligations will be considered at another stage.891 It can thus be stated that irrespective of the source of a right or obligation between old employer and employee, it will transfer to the transferee, subject to the condition that it is relevant to the employment relationship and thus capable of being applicable between the new employer and employee. Certain individual rights and obligations, inter alia restraints of trade, share options, bonuses/profit sharing, social security contributions, pensions, criminal liabilities and vicarious liability, are more problematic.892 8.2.1 Restraints of trade An employer and employee can contractually agree that the employee, after he/she has left the service of the employer, may not do the same work elsewhere within a certain period of time and/or within a certain radius. In this way competition, is prohibited or limited. Such a prohibition or limitation originates contractually and is not a term implied in the contract of employment by common law. The contractual restraint of trade must therefore be distinguished from the employee’s common-law obligation not to compete with his/her employer (resulting from the employee’s duty to act in good

886 S 49(1). Sectoral agreements may alter, replace or exclude any basic condition of

employment. See Olivier 1998 TSAR 544 where he states that this is, however, subject to at least two qualifications: firstly, the agreement must be consistent with the purpose of the BCEA and, secondly, the agreement may not reduce or be in conflict with the protection of certain core rights provided for by the Act. These core rights include: a 45-hour working week, the protection afforded to employees performing night work, the prohibition of forced labour and of certain kinds of child labour, and regulations issued by the minis ter to regulate hours of work for health and safety reasons (s 49(1)).

887 S 50. 888 S 49(4) stipulates that “[n]o provision in this Act or a sectoral determination may be

interpreted as permitting – (a) a contract of employment or agreement between an employer and an employee contrary to the provisions of a collective agreement; (b) – a collective agreement contrary to the provisions of a collective agreement concluded in a bargaining council”.

889 Olivier (1998 TSAR 544) states that the cumulative effect of this regulation is “ that the future growth of real flexibility in the areas by the act may be hampered, as the levels at which flexibility is normally introduced, namely at plant and individual level, have little actual power to initiate and introduce flex ibility arrangements”.

890 Regarding statutory rights, see also chapter 9, par 9.5 infra. 891 See chapter 9 infra. 892 See Elias & Bowers Transfer of undertakings 43-48.

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faith).893 In Magna Alloys and Research (SA) (Pty) Ltd v Ellis,894 the Appellate Division laid down a number of important principles regarding restraints of trade. Such a prohibition or limitation is thus prima facie valid and enforceable, unless it is contrary to the public interest. The Court would have to have regard to the circumstances existing at the time when it is asked to enforce the restriction.895 The Court also accepted that it has the jurisdiction to partly enforce the restraint of trade, where it would otherwise be held to be unreasonable. It thus seems as if restraints that were reasonable when being applied to the transferor, might be unreasonable, and therefore unenforceable, when being applied to the transferee.896 For example, a universal occurring restraint stipulates that the employee may not solicit customers of the employer. Where the transferee is a large firm with a much broader client base (perhaps even nationwide), the question arises as to whether or not the restraint will still be reasonable. A further question concerns the issue of to whom the duty not to solicit customers is owed.897 If it is owed to the company of the old employer, it can ostensibly only transfer if the undertaking or part of the undertaking that is transferred retains its identity and it is not merged with the business of the transferee to such an extent that it is undistinguishable. This applies, unless, of course, it is argued that the duty will transfer in any event as it was an obligation that existed between the employee and the old employer at the time of the transfer. 8.2.2 Share options, bonuses and profit sharing

893 Unlawful competition. 894 1984 4 SA 874 (A). 895 The question is whether a contractual limitation on freedom of trade is legal and enforceable

due to s 22 of the Constitution, which stipulates that every person shall have the right to freely engage in economic activity. The Court decided in Waltons Stationery Co (Pty) Ltd v Fourie 1994 1 BCLR 59 (O) that the principles regarding the enforceability of restraints of trade as formulated in the Magna Alloys and Research decision still reflect the present legal position and are binding. Restraints of trade therefore do pass constitutional muster. See also Coetzee v Comitis & others 2001 ILJ 331 (C).

896 See McMullen Business Transfers 7/46-7/47. He states that: “In England, however, it has certainly been assumed that a restrictive covenant in principle at least can transfer. But again, we return to the question of whether it can survive the transfer process on its wording”.

897 See Morris Angel & Sons Ltd v Hollande 1993 IRLR 169 (CA) where the wording of the covenant was in effect re-wrote by the Court to mean that the plaintiff could enforce the covenant if within one year of the date on which they dismissed him (immediately after the transfer in casu) he did business with the persons who in the previous year had done business with the undertaking transferred and not with persons who in the previous year had done business with the transferee. Thus it was considered that that reg 5(1) required the covenant to be read as if it was retrospectively concluded between the transferee and the employee.


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Employees are often given the right to purchase shares of their employing company directly from that employer on potentially favourable terms. Sometimes this right even forms part of the employee’s total remuneration package. Such right will certainly qualify as a right (and obligation on the employer) in terms of the contract of employment or in relation to the employment relationship. In principle, the right must thus transfer in the event of a relevant transfer of the undertaking. It is, however, difficult to foresee how such right will be enforced against the transferee. Firstly, this will only be possible if the transferee is a publicly listed company with available shares.898 Secondly, this seems to be a right that is exercisable against the transferor only in terms of a closed scheme requiring employment with that transferor. In the United Kingdom, reference can be found to a case where an employee who was transferred under the TUPE regulations and who had a right to exercise share options against the vendor, did not, after the transfer, seek to assert that the right had transferred to the purchaser and instead claimed that he was entitled to exercise the option against the transferor within six months if dismissed for redundancy within the meaning of the Employment Protection (Consolidation) Act, 1978 (EPCA). The employers alleged that, as he was transferred, he did not cease to be employed by reason of redundancy. However, the Court of Appeal rejected this argument of the employer and was influenced by the fact that the share option agreement was a separate and independent contract from the contract of employment.899 It is uncertain what the result would have been if this had been a right conferred by the contract of employment itself. Rights to a bonus or to profit sharing certainly qualify as rights (and concomitant obligations) subject to transfer.900 However, this can be problematic where the bonus is, for example, connected to the turnover of the company or to profits made. This may result in an unsuitable result when being applied to the undertaking of the transferee.901 In South Africa, an agreement can be reached to the contrary. However, it is submitted that this agreement should not be less favourable to the employee than the original term was.902 8.2.3 Contributions to social security schemes, tax, etc

898 Public companies, contra to private companies, create the opportunity for the general public

to buy shares of that company. 899 Chapman and Elkin v CPS Computer Group plc 1987 IRLR 462 (CA). 900 See also McMullen Business Transfers 7/50. 901 It appears that share option schemes, or group share option schemes will have to be drafted

to provide that, in circumstances where the employees are no longer employed by the company, such options would lapse.

902 See the discussion infra in par 8.4.2.

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Employers are obligated to deduct tax from employee’s remuneration, as well as to make contributions to, inter alia, the Unemployment Insurance Fund, etc. Where the transferor has failed to make these deductions and contributions, those claims that an employee might have against the transferor due to his/her failure, will transfer to the transferee.903 However, transfer provisions do not cover rights of third parties and the transferee is thus not liable to compensate the Receiver of Revenue, for example. Furthermore, any failure of the transferor that constituted a criminal offence is also not capable of transferring to the transferee.904

903 See chapter 10 infra. 904 See par 8.2.5 infra .


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8.2.4 Pensions Only rights and obligations between employer and employee are transferred. Consequently, where an employer has its own pension fund, those rights could well be covered. However, an independent fund does not involve rights that are subject to transfer in terms of section 197 as such.905 8.2.5 Criminal liability Generally, no criminal liabilities are transferred. An employer who breached health and safety legislation prior to a transfer thus remains criminally liable. Section 197(5) of the Labour Relations Act expressly provides that “the provisions of this section do not transfer or otherwise affect the liability of any person to be prosecuted for, convicted of, and sentenced for, any offence”.906 8.2.6 Delictual liability In the United Kingdom, it has been suggested that the transferee does not acquire the transferor’s vicarious liabilities towards third parties “except in so far as he is vicariously liable for the torts committed by one employee of the vendor to another”.907 This is because the TUPE regulations preserve employees’ rights and not those of a third party. In South Africa, Du Toit et al state that the expression “rights and obligations between the old employer and each employee” in section 197(2)(a), “would seem to be all-encompassing and should include claims arising not only from the contract of employment but also from unlawful conduct or alleged unfair labour practices committed by the old employer”.908 It has already been alluded to that the origin of any right or obligation between employer and employee is irrelevant.909 It is submitted that delictual liabilities that exist between employer and employee at the time of the transfer are subject to the principle of transfer. However, this does not include any liability of the employer towards third parties. In principle, it seems implicit

905 See chapter 10, par 10.3 regarding supplementary social insurance schemes infra. 906 The Labour Relations Amendment Bill, 2001 does not change this position. 907 Elias & Bowers Transfer of Undertakings 48. 908 Labour Relations Law 400. 909 See par 8.2 supra.

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that any delictual claims that the transferor might have had against an employee prior to a relevant transfer must then also be capable of transferring to the transferee.910 8.3 Prohibition of changes to contracts of employment due to a transfer 8.3.1 A comparative perspective The Acquired Rights Directive has been interpreted to provide that no changes may be effected to employment contracts before, during or after a relevant transfer due to the transfer.911 This was also the decision of the Employment Appeal Tribunal in Wilson v St Helens Borough Council.912 In this case, a community home controlled by Lancashire County Council was transferred to St Helens Borough Council. It was accepted that the TUPE regulations applied to this transfer. For up to eighteen months after the transfer, the employees worked under new contracts with reduced salaries. Ultimately, the employees instituted claims (under the Wage Act of 1986, United Kingdom) for recovery of alleged unlawful deductions from their wages. The only basis for their claim to succeed was that the variation to the employees’ contracts had not been effective. They thus relied on regulation 5(1) of the TUPE regulations, and article 3(1) of the Acquired Rights Directive. Regulation 12 of the TUPE regulations makes it clear that it is not possible to contract out of the effect of regulation 5. The employer relied on the common-law argument that due to the employees’ continued performance of services, their contracts had validly been varied. The Employment Appeal Tribunal relied on a passage of the European Court of Justice in the Daddy’s Dance Hall case,913 where the European Court of Justice held that employees are not entitled to waive their rights conferred on them by the Directive and that it is not permissible to diminish these rights even with their consent. However, the European Court of Justice held that the Directive did not preclude alterations in the working relationship agreed to with the new proprietor in so far as the applicable national law permits such alterations in cases other than transfers of undertakings. The Directive’s protection (based on that interpretation) was mandatory and independent of the will of the parties. The Employment Appeal Tribunal therefore found even a 910 Transfer provisions often stipulate joint and several liability for transferors and transferees,

regarding claims that arose prior to the transfer and that may be limited to a certain period after the transfer.

911 See Foreningen af Arbejdsledere I Danmark v Daddy’s Dance Hall AS 1988 ECR 739 (ECJ). 912 1996 IRLR 320 (EAT). 913 1988 IRLR 315 (ECJ). In this case the employee’s contract differed from his previous one in

that his remuneration was to be in the form of a fixed wage rather than commission, and, at his request, a three-month trial period was included during which either party could give 14 days’ notice.


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consensual variation to be ineffective where the operative reason for it was the transfer. The important qualification in Daddy’s Dance Hall that the prohibition was not to extend to changes permitted by national law “in cases other than transfers of undertakings”, was reiterated by the European Court of Justice in Rask & Christensen v ISS Kantineservice A/S.914 The judgement of Wilson was subjected to fierce criticism on the basis that changes to terms by consent, which both transferor and transferee can implement in the absence of a transfer, should fall within the exception to the Daddy’s Dance Hall principle.915 However, in the United Kingdom, other judgements also saw the light following Wilson. In Credit Suisse First Boston (Europe) Ltd v Padiachy and Others,916 the Queen’s Bench Division held that irrespective of whether or not renegotiated employment terms, entered into as the result of the transfer of an undertaking, put employees in as good as or, on the balance, a better position than they had previously enjoyed, such terms could not be enforced by the Court because of the Acquired Rights Directive. The three defendants had worked for the investment bankers Barclays De Zoete Wedd (BZW). As a result of the takeover of BZW by the plaintiff, their terms and employment had been changed. Some of the new terms were better and some worse than their previous arrangement. One term was that they should not offer their services to a competitor until three months after they had stopped working for the plaintiff. After agreeing to the new terms, the defendants resigned from their positions with the plaintiff and all of them went to work for Morgan Stanley Dean Witter, one of the plaintiff’s rivals. This was done within the three-month period. The Court held, with reference to Daddy’s Dance Hall, that the employee cannot waive the rights conferred upon him/her by the mandatory provisions of the Directive, and that employee rights were thus preserved after a transfer. The Court also referred to the exception acknowledged in Daddy’s Dance Hall as set out above. The Court, however, did not think that a Court either could or should start to weigh the competing advantages and disadvantages of new terms of employment917 that had arisen by reason of the transfer of the undertaking.

914 1993 IRLR 133 (ECJ). In this case the complaint was that the monthly pay date was changed

from the last Thursday in the month to the last working day of the month. The employees also complained about the make up of their pay as they no longer received allowances for laundry or for shoes which constituted a part of their pay, although it was not disputed that the total amount of their salary payment was unchanged.

915 See e.g. Wynn-Evans C “The Acquired Rights Directive and changes to contracts of employment” 1996 ILJ (United Kingdom) 230-234.

916 Reported in The Times 16 July 1998 (judgement handed down on 16 June 1998, reported in 1998 IRLR 700).

917 See a lso par 8.4 infra.

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In the matter of Meade and Baxendale v British Fuels Limited,918 a different division of the Employment Appeal Tribunal endeavoured to distinguish Wilson by a majority. Here, again, there was a claim by a person who had been dismissed by the transferor and re-employed on less beneficial terms to which he had consented. Two years later he sought a declaration from the industrial tribunal (under what is now section 11 of the Employment Rights Act, 1996) as to the terms and conditions of his employment. Like the applicants in Wilson, he argued that any variation in these terms was ineffective because of regulation 5(1) of the TUPE regulations. This time, the Employment Appeal Tribunal held that a dismissal for a reason connected with a transfer, although automatically unfair, was not a nullity.919 The employment with the transferor had therefore been effectively brought to an end and the transferee was free to re-employ on any basis he/she chose. Wilson was distinguished on the basis that the Employment Appeal Tribunal had not considered the effect of the dismissals and redundancy payments upon their finding that the variations were ineffective (even though the facts in Wilson were very similar, all teachers having been dismissed before accepting new contracts). Nevertheless, the Employment Appeal Tribunal went on to hold that, in the absence of a dismissal, the principle set out in Wilson would hold good. The House of Lords, in the combined appeals in Wilson v St Helens Borough Council and Meade and Baxendale v British Fuels Ltd heard both these cases.920 However, before this, the Court of Appeal gave its ruling on the combined appeals in relation to these matters.921 In the Court of Appeal ruling it was held that the Wilson case was decided on the wrong facts. There had been no agreed variation of terms and conditions. Rather, the teachers who transferred from the County Council to Borough Council had been dismissed by the first on the grounds of redundancy and the Borough Council had then offered new contracts. Assuming Wilson to be a dismissal case, Daddy’s Dance Hall was thus irrelevant. The dismissal was held to be connected to the transfer, but on the facts it was held to be for an economic, technical or organisational reason. The dismissals were thus not automatically unfair under regulation 8 of the TUPE regulations. The new contracts were therefore regarded as valid. In Meade and Baxendale, no economic, technical or organisational reason for the dismissal had been found by the Industrial Tribunal. The Court of Appeal went further and not only held that such dismissals were automatically unfair under the TUPE regulations, but that transfer connected dismissals, which were not for the above reasons, were prohibited under the Directive. In this case, although the individuals had

918 1996 IRLR 54 (EAT). 919 The EAT held that Litster v Forth Dry Dock & Engineering Ltd 1989 IRLR 161 (HL) did not

decide that a pre-transfer dismissal was ineffective as such. 920 1998 IRLR 706 (HL). 921 1997 IRLR 505 (CA).


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been dismissed in the context of a transfer process, they could therefore subsequently claim to return to their former terms and conditions of employment because their dismissals had been ineffective. The dismissals were a nullity. The House of Lords delivered its opinion in these matters on 29 October 1998. In the Court of Appeal decision the issue of the validity of an agreed change in employment terms had already effectively disappeared from the litigation.922 Thus, in the House of Lords, because there had been dismissals in both Wilson and Meade, the main issue to be decided was the effect of a dismissal and not an agreement contrary to regulation 8.923 It can therefore be stated that the law on the validity of an agreed change of terms and conditions of employment is still as contained in Daddy’s Dance Hall and as applied in Wilson. Hence, an employer may agree to a change in the terms and conditions of employment after a TUPE transfer, but if the reason for that change is the transfer itself, the change will be invalid. The House of Lords did stress, in obiter remarks, that an employer who had a reason for the change (other than the transfer) would validly be able to change terms and conditions. However, it was also recognised that it would be very difficult, in practice, to draw a line between when a change is because of a transfer and when it is not.924 What then is the present law on variation of contracts of employment? The following summary gives an explanation of European Community law (thus also applicable in the United Kingdom and Germany):925 • An employer may effect a change in the terms and conditions of employment by

dismissing employees and offering new contracts. However: o An employer will have to give full contractual notice and honour existing terms

of employment during that notice period. o The termination will necessarily give rise to a dismissal, which will be

automatically unfair in the vast majority of cases because it is not normally possible to show an economic, technical or organisational reason entailing changes in the workforce where the same workforce is required in terms of numbers.926 Dismissal will thus often be an expensive option due to statutory regulation of unfair dismissal.

922 See McMullen J “TUPE: waiver of employment rights and contract changes after Wilson”

1999 ILJ (United Kingdom) 76 80-81. 923 This issue will be discussed infra in chapter 12. 924 McMullen cautions that one should not confuse the availability of an economic, technical or

organisational defence to a dismissal in connection with a transfer and the question of whether the reason for the variation was the transfer itself (as seemingly done by the House of Lords in par 93 of the judgement). The question of whether only a variation, which is solely by reason of the transfer, will be tainted was not considered. See McMullen 1999 ILJ 81.

925 Refer to McMullen 1999 ILJ 81-82. 926 See chapter 12 infra.

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o If an employer takes the more civilised route of trying to agree to the change in the terms and conditions of employment this will be invalid if the reason for it is the transfer.927

• An employer must focus on whether there are other reasons for the change besides the transfer itself.928

The above position also applies in Germany. No changes because of the transfer are therefore allowed. A dismissal to change working conditions is also banned under article 613a(4) BGB and will be void. Furthermore, a works council must be consulted in relation to every dismissal to change working conditions and/or terms of employment.929 This summary, however, pertains only to the legal position in the European Community due to the Acquired Rights Directive. As will be seen, the regulation of this issue in South African law differs quite considerably. 8.3.2 Criticism against a prohibition on changes of contracts due to a transfer Some general arguments that can be brought against the position that no changes are allowed when connected to a transfer, include the following: • One can question why an employee can validly refuse to transfer to a transferee, but

cannot agree to a change in employment terms under an amended/new contract. • As a matter of policy, it must be considered whether some employees are not

afforded greater protection than other employees, depending on whether a relevant transfer is in question or not. If an employer were able to use a lock-out, for example, to obtain agreement to a proposed change from his/her employees, it seems that the employer will not be able to do so in the circumstances of a transfer. There thus seems to be a position where employment rights are augmented over and above the rights that apply in general law.

• Since transfers of contract provisions generally do not cover take-overs by means of the sale of a majority of shares, the anomaly seems to be even greater.

927 See Daddy’s Dance Hall and Wilson for authority. 928 For example, was the process of change underway with the transferor and would the same

have occurred irrespective of the business transfer? Where the situation follows the transfer, have new market or business conditions appeared that necessitate a change and that could well have influenced a transferor had he/she kept the business?

929 Weiss & Schmidt Labour Law in Germany 117-118. A works agreement can contain more favourable terms than an individual contract but not a lower standard, unless it complies with the so-called collective principle of more favourable conditions (i.e. the works agreement may reduce standards for the individual employee (regarding monetary issues only), if the total sum of money to be spent by the employer is not reduced).


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• It seems that it is thus not possible for a transferee to harmonise the previous terms of the transferred workers with those of its existing employees.

• It appears that an employer may be able to shed jobs following a transfer and rely upon the defence that the reason for the dismissals was an economic, technical or organisational reason entailing changes in the workforce. However, an employer who attempts to save jobs by persuading the transferring employees to accept a lower rate of pay or less advantageous conditions, cannot do so.930

• It has been argued that the position of Wilson vitiates the Directive’s mandatory consultation process. Hence, it is stated that there is no point in consulting with employees or their representatives about the consequences of a transfer, if an agreement to vary terms and conditions that results from that consultative process is legally ineffective.931

On the other hand, it is submitted that no matter what the law might say or believe about both parties to a contract having equal rights and contracts being concluded freely, the notion of an employee “consenting” to a variation of a contract of employment is often a myth. Where the choice is between signing the variation or losing your job, it is clear that employer and employee do not have equal bargaining power. Thus, for their own good, employees cannot amend or waive rights that existed prior to the transfer, unless it is shown that this was done freely and voluntarily. It could, however, be said that it would be unfair and indeed impossible to expect a Court to assess the reality of consent to change. This being so, the only possible solution then would be an absolute rule against the waiver or amendment of prior employment rights. However, it is submitted that there must be some common ground somewhere between these two stances: an equilibrium between entrenching and safeguarding an employee’s contractual rights and acknowledging an undertaking’s economic interests. 8.4 Changes to a contract of employment: a principled approach 8.4.1 Introduction The criticism that was discussed above regarding a prohibition on any variation of employment contracts occasioned by a transfer, has resulted in the proposal of a final

930 A transferee who needs to reduce costs is thus protected by the Directive/TUPE against an

unfair dismissal claim if he/she dismisses employees on the grounds of redundancy, but it is precluded from offering to save jobs if costs can be reduced by varying contractual terms due to the t ransfer.

931 See the note on Wilson by Rubenstein 1996 IRLR 317.

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model in this regard. In terms of the final option listed above,932 transfer provisions could allow variation of rights and obligations due to a transfer.933 Several issues nevertheless have to be considered painstakingly: whether or not the purpose of employment transfer provisions 934 is promoted by the introduction of a possibility to amend existing rights and obligations; which aspects of the employment relationship may be varied; the question of the identity of the parties who consent to the variation; whether there must be an agreement or whether unilateral amendment is also acceptable; whether the voluntary nature of an agreement should be tested or not, and if yes, how and by whom it should be done; and whether it should be possible to waive continuity of employment. The rest of this chapter will attempt to address each of these issues on a principled basis. The specific regulation of this aspect in South Africa, as found in section 197 of the Labour Relations Act 66 of 1995, will then be evaluated. It is acknowledged that this is perhaps the one aspect of the regulation of the transfer of contracts that could have the most impact on the economic interests of companies and undertakings. Next to the automatic transfer of employment contracts, the regulation of rights and obligations originating from the employment relationship is undeniably of the utmost importance to both workers and employers. This aspect of transfer provisions therefore needs to be considered carefully. 8.4.2 Policy and legal considerations The starting point of this debate is certainly whether or not the purpose of employment transfer provisions is promoted by the introduction of a possibility to amend existing rights and obligations or indeed to waive employment rights after a relevant transfer. It has been stated that the primary purpose of transfer provisions is to ensure that the rights arising from the employment contract or employment relationship of employees affected by the transfer of an undertaking are safeguarded.935 This protection is a matter of public policy and any limitation thereof should be viewed with circumspection. It has been accepted that provisions that safeguard employees’ rights in the event of the transfer of an undertaking as a going concern, strive to minimise the effect on the

932 See par 8.1 supra. 933 The model that involves the prohibition of changes to contracts of employment for a certain

period, e.g. one year after the transfer, will be considered at a later stage. 934 I.e. employment protection; see chapters 1 & 3 supra. 935 Daddy’s Dance Hall. This was also the decision of the EFTA Court in the case of

Langeland v Norske Fabricom A/S Case E 3/95. See also chapters 1 & 3 supra .


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employees concerned of a change in the person responsible for running the undertaking. The aim of these provisions is not to benefit transferred employees over and above the protection to which any other employees would have been entitled in any given situation. These provisions aim at keeping the employees in the position they would have been, had the identity of the legal or natural person responsible for the running of the business not changed. It is thus submitted that the effect of these provisions should not, as a general rule, be to prohibit any alteration of employment contracts that do not allow for any exceptions. The transferred employees should be in exactly the same legal position after the transfer than before and changes that would have been permissible under national law before the transfer should still be possible after the transfer. However, it is also accepted, at the same time, that individuals and employers are not equal bargaining partners and any waiver or alteration to the detriment of employees should thus be subjected to scrutiny at the request of an interested party (usually it would be the employee). This safeguard should be included even though, where there was no transfer, employees would not generally, in the normal course of events, have been entitled to such protective process (that is except for general contractual avenues, that are always available to any party, on the grounds of absence of true agreement due to misrepresentation, undue influence, etc). As support for this proposal, it is submitted that, within the context of transfers, additional pressure is placed on employees to consent to modifications or waivers of existing rights and obligations. This is partly because a new employer, the transferee, is involved with whom the employees have not had the benefit of dealings with before. Furthermore, the employees and/or their representatives are often not fully informed about the true economic position of the transferee, even though there might be a right to consultation and disclosure of information. This being the case, employees may, in the absence of consent, perceive the possibility of retrenchments as a very real threat. What kind of form should this process of scrutiny take? It is submitted that this will be greatly influenced by two factors: firstly, who exactly the parties are to the agreement to alter contracts or to waive rights and, secondly, the decision regarding which aspects of the employment relationship may be altered or which protection may be waived. There are essentially two options as far as the possible employee party to an agreement to amend contracts is concerned: the individual employees themselves or the representatives of the employees. It is proposed that if transfer provisions allow for the waiver of any or all of the rights in terms of the provisions, it must only be possible for the employees to do so themselves. It is not suitable for an employee’s representative to exercise his/her discretion in this regard, as this may be in conflict with the personal

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choice of an individual employee. If allowance is indeed made for representatives to act in this capacity, the individual employee must have the final say. This may complicate and prolong the process, as an employer may negotiate with a union and come to an agreement, for example, that some employees will not transfer (whilst those individual employees might want to transfer) or, for example, that short time will now be worked after the transfer. If the individual employee does not consent to working short time, it is submitted that he/she should not be bound by the agreement of the collective entity, the union, as the agreement pertains to existing and vested rights and not to future interests or rights (regardless of the principle of majoritarianism). It is thus submitted that amendments and waivers must be agreed upon between the employee and the old and/or new employer. Unfortunately, this suggestion does, in principle, allow more scope for involuntary agreements, as there is perhaps a greater possibility that an individual employee could be influenced to his/her detriment, something that might not happen to a union so easily. If such an individualistic approach does not enjoy favour, the employees should, at least, have a right to specially elect representatives for these purposes. Regarding the question of which aspects of the contract could be amended, it is submitted that the position under the Acquired Rights Directive perhaps goes too far in not allowing any amendments of contracts due to a transfer (whether more beneficial to the employee or not). However, a downgrading of rights is not consistent with the purpose of protective legislation. A policy decision therefore has to be taken as to whether amendments and waivers should perhaps only be allowed to the extent that these are not less beneficial as a whole or where they are more beneficial to the transferred employees than was the position before the transfer. It should once again be stressed that the purpose of transfer provisions is not purely economic but that they encompass specific social values (for example, safeguarding of employee rights). In this regard, it must be expressly stated that amending agreements should not be allowed if no effective right to information and consultation on an envisaged transfer is granted to the employees and their representatives.936 It is submitted that, as a matter of public policy, employees should, at the very least, not be able to waive the protection of transfer provisions pertaining to the automatic transfer of their contracts and their continuity of employment. It is strongly advocated that employees should not be able to waive the protection conferred by transfer provisions with regard to the automatic transfer of their contracts (subject only to the right to object). To allow this would impact negatively on the interests of the old employer, as



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this would open the door for potential buyers to shop around for a “better deal”. Furthermore, it is submitted that it should especially not be allowed where the proposed parties to the agreement are the representatives of the employees and the transferor/transferee. For example, an agreement should not be valid if a union negotiates favourable severance packages for employees in return for some of the employees not transferring to the transferee. Such agreement would also be prejudicial to employees since undue influence could be exercised in order to obtain such an agreement to the detriment of employees. (This argument of undue influence, of course, is also pertinent for all the other rights and duties accorded in terms of employment contracts that existed prior to a transfer.) With regard to continuity of employment, it is proposed that a waiver could not only have serious monetary implications, but that it could also play an important role in the termination of employment (when, for example, implementing the well-established selection criterion of last-in-first-out (LIFO)). The date of conclusion of a contract is an historical fact, and should not be able to be amended after a transfer. It thus becomes evident that several policy and legal considerations are important with regard to changes of contracts in the event of the transfer of an undertaking or part thereof as a going concern. In evaluating the different options available, a flexible approach has been favoured where some amendments and waivers are allowed, even if due to the transfer alone. However, it is argued that this should only be allowed in circumstances where the changes, as a whole, will be more and not less beneficial to the employee.937 Moreover, it is also proposed, as a matter of public policy and in order to protect transferors from adverse selection, that the automatic transfer of contracts and the continuity of employment should be sacrosanct. The protection of transfer provisions relating to continued employment, together with preservation of continuity of employment, should be inviolable, subject only to the right of an individual employee to object to his/her transfer to the transferee. It is also submitted that any such agreement must be in writing938 and that the amendments that are to be effected must be clear and unambiguous. The remaining issue to be considered is thus whether the voluntary nature of an agreement to amend should be subject to adjudication or not. In addition, it must be 937 The question is how to measure the comparative positions of an employee prior to and after

an agreement relating to a transfer. It is submitted that an approach could be considered that is similar to the balancing of interests test in the event of a dispute regarding the disclosure of information (s 16 LRA). Thus, such an approach would involve the weighing-up of conflicting policy considerations (e.g. freedom of contract and employee protection). If a neutral third party performs this test it should serve to prevent employers from pulling the wool over the eyes of unsophisticated employees.

938 All employees must have written particulars of employment in terms of s 29 of the BCEA 75 of 1997.

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considered how and by whom such evaluation of the agreement should be performed. It appears that there must be a right to refer a dispute regarding an agreement providing for amendments of prior existing rights and obligations that arises after a relevant transfer to an appropriate forum for consideration. If an employee can, for example, show that misleading information or a lack of disclosure of information influenced his/her decision to consent to an amendment, such forum should be able to invalidate the “agreement”. To ensure that legal certainty is not derogated from and that the transferee does not have to function under a constant threat of litigation, a fixed period could be determined within which an employee must bring his/her complaint to the appropriate forum. Such an approach would balance the sometimes conflicting interests of employer and employees and would also have regard to differing policy options in order to arrive at an equitable and fair dispensation. Contrary to the general prohibition that amendments due to a transfer are not valid, it is also possible to provide that a transferee could unilaterally change his/her employees’ working conditions due to the transfer. However, this seems to be an undesirable regulation of changes to contracts and rights and obligations. The new employer has a right to amend contracts, subject to the same restrictions as were applicable to the old employer. This is a more principled way of ensuring the goal of transfer provisions and of giving effect to well-established principles regarding variation of contracts. A new employer could thus resort to a lock-out or, if he/she has such a right, resort to consultations regarding the possibility of operational requirement dismissals, should the previous conditions be impossible to meet. The onus to prove the substantive fairness of such dismissals, of course, rests on the new employer. Unilateral amendments should thus not be accepted as valid in the context of the transfer of undertakings, just as they are not allowed in general.939 8.5 The legal position in South Africa Section 197(2) of the Labour Relations Act of 1995 expressly provides that an agreement may be reached between certain parties so as to regulate the effect of the transfer of an undertaking as a going concern in quite a disparate way than that provided for in the section itself. It has been argued that this provision refers to the effect of the

939 Under the principles of the law of contract, a unilateral change to terms and conditions of

employment constitutes breach of contract, enabling the other party to claim specific performance or to repudiate the contract (see Du Toit et al Labour Relations Law 170 on unilateral changes to an employment contract). In SAMRI v Toyota of South Africa Motors (Pty) Ltd 1997 18 ILJ 374 (LC) it was held that a unilateral change is one made without the consent of the employees.


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transfer as it pertains to the prior existing rights and obligations and not to the transfer of the contract itself.940 The following relevant levels can thus be distinguished: the transfer of the contract itself; the continuity of employment;941 and rights and obligations existing due to the employment relationship. It is submitted that it is the third level that is relevant here, that is the amendment of pre-transfer rights and obligations. The question of which rights and obligations are transferred has been considered earlier.942 However, it is perhaps prudent to state again that it is only terms and conditions of employment that are apposite here and not work practices as such. The matter of Carol Keil v Foodgro (a Division of Leisurenet)943 is of importance in this regard. On 1 January 1997 the business in which Keil was employed was transferred as a going concern to the respondent. The applicant continued in employment until she was dismissed on 30 June 1997 for operational reasons. The Court a quo held that the respondent used, as selection criterion, the last-in-first-out method.944 The reason why the applicant was selected was that her service was deemed to be shorter than that of another manager. This position was based on the contention that when MacRib was acquired, a new contract of employment was concluded with the applicant, which effectively wiped out her previous length of service with MacRib. The Court held that it is possible for parties to agree otherwise in terms of section 197(2)(a) and (b) with regard to the automatic transfer of a contract of employment in the event of the transfer of a going concern. However, such agreement must be clear and unambiguous. An employee must therefore agree expressly to waive his/her rights that accrue by virtue of long service. In the absence of such an agreement or waiver, the new employer is not absolved from recognising the employee’s length of service with the old employer.945 The Court found fault with the respondent’s selection criterion in so far as the applicant was viewed as having commenced with the respondent on 1 January 1997 instead of 1 February 1993. Severance pay should also have been determined with reference to the earlier date. The judge a quo held as follows:946

I am of the view that the agreement referred to in this section must be clear and unambiguous. It must be clear as to the new terms and conditions agreed upon and it must not be ambiguous about the parties’ agreement on those terms and conditions. It is

940 See chapter 7 supra . 941 See s 197(4) in this regard. 942 See par 8.2 supra. 943 1999 4 BLLR 345 (LC). For an exposition of the facts of this case refer to chapter 7 supra . 944 The issue of continuity of service was thus relevant here. 945 This view was not accepted by the LAC. 946 Par 14-16.

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important that such agreement be clear and unambiguous as it must be apparent which terms of conditions from the old employer survive and which are new.

Section 197(2) specifically provides that all rights and obligations between the old employer and each employee of the time of transfer continue in force as if these were rights and obligations between the new employer and each employee, unless, of course, the parties agree otherwise. One of the rights of employees at the time of transfer is the right accruing by virtue of length of service. The new employer’s obligation in this regard is to recognise this length of service especially should it decide to retrench the employee concerned. This means that in the calculation of severance pay in terms of Section 196(1)[now s 41 of the BCEA 75 of 1997] the new employer must also take into account the employee’s length of service with the old employer. Another rationale for Section 197(2) is that, in effect, the employee’s service is not interrupted by the transfer as the employee continues to render service to the same employer who is now under new management or different shareholding.

… Where a business is transferred as a going concern new agreements do not therefore replace the old contracts. The old contract will be replaced by a new contract if the parties agree to change every aspect of the old contract [my emphasis]. In this regard therefore an employee must expressly agree to waive his/her rights accruing by virtue of long service. In the absence of such express agreement or waiver the new employer is not absolved from recognising the employee’s length of service with the old employer. A new contract will also replace the old contract where the old employer terminated the old agreement before the transfer [own emphasis].

It is not exactly clear what is meant by the statement “a new contract will also replace the old contract where the old employer terminated the old agreement before the transfer”.947 The Labour Court emphasised that employment contracts that are 947 It can surely not be countenanced that an employer terminates a contract before the transfer

of a going concern and then concludes new contracts with the employees. The Court needs to explain on which grounds an employer can ostensibly terminate the old agreements. It should not be possible to waive the protection conferred by the Act, unless the employee


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transferred may be amended by agreement, as long as this is clear and unambiguous. However, the Court regarded the issue of continuity of employment in a much stricter light because of the provisions of section 197(4). In the case of a waiver of continuity of employment or the transfer of the contract, although possible according to the Court, a more stringent test948 was applied.949 The Labour Appeal Court then reconsidered this case.950 The appeal was dismissed with costs. It was contended, on behalf of the employee, that although section 197(2)(a) allowed the amendment, by agreement, of the terms and conditions of employment with the old employer, it did not allow for contracting out the transfer of the contract of employment or for interrupting the continuity of employment. This was prohibited by section 197(4). The Court accepted this view and found that continuity of employment was a fact and not a right or an obligation between an old employer and an employee. The parties can therefore alter the terms of the transferred contract, but they cannot escape the existence thereof.951 The contract took effect at a certain date, which is an inescapable fact. Since the contracts transfer to the new employer, they can only be amended and a new contract is not concluded. The Court referred to the European Court of Justice’s decision of Foreningen af Arbejdsledere I Danmark v Daddy’s Dance Hall952 where it was held, in the context of the Acquired Rights Directive, that an employee is not in a position to validly waive rights under the Directive, even in circumstances where, as a consequence, the employee receives benefits that place him/her in a better position. The decision in Wilson v St Helens Borough Council953 (that held that if the operative reason for the variation was the transfer of the undertaking, the variation would be ineffective) was also referred to by the Court. However, contrary to the European Community position, the Labour Appeal Court accepted that section 197(2)(a) and (b) clearly allows for the amendment of rights and obligations by agreement. The judgement held that section 197(2)(a) permits both the employee and the new employer to modify the terms of the existing employment contract. They may, as the Court read the section, do this by renegotiating its terms regulating their future relationship and also by adjusting rights and obligations, which had already accrued at

would be in a better position (however, see the European position supra). See chapter 12 infra regarding transfer-related dismissals.

948 Not only should the agreement be clear and unambiguous, it should also be express. 949 It is of course realistically arguable that continuity of employment cannot be waived in terms

of s 197(2), as it is a separately entrenched right in s 197(4). See the LAC judgement infra. 950 Foodgro (a Division of Leisurenet) v Keil 1999 9 BLLR 875 (LAC), 1999 20 ILJ 2521 (LAC). 951 2528C-G. 952 1988 IRLR 315 (ECJ). 953 1996 IRLR 320 (EAT); 1997 IRLR 505 (CA).

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the time of the transfer.954 The learned judge Conradie, in a separate judgement, stated that although the old contract may suffer so many modifications that it survives only in skeletal form, its survival is not unimportant as it provides the continuity of employment of which subsection 197(4) speaks.955 This stance implies that it is impossible for a new owner to contract out of retrenchment benefits calculated on the basis of one week’s severance pay for every completed, continuous year of employment owed to an employee who is taken over as part of the transfer of a going concern. This fact, and the costs that are implicit for the new employer, where retrenchments are imminent, will thus have to be tailored into the price negotiated for the concern. The Labour Appeal Court was of the firm view that section 197(2)(b)956 allows for the contracting out of the transfer of the contract of employment itself, but that section 197(2)(a) does not.957 It is arguable that section 197(2)(b) should not be interpreted in this way. It is submitted that parties may only reach agreement regarding the possible transfer of rights and duties that would otherwise not transfer automatically to the transferee. To hold otherwise would severely limit the protection afforded to employees in these insolvent circumstances since it would mean that an affected employee’s continuity of employment would be destroyed if the purchaser of the going concern were permitted to enter into entirely new employment contracts.958 Such an interpretation of section 197(2)(b), as found in Foodgro v Keil, is rendered even more unacceptable by the proposed parties to such an agreement in section 197(3).

954 2530B. 955 2530C. 956 Transfers in insolvency-related circumstances. 957 For criticism of this interpretation, see chapter 7 supra . 958 This would result in a directly contrary position regarding continuity of employment than

that intended under s 197(4). Refer to chapters 7 & 13 as well.


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8.6 Concluding remarks The purpose of transfer provisions must not be undermined by whatever regulation of the issue of amendment and/or waiver of prior existing rights and obligations is deemed fit. It is thus submitted that the change in the identity of the entity responsible for the running of the undertaking should not single-handedly be sufficient reason to amend prior terms and conditions of employment prejudicially. It has been shown that, at European Community level, followed expressly by the United Kingdom Courts, it is forbidden to make any amendment whatsoever to prior rights and obligations if the amendment is made due to the transfer. This is the case even if the amendment would place the employee in a better position overall. It is, however, still open, in principle, to the parties to agree to any other amendments that they normally would have been able to agree upon in terms of the Member States’ national law. It need not be stated that both parties must agree upon any amendment. An even stricter approach than that of the European Community would be to allow no amendments at all, whether connected to the transfer or not, for a certain period after a relevant transfer. This approach was rejected on the ground that it unduly limits the principle of freedom of contract. A viable option, besides that of the European Community, includes one where any amendments that the parties may possibly have agreed on, are allowed. Where, however, an amendment is only or principally due to the transfer, such amendment may not be less beneficial as a whole to the individual concerned. This last option would necessitate a judicial procedure to ensure that individuals have freely agreed upon amended terms and conditions of employment. It also necessitates a position where a Court or a forum will have to decide on the question of whether or not the amended terms and conditions are, as a whole, not less beneficial to the employee. This would certainly be no easy task. If it is found to be too ambitious an instruction, it seems that the only other viable option is to disallow all changes due to a transfer, whether more beneficial or prejudicial to the employee. Attaching a time limit to the same could arguably mitigate the effect of such prohibition. In summary it seems that in South Africa at present, the amendment of contracts, due to the transfer or for other reasons, is allowed during or after the transfer of a going concern. The Labour Appeal Court959 has held that all rights and obligations between an employer and employee may be amended, but that the waiver of the transfer of the contract in a section 197(2)(a) transfer and of continuity of employment in both sections 197(2)(a) and (b) transfers is prohibited. The contract is transferred under section 959 Foodgro, A Division of Leisurenet v Keil .

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197(2)(a) and any modifications, however far reaching, can only change the transferred contract and not replace the contract with a new one.960 These changes need to be agreed upon in a clear and unambiguous agreement between the parties listed in section 189(1) and, presumably, the new employer.961 It has been argued that it is doubtful whether employees and transferees should be allowed to downgrade prior existing rights and obligations due to a transfer. This seems to be contradictory to the very nature and purpose of transfer provisions. The viewpoint has therefore been advanced that contracts should only be able to be amended if the amended terms and conditions of the contract are, as a whole, not less beneficial to the employee than his/her previous position. It has been recognised that this will necessarily require some kind of judicial process to determine whether or not the amendments comply with this requirement or not. Although there is merit in the argument that this could result in a transferee retrenching employees, rather than saving jobs by amending contracts,962 it is still believed that the possibility for prejudicing employees is greater if unrestricted amendments are allowed. It should be kept in mind that in the worst case scenario where, after a transfer, the transferee realises that he/she cannot continue to be economically viable due to the prior rights and obligations that were transferred, the law of unfair dismissals still requires that a fair procedure be followed in the event of dismissals that may occur for operational reasons. Such law also requires that the transferred employees form part of the pool of employees to be considered for dismissal on the grounds of an objective selection

960 Here no right to object is acknowledged. 961 S 197 does not stipulate who the parties to a contrary agreement should be. S 197(2)(a) &

(b) only provide that “unless otherwise agreed”. Even if it seems prima facie clear that the employees should be involved (s 197(3) provides that “an agreement concluded in subsection (2) must be concluded with the appropriate person or body referred to in section 189(1)”) it is apparent that the exclusionary nature of s 189 results in a position where, e.g. if a workplace forum exists in a workplace, that workplace forum is the appropriate other party and not the individuals affected by the transfer. On the other hand, it is also unclear whether it is the transferor or transferee that is foreseen as the other party to the agreement. It has been suggested that it should be the transferee, as this is the interpretation that makes most practical sense, since it is the new employer that will be taking over the rights and obligations. The wording of s 189(1) nevertheless indicates that the old employer must be involved, e.g. it will be the old employer who concluded a collective agreement with a union in terms of that section. In the event of such an interpretation, it is submitted that the old employer will actually act as intermediary for the transferee (see also Le Roux PAK “Transferring contracts of employment: implications surrounding the sale of a business under the new LRA” 1996 Contemporary Labour Law 11 14). For opposition of this downgrading of the possibility to agree to amendments to “outside” parties other than the individuals concerned, refer to chapter 14 infra . See also chapter 7 supra where it was argued that only an employee should be able to object to the transfer of his/her contract in accordance with his/her own free will.

962 From this viewpoint, an approach that outlaws all amendments for a certain period after the transfer, could also be attacked on this basis so that it could result in unnecessary retrenchments.


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criterion. The selection criteria of the transferee could thus not merely target the transferred employees.963 Subsequent negotiations and industrial action in this regard could also follow.964 It is submitted that this fact will certainly contribute to containing and restraining unnecessary dismissals based on alleged operational requirements.

963 The position of the employees will be strengthened if it is accepted that, owing to the

provision of s 197(4), the transferred employees’ continuity of employment survived, i.e. if it is accepted that an employee cannot waive his/her continuity of employment.

964 See the amendments proposed in relation to s 189 by the Labour Relations Amendment Bill, 2001.

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CHAPTER NINE

TRANSFER OF COLLECTIVE RIGHTS AND OBLIGATIONS 9.1 General The inherently unequal nature of the employment relationship necessitates that regard must always be had to collective rights and duties that may exist in a workplace. Such an approach is one that promotes employee protection in the wide sense of the word.965 Section one of the Labour Relations Act 66 of 1995 states that the purpose of the Act is to advance economic development, social justice, labour peace and the democratisation of the workplace by fulfilling the primary objects of the Act. These include the aim of promoting orderly collective bargaining, collective bargaining at sectoral level and employee participation in decision-making in the workplace. Furthermore, the Constitution of South Africa,966 in section 23 of the Bill of Fundamental Rights, entrenches the rights of workers and employers to organise and bargain collectively. At the same time, South Africa has now adopted a model of collective bargaining where, except in very limited circumstances, collective bargaining cannot be compelled. Issues that fall under the scope of collective bargaining are issues where the respective economic power of the parties must determine the outcome. However, registered representative unions have been granted a comprehensive set of organisational rights that substantially reduce the need to strike for recognition in the workplace.967 A successful process of collective bargaining will usually result in the conclusion of a collective agreement. A collective agreement is defined in section 213 of the Labour Relations Act as:

a written agreement concerning terms and conditions of employment or any other matter of mutual interest concluded by one or more registered trade union(s), on the one hand, and, on the other hand, one or more employer(s), one or more registered employers’ organisations or one or more employers and one or more employers’ organisations.

965 In this regard see chapters 1 & 8 supra . 966 Constitution of the Republic of South Africa 108 of 1996. 967 Chapter 2 of the LRA.


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It has been held that the phrase “terms and conditions of employment” refers to the express or implied terms of the contract of employment in the narrow sense, and does not include the physical conditions or the surrounding circumstances of employment.968 The expression “any other matter of mutual interest” has also received attention in our Courts:969

Whatever can be fairly and reasonably regarded as calculated to promote the well-being of the trade concerned, must be of mutual interest to them; and there can be no justification for restricting in any way powers which the legislature has been at the greatest pains to frame in the widest possible language.

The substantive part of a collective agreement can thus cover terms and conditions of employment as well as other matters of mutual interest. Issues regarding interpretation of the agreement, dispute resolution, notice period for termination, etc, are rather elements of the procedural part of the collective agreement. Other protective legislation also incorporates terms into the contracts of employment of workers.970 This chapter considers the validity and enforceability of these agreements and incorporated terms against the transferee. It is necessary to take these collective rights into account for two reasons: firstly, section 197 of the Labour Relations Act provides for the transfer of all “rights and obligations between the old employer and each employee”, which encompass more than rights originating from the employment contract;971 secondly, in view of the constitutional framework and the emphasis that the Labour Relations Act places on collective bargaining, one must consider whether it is appropriate that collective rights and obligations that existed between the old employer and employee representatives should not be included under the scope of section 197. 9.2 The legal effect of collective agreements in South Africa In South Africa, the legal effect of collective agreements is determined by sections 23, 31 and 32 of the Labour Relations Act. Section 23, which deals with collective agreements concluded at workplace level, firstly binds the parties to the agreement. Non-parties can, however, also be bound. In section 23(1)(d), the principle of 968 See Du Toit et al Labour Relations Law 206; A Mauchle (Pty) Ltd t/a Precision Tools v

NUMSA 1995 16 ILJ 349 (LAC). In this case the LAC distinguished between terms of employment and work practices.

969 Rand Tyres & Accessories v Industrial Council for the Motor Industry (Transvaal) 1941 TPD 108 115.

970 See chapter 8 supra , par 8.2, regarding the transfer of statutory rights and obligations. 971 At least in the event of the transfer of a solvent undertaking (s 197(2)(a)).

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majoritarianism is promoted, as the provision stipulates that a collective agreement binds employees who are not members of the union party to the agreement, provided that the union represents a majority of the employees in the workplace, the non-members are identified in the agreement and they are expressly bound by it.972 Finally, section 23(3) regulates the interaction between collective agreements and contracts of employment. In terms thereof, where applicable, a collective agreement varies any contract of employment between an employee and employer who are both bound by the collective agreement. The normative or substantive provisions of the collective agreement are thus superimposed on the contract of employment. The Act also provides that a contract of employment, whether concluded before or after any applicable collective agreement came into operation, may not:973 • permit an employee to be paid remuneration that is less than that prescribed by that

collective agreement; • permit an employee to be treated in a manner, or to be granted any benefit, that is

less favourable than that prescribed by such collective agreement; or • waive the application of any provision of such collective agreement. Any provision in any employment contract that purports to permit or grant any payment, treatment, benefit, waiver or exclusion prohibited by section 199(1), is invalid in terms of section 199(2). As stated above, a collective agreement varies a contract of employment, where applicable. In this regard, it is clear that some provisions of an agreement may not pertain to the employment relationship between employer and employee, for example an agreement relating to organisational rights of a union. Such an agreement does not alter the terms and conditions of employment of the employees. Furthermore, it should also be understood that the agreement will only vary the contract of employment to the extent that it introduces more favourable terms and conditions. The Constitutional Court has held that a collective agreement infringing the Constitution will not be upheld.974 An agreement that contravenes a statutory provision will also not be enforced.975 One can thus state that a collective agreement can apply between an employer and a union resulting in the creation of rights for the union in the workplace. A collective agreement can also be, and often is, applicable between each individual employee and the employer, in which case rights and obligations are created between employer and employees.

972 S 32 allows for the extension of collective agreements concluded at sectoral level. 973 S 199(1). 974 Larbi-Odam v MEC for Education (North-West Province) 1998 3 LDD 102 (CC). 975 Provincial Administration (Western Cape) and Hospersa 1998 7 CCMA 4.8.1.


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The implications of the legal effect of collective agreements, as regulated in chapter 3, part B of the Labour Relations Act, are the following for a transferee: • Only the normative part of any collective agreement that existed prior to a transfer

may be of relevance to a transferee under section 197 of the Labour Relations Act at present.

• The transferee is bound to observe those provisions of any collective agreement that was concluded between a representative union and the transferor, as far as those provisions have been incorporated into the contracts of employment due to the working of section 23(3).

• Where a collective agreement has dealt with collective rights and obligations that applied between the union and the transferor, for example the right of access, recognition, etc, the transferee need not observe such provisions.

9.3 Other protective legislation Statutory rights and obligations also fall within the scope of transfer provisions. These rights may have an individual or collective nature. It has been submitted that only those rights and obligations that were enforceable between the old employer and each employee at the time of the transfer, are subject to transfer to the transferee in terms of section 197(2)(a).976 9.4 Comparative perspective Article 3 of Directive 2001/23/EC977 pertains to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of undertakings or businesses. Article 3(1) provides that the transferor’s rights and obligations arising from a contract of employment or employment relationship, existing on the date of a transfer, are transferred to the transferee by reason of such transfer. Article 3(3) deals with collective rights and obligations. This subsection states that, following the transfer, the transferee must continue to observe the terms and conditions agreed on in any collective agreement, on the same terms applicable to the transferor under that agreement. The transferee must observe the terms and conditions until the date of termination or expiry of the collective agreement or until another collective agreement comes into force or is applicable. However, the section also provides that Member States may limit the

976 See chapter 8, par 8.2 supra . 977 Replacing Directive 77/187/EEC as amended by Directive 98/50/EC.

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period for observing such terms and conditions, with the proviso that such period may not be less than one year.978 A collective agreement can be said to have a twofold nature:979 the normative part and the obligatory part. The normative part also encompasses two possibilities:980 it contains individual normative stipulations, comprising the conditions of the individual employees (wages, benefits, working time etc) and it contains collective normative stipulations in the enterprise. These are norms that:

[g]enerate obligations neither for the contracting parties nor the employer in relation to individual employees. They are a sort of in-between rules (between individual normative and obligatory), which regulate “collective” labour relations. Examples of collective normative rules are the provisions in e.g., sectoral collective agreements covering: 1) the establishment, competence and functioning of the works council in the enterprise ….981

The obligatory part of a collective agreement can be said to comprise:

… obligations between the contracting parties which have to be clearly distinguished from the normative rules. These obligations can be explicit (e.g., concerning the interpretation of the agreement) or implicit .982

The parties to a collective agreement concerning the terms and conditions of employment and the rights and obligations of the contracting parties are employers or employers’ organisations, on the one hand, and one or more trade unions, including other bona fide representatives of employees, on the other hand.983 As far as the 978 As Barnard indicates (EC Employment Law 480) this may well mean that different collective

agreements regulate the employment conditions of different sections of the transferee’s workforce. It appears that the Member States regulate this differently: “Consequently, in some States, such as Spain, the law provides that if the terms of the collective agreements enjoyed by the transferee’s workers are superior to those of the transferor’s workers, the transferor’s workers enjoy the better terms” (Barnard 480).

979 See Blanpain European Labour Law 427. 980 Ibid. 981 Blanpain European Labour Law 427. 982 Ibid. 983 Ibid 429. In most continental European Member States of the European Union, collective

agreements are defined by legislation as formal, written agreements that do not qualify as collective agreements unless certain formal or structural requirements are met. The German Federal Labour Court has established a range of criteria which must be met in order for an association to be able to be a party to a collective agreement, inter alia the association must be created for an indefinite time, must have a corporate structure, be independent of the employer and of State influence, etc. See in this regard, Nielsen European Labour Law 84-


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binding effect of the agreement is concerned, it appears that, in the case of the obligatory part, the binding effect thereof will depend on the law that is applicable to the agreement.984 It can be stated that there are key differences between continental European collective agreements and English collective agreements as far as the mandatory normative effect of collective agreements are concerned. Nielsen states that:985

The general pattern in continental collective labour law is that collective agreements have a mandatory normative effect, i.e. they cannot be derogated from to the detriment of the worker by individual employment contracts or unilateral employer decisions. An English collective agreement is largely an extra-legal custom or practice which enters into the individual employment contract as an implied term in the absence of agreement to the contrary in the individual contract of employment. An English collective agreement can be derogated from to the detriment of the worker by express terms in the individual employment contract and thus has no mandatory normative effect.

The distinction between the obligatory and normative function of collective agreements, as first developed in Germany and Denmark, is therefore not applicable in the United Kingdom. English collective agreements have no obligatory (contractual) and no mandatory normative effect, but only acquire limited legal effect as an implied term of the individual employment contract. In continental European countries, including Germany, a collective agreement is binding as a contract (its obligatory effect)986 and it has a mandatory normative effect.987 Article 6 of the Acquired Rights Directive provides that if the undertaking, business or part of an undertaking or business preserves its autonomy, the status and function of the

85. As a general rule they bind only parties to collective agreements. However, most EU Member States, except Italy and the United Kingdom and, to a very limited extent, the Nordic countries, allow for a system of extending these agreements so as to make them binding on employers who are not parties to them (Nielsen 89). In Germany, an employer who is bound by a collective agreement only has a duty to respect vis à vis employees who are members of the trade union with which the employer has concluded the agreement.

984 Blanpain European Labour Law 433. 985 European Labour Law 82. 986 The obligatory (contractual) effect of an agreement entails a peace obligation on the side of

the worker. 987 Kahn-Freund (Labour and the Law (London 1977) 129) argued: “It is not a gross

exaggeration to say that the contractual function of collective agreements is mainly for the benefit of management, and its normative function mainly for the benefit of labour”. Thus, where an individual contract stipulates terms that are inconsistent with the collective agreement, those contractual provisions are invalid.

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representatives or of the representation of the employees affected by the transfer must be preserved on the same terms and subject to the same conditions as existed before the date of the transfer by virtue of law, regulation, administrative provision or agreement, provided that the conditions necessary for the constitution of the employee’s representation are fulfilled. The first subparagraph of article 6 does not apply if, under the laws, regulations, administrative provisions or practice in the Member States, or by agreement with the representatives of the employees, the conditions necessary for the reappointment of the representatives of the employees, or for the reconstitution of the representation of the employees, are fulfilled. Where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings which have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority), Member States may also take the necessary measures to ensure that the transferred employees are properly represented until the new election or designation of employees’ representatives. If the undertaking, business or part of an undertaking or business does not preserve its autonomy, the Member States must take the necessary steps to ensure that the employees transferred, who were represented before the transfer, continue to be properly represented during the period necessary for the reconstitution or reappointment of the representation of employees in accordance with national law or practice. Subparagraph 2 states that if the term of office of the representatives of the employees affected by the transfer expires as a result of the transfer, the representatives will continue to enjoy the protection provided by the laws, regulations, administrative provisions or practice of the Member States. In the United Kingdom, the TUPE regulations provide (in regulation 6) that where at the time of a relevant transfer, there exists a collective agreement made by or on behalf of the transferor with a trade union recognised by the transferor in respect of any employee whose contract of employment is preserved in terms of regulation 5(1), then such agreement, in its application in relation to the employee, will, after the transfer, have effect as if made with that trade union by or on behalf of the transferee.988 Accordingly, anything done under or in connection with it, in its application by the transferor before

988 Reg 6 of the TUPE regulations does not limit the period for observing the terms of a

collective agreement to any minimum period. McMullen Business Transfers and Employee Rights 11/2 comments that this is undoubtedly the case, since to have done so would have been inconsistent with the position under domestic law that collective agreements are not, generally, legally enforceable.


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the transfer, will be deemed to have been done by or in relation to the transferee after the transfer.989 Furthermore, any order made in respect of such agreement, in its application in relation to the employee, will, after the transfer, have effect as if the transferee were a party to the agreement.990 991 The TUPE regulations also deal with the effect of a relevant transfer on trade union recognition.992 Where the undertaking or part of the undertaking transferred maintains an identity distinct from the remainder of the transferee’s undertaking and where, before the transfer, an independent trade union was recognised to any extent by the transferor in respect of employees of any description who, in consequence of the transfer, became employees of the transferee, the following applies after the transfer: • The union is deemed to have been recognised by the transferee to the same extent

in respect of employees of that description so employed; and • any agreement for recognition may be varied or rescinded accordingly (i.e. as was

regulated in the original recognition agreement or otherwise). In Germany, in terms of article 613a(1) of the Civil Code, rights originating in terms of collective agreements are also regulated. It is provided that where rights and obligations between an employer and employees are stipulated in collective agreements or works agreements (with works councils), the provisions of these agreements993 are deemed to be part of the individual contract of employment.994 These terms may not be changed before the lapse of one year after the time of the transfer.995 989 McMullen (Business Transfers 11/5) states that reg 6 may well have limited practical

significance on the level of legal enforceability between the parties, as the transfer of collective agreements under reg 6(a) is made expressly subject to what is now TULR(C)A, s 179. This section has as result that pre-1971 and post-1974 collective agreements are subject to a presumption against enforceability. McMullen (11/5) further comments that “there is a clear argument that the obligation in the Directive overrides pre-existing United Kingdom rules in a non-TUPE context that collective agreements may be presumed to be legally unenforceable thus allowing an employer to resile from the collective agreement prior to its expiry under its terms (or replacement)”.

990 See Harvey Harvey on Industrial Relations and Employment Law F/74. 991 McMullen (Business Transfers 11/6) states that collective agreements may be a source of

terms for an individual contract of employment. This may be the case even though the source has expired or been resiled from. However, he also states (see Business Transfers 11/6-11/7 and authority referred to there) that, in general, the Courts are more likely to hold that substantive provisions of a collective agreement (such as terms about hours and pay) are more appropriate for incorporation than procedural or collective matters.

992 Reg 9. 993 I.e. the normative part of the agreement. For an exposition of the collective agreement in

Germany, see Halbach et al Labour Law in Germany 311-327. The Act on Collective Agreements and the Works Constitution Act are applicable. It is not possible for an employee to waive his/her rights under a collective agreement (art 4(4) of the Act on Collective Agreements, see Halbach 325 for exclusions to this general rule). Furthermore, no forfeiture of rights under the Collective Agreements Act is possible (art 4(4)).

994 I.e. the individual normative provisions, a position similar to that brought about by the working of s 23(3) of the LRA.

995 Earlier changes to the employee’s disadvantage are permitted only on condition that the disadvantageous working conditions are laid down in normative provisions of a collective agreement or a works agreement applicable to the transferred entity (art 613a (1) sen. 3 BGB).

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This is not an area (regarding the continued observance of collective agreements and the transfer of representatives’ status and function in transfer situations), where a large amount of case law has materialised at either European Community level, in the United Kingdom, or in German law. However, in Watson Rask and Christensen v ISS Kantineservice A/S the European Court of Justice confirmed that the transferee must observe the terms and conditions agreed upon in any collective agreement after a transfer, until the date of termination or expiry of the collective agreement or until another agreement comes into force or is applicable.996 In Landesorganisationen v Ny Mølle Kro997 it was confirmed that the Acquired Rights Directive does not oblige the transferee to continue to observe the terms and conditions agreed upon in any collective agreement in respect of those workers who were not employed by the undertaking at the time of the transfer. An interesting question that arises with regard to regulation 6 of the TUPE regulations, is whether or not procedural or collective matters covered in collective agreements are covered by transfer provisions. Due to the wording “its application in relation to the [transferred] employee” a restrictive interpretation is quite possible. However, McMullen argues that collective matters can also relate to an individual employee (albeit sometimes indirectly, for example the duty to inform and consult with trade unions over dismissals, redundancy planning, etc).998 McMullen thus argues that a better view would be that regulation 6 can apply to a provision of a collective agreement even if not incorporated into an individual contract of employment (the emphasised words in regulation 6 could then be seen as merely identifying those employees to whom the transferred agreement relates). This is, however, an issue that has not yet been decided by the Courts and is thus open for debate. 9.5 The legal position in South Africa Section 197 is silent on the question of the transfer of collective rights and obligations as well as statutory rights and obligations.999 Section 197(2)(a) only declares that “all the rights and obligations between the old employer and each employee at the time of the transfer continue in force … between the new employer and each employee”. In the event of a section 197(2)(b) transfer “all the rights and obligations between

996 1992 ECR 5753 (ECJ). 997 1987 ECR 5465 (ECJ). 998 Business Transfers 11/7. 999 See also chapter 8, par 8.2 supra regarding what rights a transfer in South Africa covers.


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the old employer and each employee at the time of the transfer remain rights and obligations between the old employer and each employee …”. It appears that the transfer of rights and obligations under section 197 would include statutory rights and obligations.1000 Obligations therefore appear to include obligations that go further than contractual ones.1001 Provisions in the Basic Conditions of Employment Act 75 of 1997, such as the right to severance pay, may thus be transferred. 1002 Statutory rights in the Labour Relations Act (for example, the right not to be unfairly dismissed and the right to compensation for unfair dismissal) are also transferred.1003 Claims arising from unlawful conduct or alleged unfair labour practices, or unfair discrimination by the old employer, are similarly included.1004 However, it is submitted that section 197 does not, at present, result in the transfer of provisions contained in collective agreements that are not applicable between the employer and employee and that are thus not incorporated in the contracts of

1000 See Le Roux 1997 CLL 14. See also chapter 8, par 8.2 supra. 1001 Le Roux opines that even obligations incurred in terms of a wage determination (now

sectoral determinations), the BCEA or a collective agreement “to the extent that these sources are not incorporated in the contracts of the employment of the employees concerned” are also transferred (1997 CLL 14).

1002 S 41 BCEA; SACWU v Engen Petroleum Ltd & others 1998 ILJ 1568 (LC) 1572A-B. In this case, the applicant sought a declaratory order to the effect that those members of the applicant employed by the second respondent at the time of the application, and who were transferred to the second respondent in terms of an agreement reached between the first respondent and the second respondent, were entitled to the same redundancy benefits which formed part of their conditions of employment while they were still employed by a division of the first respondent prior to the transfer in terms of s 197(1)(a). The Court assumed jurisdiction in terms of s 158(1)(a)(iv) of the LRA (also referring to Kgethe & others v LMK Manufacturing (Pty) Ltd 1998 19 ILJ 522 (LAC)). The union contended that the redundancy benefits conferred upon its members by the old employer formed part of their contracts of employment and that the transferee was thus obliged to give effect to the rights of the union in terms of s 197(2)(a) of the Act. The Court held, in par 12, that: “Section 197(2) of the Act deals with ‘rights and obligations’ of the old employer which are transferred to the new employer in the circumstances contemplated in section 197(1) of the Act. These rights and duties can have their origin in statute. Severance pay may be considered a right although the extent or the quantum of the right may vary between nil and one week.” The Court did not grant a declarator but stated that “… for the union to succeed … it must show that a right to a redundancy benefit, in the event of future redundancies, accrued contractually to each affected employee. It is not enough to show that it was available by operation of law or that it was offered to the union and accepted. If a contract came into existence between the old employer and the union, or another union, the parties could have intended that the benefit be accepted by the employees i.e. the parties may have intended the stipulation alteri to apply. There is no allegation to this effect in this case” (par 13).

1003 In NUMSA & another v Success Panelbeaters & Service Centre CC t/a Score Panelbeaters & Service Centre 1999 ILJ 1851 (LC) the Court ordered the transferee to reinstate the dismissed employees of the transferor. This decision was confirmed by the LAC in Success Panel Beaters & Service Centre CC v NUMSA & another 2000 6 BLLR 635 (LAC). However, see chapter 5, par 5.2 supra for conflicting opinions in this regard.

1004 In this regard, a prospective transferee will be advised to negotiate for indemnity against contingent claims against the old employer.

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employment in terms of section 23(3).1005 Union recognition agreements, for instance, are certainly not covered. In addition, organisational rights1006 of unions are also excluded from the ambit of section 197 as it is currently drafted.1007 It remains to be seen whether it could be successfully argued that some organisational rights, for example the right to access, could also result in an individual right for an employee (for example, that an employee could allege that he/she has a right that his/her former union representative contact him/her and assist him/her in proceedings in the workplace after the transfer).

It is submitted that most of the collective agreements, which will not be transferred, will in all probability deal with organisational rights. In this regard, the practical consequences of the failure to transfer are that unions will have to indicate afresh that they are either sufficiently representative or a majority union, depending on the specific organisational right demanded.1008 This opens the door for disputes regarding representivity, ultimately adding to the burden of the Commission for Conciliation, Mediation and Arbitration (CCMA). Furthermore, it will often be difficult for the unions to indicate representivity in the transferee’s workplace due to the definition of workplace1009 and the guidelines established thus far by the CCMA regarding how representivity is determined.1010 It is clear, however, that the first sentence of the definition (referring to the place or places where the employees of the employer work)

1005 Employment contracts and collective agreements are undeniably distinct from one another.

See SACTWU obo Zondi v Waverley Blankets Limited 1999 7 BALR 841 (CCMA) where it was held that the liquidation of a company only extinguished employment contracts and not collective agreements.

1006 See ss 12-16 of the LRA. 1007 See chapter 14 infra for the proposed inclusion thereof. 1008 S 21 deals with the exercise of organisational rights. One of the requirements for a union to

exercise such rights is that the union must be representative in the workplace. S 21(8) regulates disputes regarding the representativeness of a trade union. For most organisational rights, a union must be “sufficiently representative”. However, for some rights (ss 14 & 16) the union must be a majority union, or two or more unions acting jointly with majority membership in the workplace. S 65(2)(a) provides that despite s 65(1)(c) (prohibition on strikes with regard to disputes of right) a person may take part in a strike or a lock-out or in any conduct in contemplation or in furtherance thereof, if the issue in dispute is about any matter dealt with in s 12 to 15 of the Act, i.e. organisational rights (excluding the right to disclosure of information).

1009 S 213 of the LRA states that in the private sector, “workplace” means: “the place or places where the employees of an employer work. If an employer carries on or conducts two or more operations that are independent of one another by reason of their size, function or organisation, the place or places where employees work in connection with each independent operation, constitutes the workplace for that operation”.

1010 See OCGAWU v Total SA CCMA WE 15487, Jutastat, 30 March 1999 where the regional depots where the union had members did not make up a workplace. In SACCAWU v The Hub 1999 20 ILJ 479 (CCMA) the whole operation was also considered a workplace as defined. These awards indicate that the bias is towards finding for larger rather than smaller units and that the onus is on the party alleging that a workplace should be fragmented to establish its case. This will make it very difficult for a union in the transferee’s workplace to satisfy the Act’s requirements for organisational rights, unless it was already established in that workplace before the transfer.


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is preferred as the most important indicator of a “workplace”.1011 In SACCAWU v Medlife,1012 the commissioner did not regard a 14% support solicited by the union at Medlife countrywide as sufficient. In Speciality Stores Ltd v SACCAWU,1013 the Labour Court similarly regarded all the stores of the employer across the country as a single workplace in the absence of sufficient proof that the different stores operated independently. In Speciality Stores, the Court stressed that the norm set by the definition is the place or places of the employer where the employees work. It also found that in the case of a dispute in this regard, the dictates of a uniformed approach require that only the Labour Court is empowered to decide whether a particular entity constitutes a workplace. However, in SACCAWU v Speciality Stores Ltd,1014 the Labour Appeal Court overturned the Labour Court decision by Zondo AJ (as he then still was) in terms of which only the Labour Court was said to have jurisdiction to determine what a workplace was for purposes of the Act. The LAC commented that a statutory body such as the CCMA was generally obliged to determine the scope of its own powers before it acted, even though such determination was not final. 9.6 Concluding remarks It is evident that the South African regulation pertaining to the transfer of collective rights and obligations differs fundamentally from that of the European Union, United Kingdom and Germany as far as collective rights and obligations (other than those falling under section 23(3) of the Labour Relations Act) are concerned.

One of the practical consequences of the failure to include the transfer of these collective rights and obligations under a transfer in South Africa is that these agreements will have to be renegotiated afresh with the transferee. This could involve unnecessary industrial action at a cost to the new employer and the South African economy as a whole.1015

What would the reasons be for the legislator’s failure to include these rights and obligations under South African provisions for the transfer of contracts? The most likely reason is that the legislator simply did not think that far. The haste with which the Labour Relations Act was drafted and the considerable disputes regarding “important” 1011 See Olivier MP in Slabbert K et al Managing Industrial Relations (Butterworths 2001)

Chapter 5. 1012 CCMA award of 7 May 1997. 1013 1997 BLLR 1099 (LC), 1997 ILJ 992 (LC). 1014 1998 BLLR 352 (LAC). 1015 However, see chapter 14 infra regarding proposed amendments to s 197 in this regard.

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provisions such as the right to strike, operational requirement dismissals, etc, certainly contributed to the inclusion of a very vague and incomplete section 197 in the Act. Other meaningful reasons appear absent. This omission is especially unclear, having regard to our constitutional framework and the primacy accorded to collective bargaining, also in the Labour Relations Act. It is consequently argued that a strong case can be made in favour of the inclusion of collective rights and obligations under South African provisions regulating the transfer of undertakings as going concerns. The case for the inclusion of collective rights and obligations under the scope of transfer provisions is based on both policy and practical considerations. Social policy indicates that it is clear (and this is also apparent from the regulation of this issue at European Community level), that transfer provisions are intended to protect employees in the wide sense. In terms of the Acquired Rights Directive, collective rights and obligations pertaining to the individual relationship are therefore entrenched for a period of one year1016 and extensive rights of disclosure of information and consultation1017 are provided for. Employee representatives also retain their status and function where the transferred undertaking preserves its autonomy. Such regulation contributes to achieving the goal of minimising the effect on transferred employees of a change in the person/institution responsible for carrying on an undertaking. The absence of the transfer of collective rights and obligations between the old employer and employee representatives in South African law is regarded as unsatisfactory. The relationship between employer and employee representatives moulds and influences the relationship of each individual employee with his/her employer. It therefore does not seem logical to provide for the transfer of rights and obligations originating from the individual relationship but not for those collective rights and obligations originating from a collective agreement between the old employer and employee representatives. It is further submitted that the notion of “employee protection in the wide sense” as a goal of transfer provisions, is supported by the inclusion of statutory rights and obligations under the scope of section 197. The exclusion of collective rights and obligations should also be further considered in this light. Finally, it could be argued that it would be prudent to include the transfer of these collective rights and obligations. This would certainly contribute to transparency in the workplace as well as legal certainty regarding the practical consequences of a relevant transfer for the transferee, employees and unions. The absence of these rights might 1016 S 197 does not contain any such provision limiting a period of observance to one year and it

thus seems that provisions incorporated into contracts of employment in terms of s 23(3) of the LRA enjoy stronger protection in South Africa.

1017 See chapter 11 infra regarding the absence of these rights in South Africa.


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lead to a higher incidence of industrial action. It is submitted that only the substantive/normative provisions of collective agreements need transfer. However, if the procedural provisions are reopened for fresh negotiation, this could result in unnecessary industrial action. The sanctity of transferred agreements could be limited to a fixed period,1018 for instance one year after the transfer.1019 This would give all the relevant roleplayers the opportunity for fresh negotiations on a level playing field. It is indeed extraordinary that the unions themselves have apparently not recognised this half-hearted approach in neglecting their interests and that they have not clamoured for improvement in this regard.

1018 That is if no amendments due to the transfer are allowed (see chapter 8 supra regarding

different models in this regard). It is also possible that amendments may be allowed as long as the employees are, on the whole, not worse off than before the transfer.

1019 This is stated with regard to collective rights and obligations originating in a collective agreement (not prior individual rights and obligations existing between transferor and individual employees, whether due to a contract, a statute or a collective agreement (s 23(3))).

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CHAPTER TEN

THE TRANSFER OF SOCIAL SECURITY RIGHTS AND OBLIGATIONS 10.1 General The employment relationship is much wider in scope than the employment contract.1020 The employment relationship is moulded not only by the rights contained in the employment contract but also by statutory minimum rights, rights in collective agreements and entitlements found in social security legislation.1021 The influence and impact of social security on the lives of workers and other people outside the workplace in all countries is undeniable. The fact that someone is employed and can be classified as an employee, whether in the formal or the informal sectors is, in many instances, the qualifying condition for benefiting from social security protection (in particular social insurance). The main functions of social security are as follows:1022 • A safety net function.1023 This ensures that each member of society who is facing

destitution is provided with the minimum level of cash income, health and social services that allow the individual to lead a socially meaningful life.

• An income maintenance function.1024 This permits the economically active members of society, or all the residents, to build up entitlements to allow them to maintain a decent standard of living during periods of unemployment, maternity, sickness, old age, and invalidity under those conditions in which other forms of income and economic activity are not possible.

It is the second basic function of social security entitlements of workers (that of income maintenance), which is especially relevant for this study. In South Africa, these social security measures fall within the social insurance branch of social security and the compulsory precondition is usually that the individual must be (or must have been) an employee.1025 Social insurance has as a characteristic the fact that those who benefit from a scheme must have contributed towards the same. The worker, the employer, the State or a combination of any of these parties can make contributions and, since contributions are compulsory, solidarity plays an important role so that risks can be 1020 See NAAWU v Borg Warner SA (Pty) Ltd 1994 15 ILJ 509 (A). 1021 See chapter 8, par 8.2 supra regarding the transfer of statutory rights in terms of s 197 of the

LRA. See also chapter 9 regarding the transfer of collective rights and obligations. 1022 Olivier et al Social Security Law 13. 1023 Social assistance. 1024 Social insurance. 1025 This is the case for the following branches: unemployment benefits, compensation for

occupational injuries and diseases, maternity benefits, occupational pensions and employer-provided health insurance.


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spread as widely as possible. An important consequence of having contributed to a scheme is that the individual has a right to benefit from such contribution in the event of the insured risk occurring. The contribution ensures the contributor a return. The question that must now be considered relates to the effect of the transfer of an undertaking as a going concern on an employee’s social security entitlements or what such effect should be. In some instances, the transfer will have no direct effect because the employer does not contribute and because continued employment with one specific employer is not relevant. However, in some instances, the old employer is a party to the scheme (e.g. occupational injuries and diseases) and it is submitted that this factor alone might have some effect. Unfortunately, the limited scope of this thesis does not allow a complete consideration of these issues. However, an attempt will be made to highlight some of the most problematic issues. 10.2 Statutory occupational-based social insurance schemes1026 10.2.1 Unemployment South Africa has a compulsory unemployment insurance scheme regulated by the Unemployment Insurance Act of 1966 (UIA). The Act establishes the Unemployment Insurance Fund (UIF) towards which every employee and employer must contribute, unless excluded from the scope of the Act.1027 The scheme targets the victims of temporary unemployment and long-term unemployment is thus not covered. Benefits are only paid out for a limited period of time. Certain conditions are set before a claim may be brought. These include having been employed for a certain period and a willingness to work. In South Africa, the reason for the loss of the job is irrelevant. It is also payable where a person, for example, has resigned from his/her job.1028 If this were not the case, then

1026 Most European countries have very advanced social security systems. This results in

statutory social security schemes being the norm, whereas occupational-based schemes are only there to top-up other entitlements, often being available only to the wealthier employee. It is thus submitted that the scope of problems that may arise in South Africa owing to the widespread memb ership of voluntary occupational schemes and the absence of sufficient statutory protection will not be as much of a problem in these countries. Another reason for such a viewpoint is that, in many instances, in the European Community, Member States are obliged to ensure the establishment and functioning of guarantee institutions, against which employees lodge their claims, rather than individual employers.

1027 S 2 of the Act. One of the most important exclusions relates to public servants (other exclusions include domestics, seasonal workers, etc.).

1028 Olivier et al Social Security Law 290.

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an employee who exercises his/her power to object1029 in the context of the transfer of an undertaking as a going concern could be in danger of not being able to claim unemployment as a result of not being “involuntarily unemployed”. The basis for calculating the quantum of benefits is the total number of weeks for which an unemployed person contributed to the Fund, regardless of any interruptions. A maximum is applicable. In this case the ceiling is one week’s benefit for every six weeks’ completed employment to a maximum of 26 weeks in any period of 52 consecutive weeks.1030 The transfer of the contract of employment, with or without continuity of service, is thus irrelevant. A practical problem that becomes evident in transfer situations is the question of the old employer’s failure to register with and pay its employees’ contributions to the UIF. Since an employee can only claim unemployment benefits if he/she has been registered as a contributor and has been employed for at least 13 weeks during the 52 weeks immediately preceding his/her unemployment, the omission of the old employer endangers the claim of an employee who is dismissed within 13 weeks after the transfer.1031 The omission of the old employer constitutes a criminal offence, which is not transferable to the transferee.1032 However, section 197(2) does provide that all rights and obligations between every employee and the old employer transfer to the transferee, at least in section 197(1)(a) transfers. 1033 In the case of section 197(2)(b) transfers, according to our Labour Appeal Court, the parties can contract out of the transfer of the contract itself, with the result that continuity of employment will be interrupted.1034 The question is thus whether the transferee is liable for damages caused to the employee because he/she is not able to claim unemployment without the well-known blue card as a result of the failure of the transferor to register and contribute. It is submitted that the failure of the employer should not prejudice the employee, as long as the money owed was indeed deducted from his/her remuneration. However, it seems as if the burden of proof will rest on the employee. 10.2.2 Maternity benefits

1029 Depending on the effect of such objection, see chapter 7 supra . 1030 S 34. 1031 This would be the case where an employee has not built up enough old credits to assist

his/her claim and he/she cannot prove employment for 13 weeks during the preceding 52 weeks because of the transferor’s failure to register and pay over contributions.

1032 S 197(5). 1033 See chapter 8, par 8.2 supra regarding the transfer of statutory rights and obligations. 1034 I.e. in insolvency-related circumstances.


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Maternity benefits are paid out of the UIF to a contributor who becomes “unemployed” owing to her pregnancy and confinement, irrespective of whether or not she is able and willing to work.1035 The female contributor is deemed to become unemployed on the date from which she receives no payment, or receives less than a third of her normal remuneration. The applicant must have been employed for at least 13 weeks during the 52 weeks immediately preceding the expected date of confinement or the date of birth.1036 The basis for calculating the quantum of benefits is the total number of weeks for which an unemployed person contributed to the Fund, regardless of any interruptions. A maximum is applicable. In this case, the ceiling is also 26 weeks’ benefits. As a result, the transfer of an employment contract does not play any role as regards the right of a contributor to claim maternity/adoption benefits. Previous credits are not lost. However, the practical problem alluded to above is also relevant here. If the transferor did not register and pay over the prescribed contributions, a female contrib utor can face a situation where, after a transfer, she does not have 13 weeks’ employment with the transferee and there is no record of previous registration within the preceding 52 weeks of confinement. The question remains as to whether the transferee is obliged to make good for damages suffered as a result of the transferor’s omission. 10.2.2.3 Survivors’ benefits Death and survivors’ benefits are also paid out of the UIF in terms of the Unemployment Insurance Act.1037 These benefits are paid to the dependants of a deceased contributor if the contributor was employed for at least 13 weeks during the five years immediately preceding the date of the contributor’s death. The same problem regarding a transferor’s omission to register and contribute is also relevant in this case. 10.2.4 Occupational injuries and diseases An employer who carries on a business in the Republic of South Africa is obliged to apply for registration with the Compensation Fund as an employer of contributors.1038

1035 S 37 of the UIA. 1036 S 37 & s 37A provide that a female contributor who adopts a child under the age of 2 years

may receive adoption benefits. 1037 S 38. 1038 Two exceptions exist: Rand Mutual Assurance Company Ltd and the Federated Employer’s

Mutual Association.

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This position is regulated by the Compensation for Occupational Injuries and Diseases Act (COIDA) 130 of 1993. COIDA provides for a system of no-fault compensation of employees who are injured in accidents that arise out of and in the course of their employment or who contract occupational diseases. The failure to comply with the provisions of the Act is a criminal offence. In addition, the Compensation Commissioner has the power to penalise employers who do not comply with their statutory obligations (only employers contribute to the Compensation Fund and not employees).1039 In the event of an injury/disease resulting in temporary total disablement, the employer must pay the compensation for the first three months.1040 This liability is not affected by the fact that the employee may be dismissed during the three-month period or the fact that the employee would have ceased to be in the employer’s employment during the three months.1041 It thus seems as if the transferor will be liable to pay this compensation even where there has been a transfer of its undertaking as a going concern in terms of section 197.1042 However, section 210 of the Labour Relations Act provides that this Act enjoys preference over any other Act, save the Constitution or an Act that expressly amends the Labour Relations Act. It could thus be argued that the transferor’s liability or obligation to pay such compensation is also transferred to the transferee, unless otherwise agreed.1043

1039 See chapter 11 of Olivier et al Social Security Law 307 and further. 1040 S 47(3) COIDA. 1041 Thompson and Benjamin South African Law: Commentary on the Compensation for

Occupational Injuries and Diseases Act (Juta 1998) H1-27. 1042 Rights and obligations of persons employed at the time of the transfer are subject to transfer

to the transferee. See chapter 8, par 8.2 supra . 1043 Reg 5(2)(a) of the TUPE regulations provides that the transferee inherits all the transferor’s

“rights, powers, duties and liabilities under or in connection with” the contracts of employment. Reg 5(2)(b) makes it clear that anything done by the transferor in respect of a contract is deemed to have been done by or in relation to the transferee. In Bernadone v Pall Mall Services Group & others 1999 IRLR 617, the High Court discussed the consequences of these provisions for a claim for negligence and breach of statutory duty. Pall Mall Services employed the employee as a catering assistant. The activity in which she worked was transferred to an NHS Trust some months after the employee had an accident at work in which she suffered a head injury. The employee instituted proceedings against Pall Mall and the NHS Trust for negligence and breach of statutory duty under the Occupiers Liability Act 1957. The employee and the NHS Trust argued that the TUPE regulations did not result in the transfer of a liability in tort or for breach of statutory duty to the transferee. It was argued that the duty to take reasonable care for the safety of employees does not arise out of the contract of employment, but from case law (being outside the scope of the TUPE regulations). Similarly, it was argued that a statutory duty is owed to all visitors, whether employees or not, and therefore could not be seen as arising “under or in connection with” the contract of employment. The High Court was, however, unconvinced and placed reliance on the implied term that employees should be given a safe place of work and a safe system of work. In addition, the Court held that it was irrelevant whether the liability arose out of contract, tort or breach of statutory duty as reg 5(2) is wide enough to cover the transfer of all such liabilities.


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10.2.5 Illness Benefits can be paid out of the UIF for employees who are temporarily unable to work because of illness.1044 The same remarks that apply to the discussion of unemployment and maternity benefits are applicable here. In terms of the Basic Conditions of Employment Act 75 of 1997 (BCEA), employees are entitled to paid sick leave for a number of days. Employees with a five-day working week are entitled to 30 days in every 36-month cycle and employees with a six-day working week to 36 days in the same period.1045 The transfer of an employee’s contract affects this entitlement as section 22 of the BCEA provides that “sick leave cycle” means “the period of 36 months’ employment with the same employer”. It is submitted that section 197(2)(a) has the effect that the change in the identity of the employer does not impact on the employee’s entitlement to sick leave in terms of the BCEA in these circumstances because the rights and obligations between the old employer and each employee transfer to the transferee and continuity of employment is unaffected. In section 197(2)(b) transfers, the position may, however, be different, since it is only the contracts of employment that transfer and not the rights and obligations that existed between the old employer and each employee, unless otherwise agreed upon.1046 The question of supplementary medical aid schemes will be discussed infra.1047 10.3 Occupational social insurance schemes 10.3.1 Introduction It has been shown that there are at least four reasons why employers consider the inclusion of retirement and other group benefits in their remuneration packages for employees (that is in the absence of statutory compulsion):1048

1044 S 36 of the UIA. 1045 S 22 of the BCEA. 1046 See chapter 8, par 8.5 supra where the approach of the LAC in Foodgro, A Division of

Leisurenet v Keil was discussed. The LAC was of the view that s 197(2)(a) transfers do not allow for the contracting out of the transfer of the contract of employment itself, whereas, according to the Court, section 197(2)(b) does.

1047 See par 10.3. 1048 Marx GL & Hanekom K The Manual on South African Retirement Funds and Other

Employee Benefits Vol 1 (Butterworths 1998) 1/97 13.

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• The state cannot afford worthwhile social benefits for all South Africans. Employees therefore look to their employers for financial support in their needs relating to life’s contingencies.

• Many less sophisticated employees do not appreciate the need for provision for sickness, disability, death and retirement.

• The cost and availability of insurance and retirement plans are often better if they are arranged collectively for a group of people.

• Group retirement and other employee benefits form part of the employer’s remuneration package and are structured to attract and retain valuable staff.

It is submitted that the last reason above is, in practice, often the main catalyst behind employers’ actions in this regard. Given the long-term nature of many of the retirement and other employee benefits, the security of these schemes and benefits is of utmost importance. To ensure that sufficient funds are available to comply with a scheme’s obligations, it is thus often desirable that a separate fund be established instead of a situation where the employer pays the benefits as and when it becomes necessary to do so. This fund will then ideally be made up of equal employer and employee representation for managing it. The separate status of most funds from that of the employer will often result in uncertainty regarding the applicability of section 197. A distinction has to be drawn between funds that are controlled by the employer and other funds that are managed and formed independently of any employer per se.1049 A further distinction can also be identified between instances where an employer may make a contribution to a fund on behalf of the employee and instances where an employer grants a benefit to an employee, in order for the employee to obtain medical cover, for example. Employers may deduct from their taxable income (limited to a certain percentage), any sum contributed to any pension fund, provident fund, or benefit fund (including medical schemes) during the year of assessment for the benefit of their employees.1050 The two main areas of great importance here are old age and health provision. These will be dealt with uniformly; even though discussions may centre around retirement benefits, for example, the principles are largely the same. There is generally no statutory compulsion to belong to either a retirement fund or a medical scheme in South Africa at present. Employers and employees often contract on private occupational retirement provision. There are two types of occupational retirement schemes to choose from

1049 See e.g. Society of Bank Officials v Bank of Lisbon International Ltd 1993 14 ILJ 394 (IC) &

1994 15 ILJ 555 (LAC). 1050 S 11(1) of the Income Tax Act 58 of 1962.


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regarding old age: pension funds and provident funds.1051 In addition to retirement benefits, retirement funds often provide additional benefits for death and disability. These funds can be operated on the basis of a defined benefit fund or a defined contribution fund.1052 Regarding health provision, employers often provide medical schemes open only to their employees.1053 Employers may also enforce a contractual duty that employees must belong to a specific fund or to one of several specified funds. In terms of the Labour Relations Act, an employee may refer a dispute to arbitration regarding “the unfair conduct of an employer relating to … the provision of benefits” in terms of item 2(1)(b) of part B of Schedule 7 of the Act. This is part of the residual unfair labour practice jurisdiction under the Labour Relations Act.1054 Therefore, where the rules of the medical scheme/pension fund constitute part of the terms of employment, the rules or any action taken in terms thereof could ostensibly constitute an unfair labour practice.1055 Some have argued that any dispute that a member may have with the management of the scheme is likely to be considered to arise from the employee/employer relationship, in which event the Labour Court will have jurisdiction.1056

1051 For a discussion on the differences between these two types of schemes, see Olivier et al

Social Security Law 112-113; Marx & Hanekom Manual on South African Retirement Funds 25.

1052 For an explanation of these concepts, see Olivier et al Social Security Law 113-114. 1053 All medical funds must be registered with the Registrar of Medical Schemes under the

Medical Schemes Act 131 of 1998. 1054 There is considerable uncertainty regarding the precise content of the term “benefit”. See

Smit N “The residual unfair labour practice” 2000 TSAR 632 635-640. In Schoeman v Samsung Electronics SA (Pty) Ltd 1997 10 BLLR 1364 (LC) it was held that something received as a quid pro quo for services rendered could not be deemed to be a “benefit”. A benefit is something extra, separate from remuneration. It can sometimes be a term of the employment contract and sometimes not. In contrast, remuneration is always a term and condition of an employment contract. The wide definition of “remuneration” allows very limited scope of application for item 2(1)(b) relating to the unfair conduct in the provision of benefits.

1055 See e.g. Van Coppenhagen v Shell BP SA Petroleum Refineries (Pty) Ltd & another 1991 12 ILJ 620 (IC). See also Grogan Workplace Law where he states: “For purposes of disputes concerning item 2(1)(b) of Schedule 7 of the LRA, however, the Labour Court has pointed out that the phrase ‘any act or omission that arises between an employer and an employee’ means that it can potentially embrace acts by third parties, such as pension funds, as long as the employer and the employees are in dispute over them”. The crucial question is whether the employer is in a position to exert direct pressure over the scheme (SA Clothing & Textile Workers Union v Garlicks Stores (Pty) Ltd 1996 17 ILJ 255 (IC)).

1056 Marx & Hanekom Manual on South African Retirement Funds 599. However, this appears to be too wide a statement. It is true that the BCEA now endows the LC with concurrent jurisdiction with the civil Courts to hear and determine any matter concerning a contract of employment, irrespective of whether any basic condition of employment constitutes a term of that contract (s 77(3)). However, other forums may also have jurisdiction and, in some cases, e.g. where there is an independent pension fund (it could also be a medical scheme), the Pensions Fund Adjudicator or another forum may have concurrent jurisdiction with the High Court (see Olivier MP “Pensions: some employment law aspects” 2000 TSAR 741 742-744).

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It is evident that the liability that existed between the old transferor and each employee in this regard can be transferred to a transferee as a result of section 197(2)(a).1057 Questions arise as to whether, in a defined benefit scheme, for example, the transferee is also liable to make good any deficit that may exist in this regard, since the employer is expected to make good the shortfall in this type of scheme to ensure the defined benefit.1058 An issue closely linked to this, and that deserves consideration, is the matter of prefunding, which can be paid by either party, the employee or employer. Prefunding entails the accumulation of funds to provide for future liability of a member to a medical scheme or future medical expenses of such member. Since the traditional cross-subsidy from younger members to older members has resulted in huge increases in costs, it has fallen to the employer or the member himself/herself to fund for retirement medical costs. If money is to be set aside, some questions arise: How much money? What happens to the money if the members leave the company? What happens with the money if the undertaking is transferred? It can be stated that whilst the employer requires a safe, protected reserve, the employee needs to be able to build up a contribution in a “portable” vehicle that he/she can continue to contribute to even should he/she change employers. It is submitted that the outcome of these questions will ultimately depend on whether or not the issue of prefunding falls within the concept of “rights and obligations between the old employer and each employee”. 10.3.2 Comparative perspective Subparagraph 4(a) of article 3 of Directive 2001/23/EC, which deals with the transfer of the transferor’s rights and obligations (arising from a contract of employment or from an employment relationship) to the transferee, provides that unless the Member States provide otherwise, the transfer of the said rights and obligations will not apply to employees’ rights to old-age, invalidity or survivors’ benefits under supplementary company or inter-company1059 pension schemes outside the statutory social security schemes in Member States.1060 However, subparagraph 4(b) goes on to state that even where the Member States do not provide that articles 3(1) and (2) will apply in

1057 See chapters 7 & 8 supra . However, the employer must be able to influence the board of the

fund. See also s 86(1) of the LRA, that renders any changes to the rules regulating social benefit schemes effected by the employer or employer-appointed representatives on trusts or boards of employer-controlled schemes the subject of joint decision-making with workplace forums (see Grogan Workplace Law 243).

1058 Regarding those employees still employed at the time of the transfer. 1059 See par 10.3.3 infra. 1060 The following Member States allow for the transfer of supplementary occupational pensions

in limited circumstances: Belgium, Denmark, France, Germany, Luxembourg, the Netherlands, Portugal and Spain (as identified in Hepple B & Mumgaard K “Pension rights in business transfers” 1998 ILJ (United Kingdom) 309 310).


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relation to such rights in accordance with paragraph 4(a), the Member States must adopt the measures necessary to protect the interests of employees and of persons no longer employed in the transferor’s business at the time of the transfer in respect of rights conferring on them immediate or prospective entitlement to old age benefits, including survivors’ benefits, under supplementary schemes referred to in article 3(4)(a) (i.e. in relation to those rights that will not transfer).1061 Under the TUPE regulations in the United Kingdom, regulation 7 excludes occupational pension schemes from the scope of regulations 5 and 6. It provides that the regulations will not apply to those parts of a contract of employment, or a collective agreement relating to an occupational pension scheme1062 or to any rights, powers, duties or liabilities under or in connection with any such contract or subsisting by virtue of any such agreement and relating to such a scheme, or otherwise arising in connection with that person’s employment and relating to such a scheme.1063 Regulation 7(2) stipulates that, for purposes of the above, any provisions of an occupational pension scheme that do not relate to benefits for old age, invalidity or survivors will be treated as falling outside the scheme.1064 In Germany, upon the transfer of a company to another employer as a result of a legal transaction, the obligations to be met by the new employer include the rights and obligations of the employment relationship that existed on the date of the transfer.1065 However, the new employer does not have to meet the claims of the old-age pensioners or of the other employees who resigned previously and who had a vested right to future

1061 Thus, the obligation falls on the Member State and not the transferee, and failure to

implement may result in enforcement proceedings. 1062 See Perry v Intec Colleges Ltd 1993 IRLR 56 (EAT) where it was held that pension rights do

not transfer to a transferee. McMullen Business Transfers and Employee Rights 7/44 summarises the reasoning of the EAT as follows: “A contracted-out occupational pension scheme is a supplementary pension scheme within the meaning of Art 3(4) of the Directive and therefore the exclusion of occupational pension schemes from TUPE under reg 7 is in line with European law.” Benefits under supplementary schemes referred to in the first sub-paragraph simply mean that Member States must protect any pension scheme rights which crystallise at the time of the transfer and the true meaning of art 3(4) is that this creates no liability for the transferor or transferee.

1063 The Pension Schemes Act 1993, United Kingdom provides that entitlement to pension benefits under an occupational scheme must vest after an employee has completed 2 years’ membership, or immediately, if the employee has received a transfer credit from another scheme. If the employee leaves the scheme before that time, he or she is entitled to a refund of his/her own contributions.

1064 Hepple & Mumgaard (ibid) state that the words “occupational pension scheme” in reg 7 do not extend to a promise by an employer to make contributions to a personal pension scheme. They submit that as group personal pension schemes become increasingly common, their inclusion in the transfer provisions of the TUPE regulations will look more and more anomalous so long as occupational pension schemes are excluded.

1065 Art 613a of the Civil Code.

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pension payments.1066 The new employer only has to meet obligations that include pension claims of those employees who are still employed on the date of the transfer of the undertaking and who leave the employment of the undertaking only after the transfer. However, special provisions apply if an undertaking or part thereof is transferred to a new employer in a legal transaction involving the official receiver (in the case of a bankruptcy). Even though the transferee of the undertaking assumes the rights to future pension payments of the staff taken over, he/she does not owe the full company pension if a pension becomes payable later. The principles of the official receiver have priority.1067 In this case, the transferee has to assume the pension expectations only to such an extent as they cannot be asserted in the bankruptcy of the company transferor. In this regard the fact of whether or not the pension rights have already become vested or not, is irrelevant. However, if they have vested when bankruptcy proceedings are instituted, the insolvency protection institution is liable for that part of the pension rights acquired up until bankruptcy proceedings were instituted. It is also accepted that if there is sufficient objective reason, the transferee of a company in a financial predicament may agree with the employees whom it has taken over to limit or suspend the company pension benefits in the future.1068 10.3.3 Debates concerning article 3(4) of the Directive Some uncertainty existed within Member States as regards what type of occupational pension schemes should be accepted as “supplementary”.1069 In particular, the uncertainty pertained to whether the exclusion applies to schemes that provide benefits in lieu of statutory social security benefits. At least three cases addressed the issue of a “statutory social security scheme”. In Defrenne v Belgian State,1070 the European Court of Justice defined such a scheme as a scheme that is directly governed by legislation, without any element of agreement within the undertaking, and that is compulsorily applicable to employees.1071 This viewpoint was endorsed in Barber v Guardian Royal Exchange Assurance Group Ltd.1072 In this case it was held that benefits awarded under an occupational pension scheme, which partly or entirely take 1066 The Act on Improvement of Company Pension Schemes of 1974 ensures that an employee

has a vested right to future pension payments if he/she complies with art 1 of the Act. 1067 See Halbach et al Labour Law in Germany 227. 1068 Halbach et al (227) refers to the Federal Labour Court judgement of 4 July 1989 in DB 1989

2541. 1069 See Hepple & Mumgaard 1998 ILJ 311-313. 1070 1971 ECR 445 (ECJ). 1071 Hepple & Mumgaard thus argue that this suggests that occupational pensions schemes

which have some relationship with state social security schemes, either by offsetting the state benefits or by some other means, may nevertheless be regarded as supplementary schemes (1998 ILJ 312).

1072 1990 ECR 1889 (ECJ).


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the place of benefits paid by a statutory social security scheme, may fall within the scope of “supplementary” pension benefits for the purposes of what was then article 119 (now article 141) of the European Community Treaty. Finally, in Bestuur van het Algemeen Burgerlijk Pensionfunds v Beune,1073 the European Court of Justice held that in determining whether a scheme is a supplementary scheme, the only possible decisive criterion is whether the pension is paid to the worker by reason of the employment relationship between him and his former employer. The Court held that the fact that private, occupational schemes operate in a statutory framework was not a barrier to the application of what was then article 119 (now article 141). The debate regarding what exactly falls under the term “supplementary” pension scheme has been settled by the definitions adopted in the Directive on Supplementary Pensions.1074 This determines that:

“supplementary pensions scheme” means any occupational pension scheme established in conformity with national legislation and practice such as a group insurance contract or a pay-as-you-go scheme agreed by one or more branches or sectors, funded scheme or pension promise backed by book reserves, or any collective or other comparable arrangement intended to provide a supplementary pension for employed or self employed persons “supplementary pension” means retirement pensions and, where provided for by the rules of a supplementary pension scheme … invalidity and survivors’ benefits intended to supplement or replace those provided in respect of the same contingencies by statutory social security schemes.

This results in the exception applying to any pension benefits that have their source in the employment relationship.1075

1073 1994 ECR 4471 (ECJ). 1074 Directive 98/49/EC of 20 June 1998 on safeguarding the supplementary pension rights of

employed and self-employed persons moving within the European Community, art 3. 1075 See, with regard to the United Kingdom position, Frankling & others v BPS Public Sector

Ltd 1999 IRLR 212 (EAT). In this case it was confirmed that where employees were made redundant following the outsourcing of the health services payroll department in which they had worked to a private sector company, under Whitley Council terms and conditions, these employees were contractually entitled to augmented redundancy payments. The transferee met these. The transferee refused, however, to meet any payments to honour enhanced rights under the pension scheme. BPS argued that these were effectively occupational pension scheme rights that were excluded from the scope of the TUPE regulations. The EAT agreed and held that the benefits due were an annual pension from the date of redundancy to normal retirement age and a lump sum payable to the pension scheme

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A further debate involved the question of whether the exclusion refers only to accrued entitlements, and not to any pension promises given by the transferor in respect of post-transfer service.1076 In Eidesund v Stavanger Catering A/S a negative answer was given to this question.1077 The Court found that all rights to benefits have been excluded from the general transfer of rights and obligations to the transferee. Moreover, since the accrual of pension benefits and the payment of pension contributions are inseparable, it would not make economic sense to require pension contributions to be made when no further benefits are to accrue. From this, it followed that the transferee is not under an obligation to continue making the pension contributions to the employee’s occupational pension scheme that the transferor had undertaken to make, as this falls under the exclusion.1078 The duty to protect the right to certain benefits under article 3(4)(b) has been held to apply only to accrued pension rights as a result of the words “rights conferring on them immediate or prospective entitlement …”.1079 The protection afforded in article 3(4)(b) has been implemented diversely by Member States because of the different interpretations afforded to the term “immediate or prospective entitlement” to benefits. The essential factor pertains to when an entitlement arises, or when the benefit has vested. The Supplementary Pensions Directive defines “vested pensions rights” as follows:

Any entitlement to benefits obtained after fulfilment of the conditions required by the rules of a supplementary pension scheme and, where applicable, under national legislation.

Depending on the rules of different schemes in different countries, as well as the manner of funding, the different Member States thus regulate this matter quite differently.1080

member. These were considered to be effectively accelerated pension benefits triggered by redundancy. The fact that these benefits were accelerated because of redundancy did not prevent them from falling outside the scope of the TUPE regulations as provisions relating to benefits for old age.

1076 Hepple & Mumgaard formulate the question as follows: is the transferee bound by such promises and so committed to providing benefits promised by the transferor in respect of future service? (1998 ILJ 313).

1077 The EFTA Court decision was reported in 1996 IRLR 684. 1078 See also Barnard EC Employment Law 481. 1079 However, Hepple & Mumgaard indicate that some Member States have protected pension

rights, which accrue after the date of the transfer (e.g. Denmark, Luxembourg and Spain). In addition, in Member States where there are extensive collectively bargained arrangements (e.g. France & the Netherlands), in practice, employees continue in their existing pension arrangements, so the issue of future service commitments has never really arisen (1998 ILJ 314).

1080 Hepple & Mumgaard review general trends (1998 ILJ 315) and find that, e.g. in Spain, the employee will usually have an immediate vested entitlement to benefits under a supplementary scheme. In the United Kingdom, the period to qualify for a vested


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This position results in different degrees of employee protection and differential costs for employers in different Member States. Arguments are sometimes proposed in favour of an amendment of the Directive in order to require all Member States to provide for the transfer of supplementary pension rights in the event of a relevant transfer. There are three main reasons for this:1081 • The fact that these rights have been recognised as deferred pay under occupational

pension schemes, through a series of cases decided in relation to the application of article 119 (now article 141) of the European Community Treaty covering pension benefits.1082 It is thus argued that it seems anomalous, in principle, that such rights should be treated differently from other elements of the remuneration package relating to transfers of businesses and undertakings.1083

• The second reason is said to be the increased importance of supplementary pensions schemes as a form of social protection, especially in the Northern European countries, including the United Kingdom.1084

• The possibility that, since occupational pension benefits are part of the consideration that employees receive for rendering service, it could, theoretically, be possible for them to argue that a failure to guarantee that comparable pension rights will be maintained (or that compensation for their loss will be provided) is a substantive and detrimental change in working conditions, giving rise to claims for constructive unfair dismissal against the transferor.1085

The third consideration listed above will carry significant weight, especially having regard to the judgements of the European Court of Justice to date.1086 An amendment that has been considered in the United Kingdom is that the transferee should have to

entitlement is 2 years’ scheme membership. In Austria it is 5 years and in Germany 10 years. If an employee leaves a scheme for any reason before satisfying the requirements, he/she will commonly be entitled to a refund of only his/her own contributions or benefits deriving from the scheme, but will not benefit from any contributions his/her employer has made nor will he/she be entitled to receive any retirement benefits under the supplementary scheme in question. Some countries do not have statutory vesting requirements at all, and it is left to the individual employers to determine them. The authors also state, with regard to funding, that in Belgium, for e.g., vesting is immediate if the scheme is an insured one, but if the scheme is funded in another way, entitlement to benefits vests only after one year.

1081 See Hepple & Mumgaard 315-318. 1082 See the cases of Defrenne & Barber supra . 1083 This argument will also have merit in South Africa where the definition of remuneration is

very wide. See par 10.3.1 supra . 1084 In South Africa, supplementary pension schemes fulfil an important role because of the

insignificant old-age grant that is available subject to a means test and the absence of a compulsory national pension scheme.

1085 Art 4(2) of the Directive. 1086 See e.g. Merck and Neuhuys discussed in chapter 7.

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provide comparable pension rights (not identical) in respect of employment for transferring employees, both before and after the date of transfer.1087 10.3.4 Potential problems pertaining to the automatic transfer of pension

benefits What would the position be if pension benefits were to transfer automatically upon the transfer of an undertaking,1088 without an agreement between the parties? Authors and institutions have warned of the implications of making the transfer of pension benefits compulsory and not subject to an exception.1089 Firstly, it is submitted that binding the transferee to continue the transferor’s supplementary pension arrangements would take no account of the future needs of the transferee’s business or the transferee’s ability to fund the resulting pensions costs in the future. Secondly, it seems that it is generally accepted that such an obligation would require comparable benefits rather than identical benefits. In this regard, serious questions arise as to what exactly the content of the term “comparable” is. Furthermore, who will determine comparability - the transferor’s or transferee’s actuary, the transferor, the transferee or a combination of these parties? And will the employees have a right to appeal against decisions reached? 10.3.5 The legal position in South Africa The statutory provision that regulates transfers in South Africa, namely section 197 of the Labour Relations Act, is silent on the matter of transfer of benefits/entitlements under occupational schemes. As shown earlier, “rights and obligations between the old employer and every employee” transfer in the event of a section 197(2)(a) transfer.1090 When an undertaking is transferred in insolvent circumstances, 197(2)(b) provides that only the contracts of employment transfer and not the rights and obligations that existed between the parties prior to the transfer.1091 It is thus submitted that the rights between an independent pension fund and its members or between an independent medical scheme and its members do not transfer as they are not “rights and obligations between the old employer and each employee”. However, since 1087 See e.g. House of Lords Select Committee on the European Communities Session 1995-6, 5th

Report, Transfer of Undertakings, HL Paper 38, pars 77-78. 1088 I.e. if pension benefits are considered as part of the rights and obligations that exist between

the transferor and employees at the time of the transfer. 1089 Hepple & Mungaard 322-323; the National Association of Pensions Funds (United

Kingdom) 3rd supplement to B161, March 1998, Acquired Rights Directive: Transfer of Undertakings.

1090 See chapter 8, par 8.2 supra . 1091 See chapter 7 supra .


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there is no exclusion clause in section 197, this also means that any pension rights, for example, that do exist between employer and employee (originating from a contractual source or from the employment relationship) should transfer in a section 197(1)(a) transfer.1092 This would arguably include any obligation that the transferor had in relation to a defined benefit fund to employees in employment at the point of transfer. In Younghusband & others v Decca Contractors (SA) Pension Fund and its trustees the Pension Funds Adjudicator decided that section 14 of the Pension Funds Act1093 is part of the broader legislative scheme to socialise legal relationships in the employment context. The adjudicator held that section 197 does not automatically guarantee pension rights deriving from the relationship between the pension fund and the employee in his/her capacity as a member of the fund. The failure of section 197 to guarantee full continuity in pension rights (among the most significant of all employment rights), according to the Adjudicator, can be explained by the fact that the legislature presumably considered that section 14 of the Pension Funds Act adequately catered for the matter. Section 14 ought, therefore, to be construed holistically in conjunction with general legislative policy concerning security on transfer of employment as currently reflected in section 197 of the Labour Relations Act.1094 Section 14(1)(a)-(c) of the Pension Funds Act provides as follows:

14(1) No transaction involving the amalgamation of any business

carried on by a registered fund with any business carried on by any other person (irrespective of whether that other person is or is not a registered fund), or the transfer of any business from a registered fund to any other person, or the transfer of any business from any other person to a registered fund shall be of any force or effect unless- (a) the scheme for the proposed transaction, including a

copy of every actuarial or other statement taken into account for the purposes of the scheme, has been submitted to the registrar;

(b) the registrar has been furnished with such additional particulars or such a special report by a valuator, as he may deem necessary for the purposes of this subsection;

1092 See Younghusband & others v Decca Contractors (SA) Pension Fund and its Trustees 1999

ILJ 1640 (PFA) 1659F. 1093 Dealing with “Amalgamations and transfers”. 1094 See 1659E-I.

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(c) the registrar is satisfied that the scheme referred to in paragraph (a) is reasonable and equitable and accords full recognition- (i) to the rights and reasonable benefit expectations of

the persons concerned in terms of the rules of a fund concerned; and

(ii) to any additional benefits the payment of which has become established practice,

and that the proposed transaction would not render any fund which is a party thereto and which will continue to exist if the proposed transaction is completed, unable to meet the requirements of this Act or to remain in a sound financial condition or, in the case of a fund which is not in a sound financial condition, to attain such a condition within a period of time deemed by the registrar to be satisfactory;

The applicants sought an order directing the trustees of the respondent pension fund (Decca) to transfer their actuarial reserve values, together with a portion of the surplus of the fund, to the Superflex Pension Fund. In March 1997, Litton Industries Inc purchased the assets and business of Racal Electronics (SA)(Pty) Ltd, previously known as Decca (SA)(Pty) Ltd. All the rights and obligations of the employees employed by the business that was sold (approximately 60% of the active members of the Decca Pension Fund) transferred in terms of section 197(2)(a). Litton wanted to establish its own pension fund for transferring members (the Superflex Fund). While arrangements were made, the Decca Fund continued to accept contributions in respect of transferred members. However, in March 1998 Decca was no longer prepared to continue with this situation and refused to accept further contributio ns from the transferred employees. A dispute arose as to the proper basis for calculating the amount transferable in respect of the transferring members. The Pension Funds Adjudicator determined that the main question to be decided was whether the scheme between Racal and Litton, impacting on the pension rights of the transferring members, constituted an amalgamation or transfer of any business from a registered fund to any other person, or the transfer of any business from any other person to a registered fund as contemplated in section 14 of the Pension Funds Act. It was held that:

this section applies regardless of whether employment contracts are transferred or not, but it certainly covers the situation where


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contracts of employment are transferred in a way requiring the employees to transfer from one pension fund to another.1095

The Adjudicator expressly stated that pension benefits are part of the cost of employing labour; they are part of the remuneration which labour receives for services rendered.1096 Pensions are thus deferred pay and an employer must act in good faith in the fulfilment of that promise.1097 The Adjudicator found that the transfer of the complainants fell within the net of section 14, and that the trustees of the Decca Fund had certain statutory and fiduciary duties that they had breached by failing to comply with the section. After this matter the case (this time against the Pension Funds Adjudicator) concerning pension rights and transfer of employment contracts came before the Cape of Good Hope division of the High Court. In Resa Pension Fund v Pension Funds Adjudicator & others,1098 the applicant pension fund, a defined benefit fund,1099 was established for the benefit of Racal SA. When Racal SA was sold to LMS as a going concern, the parties agreed that the seller should transfer to the purchaser, for the benefit of a new pension fund being established by the purchaser, “sufficient assets to cover liabilities accrued at completion date, with allowance for future salary increases”. The dispute that existed has been described above. The fund made an application to the High Court to set aside the determination of the Adjudicator. The Court also found that the crux of the matter to be decided was whether section 14 applied or rather rule 28 of the fund’s rules. Rule 28.2 provided that if a member was retrenched by his/her employer and was not retiring, he/she should be entitled to twice his/her accumulated contributions. The importance of this distinction is clear.1100 If section 14 applied, negotiations would have had to take place to determine what was to have happened to the surplus, and the mere fact that the rules did not make provision for the transfer of any portion of the surplus was not necessarily a bar to the employees ultimately sharing therein.1101 The applicant argued that the contract between Racal and LMS did not amount to or result in a “transaction” or the “transfer of any business from a registered fund” envisaged in section 14. However, the Court decided that section 14 was indeed 1095 1659G-I. 1096 1658A. See Smit 2000 TSAR 635-640. 1097 1658D-F. See the arguments for automatic transfer of supplementary occupational benefits

under the Directive discussed in par 10.3 supra. 1098 2000 21 ILJ 1947 (C). 1099 See par 10.3.1 supra . 1100 1951C-F. 1101 As held in Tek Corporation Provident Fund & others v Lorentz 1999 4 SA 884 (SCA); 1999

20 ILJ 2797 (SCA).

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applicable, even though the fund was not a party to the sale agreement of the undertaking concerned.1102 Thus, in terms of section 197, the fact that Racal SA no longer required their services on its disposal of the division of its business in which the respondents were employed, did not result in the employees being retrenched for purposes of rule 28 of the fund.1103 The Court considered that in view of the fact that pension funds should be construed contextually as being part of the employer-employee relationship, the principles embodied in section 197 of the Labour Relations Act must be taken into account when considering the fate of the transferring members of the fund. Where occupational social security rights originate from the contract or employment relationship 1104 between the employer and employee, the transferee will thus be liable to continue to observe the same rights and obligations that existed prior to the transfer.1105 If these rights, however, do not form part of the contract/relationship between employer and employee, their transfer will not be covered under section 197 of the Labour Relations Act. However, their transfer may be covered under some other piece of legislation, for example section 14 of the Pension Funds Act.1106 When interpreting other relevant legislation and considering the fate of the transferring employees’ vested rights, a forum must take into account the provisions and purpose of section 197 as well. In the case of a transfer of rights not covered in any statute, it seems that in the absence of an agreement, the transferred employees cannot demand the same benefits as those that they enjoyed under an independent scheme prior to the transfer. However, should the old employer have contributed to an independent medical aid scheme, for example, the question arises as to whether the transferee is obliged to continue with the same.1107 If not, there is a very real possibility that an employee could object to the transfer to the transferee, as it would be less beneficial for him/her.1108 It is difficult to make out any significant difference between this position and one where the transferor paid a medical allowance to the employee. In the latter 1102 1955D-E. 1103 See 1953H-1954I (and 1954G-1955A). 1104 As long as the employer is involved in the scheme and it is not entirely independent in

status and function, see par 10.3.1 supra. 1105 S 197, in this instance, is thus wider than the Directive, as no express exclusions apply. 1106 See also s 63 (amalgamation and transfer) and s 64 (voluntary or automatic dissolution) of

the Medical Schemes Act 131 of 1998. 1107 In this regard, refer to the position under the Directive as discussed above. In Eidesund v

Stavanger Catering A/S the Court found that the right to these benefits has been excluded from the general transfer of rights and obligations to the transferee and, since the accrual of pension benefits and the payment of pension contributions are inseparable, it would not make economic sense to require pension contributions to be made when no further benefits are to accrue. Thus the Court held that the transferee was not under an obligation to continue making the pension contributions that the transferor had undertaken to make.

1108 Depending on the effect of such objection, see chapter 7 supra , this could thus result either in a constructive dismissal or in the employee remaining with the transferor. Refer to art 4(2) of the Directive as well.


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circumstances, an employee could certainly claim that this allowance forms part and parcel of his/her remuneration and that there is a duty on the transferee to continue providing the same. 10.4 Concluding remarks It has been argued that rights and obligations between an employer and employee encompass much more than just pure contractual rights of an individual nature. In addition, statutory rights are included and social security entitlements can also be included under certain circumstances. In the context of the employment relationship, one of the most important rights ensuing from that relationship is an employee’s entitlement to retirement “benefits”. The costs of medical treatment have also added considerable importance to these kinds of “benefits”. As far as statutory social insurance schemes are concerned (for example, compensation for occupational injuries and diseases) it has been shown that the transfer of employment contracts will not have any significant effect on an employee’s entitlement.1109 It is submitted that since section 197 of the Labour Relations Act does not exclude occupational benefits, including those pertaining to old-age, invalidity and survivors’ benefits, no undue limitation should be read into the section. The only limitation that does apply is that only rights and obligations applicable between employer and employee transfer to the transferee in terms of section 197(2)(a). In the event of the transfer of an undertaking in insolvent circumstances, in terms of section 197(2)(b), the employees will have to look to the old (often-insolvent) employer for relief.1110 It is plain that other relevant legislation must also be considered in this regard - even though the transfer of the business of a fund may not be covered by section 197, it may be covered by some other specialised legislation which may require the transfer of the same or similar rights.1111

1109 In this regard, s 210 of the LRA may be apposite. See IMATU & others v Greater

Johannesburg Metropolitan Council & others 2000 21 ILJ 2037 (LC) where a section of the Promotion of Local Government Affairs Act 91 of 1983 was held to be inapplicable and the LC held that the consent of the employees to the transfer was consequently not required (sic) and that the transfer was valid in terms of s 197. This broad approach can be criticised. S 210 does provide that effect must be given to an Act expressly amending the LRA. It is, however, arguable that where an Act specifically deals with an issue, that Act should possibly prevail, especially if the specific provisions would have granted more employment protection to the workers concerned.

1110 See chapter 13 infra. 1111 E.g. the Pension Funds Act, s 14.

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It is submitted that there are still aspects of occupational benefits for which cover is limited, especially with regard to sickness benefits accorded in terms of an agreement with a private medical scheme. If an employer contributes to such a scheme it might be argued that the transferee should provide a comparable monetary dividend. However, it has been shown that, at European Community level, this was not held to be necessary as there is no obligation on the transferee to provide the benefit. Where the old employer granted a medical allowance, the current jurisprudence on unfair labour practices indicates that it will probably be considered as part of the remuneration of the employee, rather than a “benefit”, and the transferee will thus be bound to provide the same.1112 This is, of course, not necessarily the case in the event of a transfer in insolvent circumstances. As this is such a specialised and technical field one should be cautious about making assumptions about actuarial implications of different models. The choice of which model is more suitable than another is also more complicated than it seems prima facie. One model, such as the one under the Directive, is to exclude a limited number of supplementary schemes from the scope of transfer provisions. This option may be viable as long as other protective measures are in place.1113 Another proposed model that applies in South Africa at present, is to include all entitlements from schemes that originate from the employment relationship, as long as the employer had influence on the decisions affecting that scheme and the scheme is not an entirely independent entity.1114 A third option is a model where all social security schemes are excluded from the scope of transfer provisions, but the absence of a similar/comparable scheme in the undertaking of the transferee could lead to a refusal to transfer on reasonable grounds, which may have a range of legal results.1115 Regrettably, more questions still beg answers than those that have been dealt with in this chapter. It is especially with regard to retirement funds that an assortment of problematic questions remains: liability for defined benefit schemes, ownership of surpluses, the responsibility for prefunding, and so forth, are all issues that need to be considered in depth.

1112 Even if such allowances are classified as “benefits”, they will still form part of the rights and

obligations that existed between the old employer and employees. They will therefore be subject to the transfer.

1113 This model functions well in countries where strong and financially sound statutory schemes are operative. However, even in the European Community, this approach has been criticised as too narrow and restrictive; see par 10.3.3 supra.

1114 Such an approach is a compromise on employee protection in the wide sense, especially in view of the fact that most supplementary occupational schemes are entirely voluntary in South Africa.

1115 It is submitted that, of the three models outlined, this model will result in the least measure of legal certainty.


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CHAPTER ELEVEN

DISCLOSURE OF INFORMATION AND CONSULTATION 11.1 General It is submitted that it is universally accepted today that the democratisation of the workplace involves the right of employees to participate in decision-making in the workplace from time to time. Employees always, at any rate, have the right to disclosure of information and to consultation regarding decisions that affect them in the workplace. The right to disclosure of information is an invaluable tool for meaningful collective bargaining. In South Africa, in the absence of an express duty to bargain in good faith, the Labour Relations Act 66 of 1995 grants registered majority unions1116 and workplace forums1117 extensive rights to disclosure of relevant information. An employer is placed under a duty to disclose to the union all information that its representatives need to effectively perform their functions in terms of section 14 of the Act1118 and that will enable the union to engage effectively in consultation and collective bargaining.1119 The Labour Relations Act is drafted in such a way that once a union has acquired the right to disclosure, the onus is on the employer to disclose the required information, even in the absence of any request from the union, where the employer is aware of the relevance of such information.1120 The Labour Relations Act also contains very specific requirements regarding the duty to consult. In the case of statutory workplace forums, it is only the employer who can initiate the process of consultation by submitting proposals to the workplace forum.1121 However, unions are not affected by any such limitation. In principle, these rights of disclosure and consultation should, of course, also be available to individual employees whenever their interests are involved, especially in non-unionised workplaces.1122 1116 S 16. 1117 S 89. 1118 S 16(2). 1119 S 16(3). S 89(1) provides that an employer must disclose to the workplace forum all relevant

information to enable it to engage effectively in consultation or joint decision-making. S 189 is also relevant in the context of dismissal for operational requirements.

1120 See Du Toit et al Labour Relations Law 176. 1121 Except in the case of a newly established workplace forum, which has limited capacity to

request consultation/joint decision-making (s 87) on establishment thereof. 1122 See par 11.2 infra for the German position. See also the new Promotion of Access to

Information Act 2 of 2000.

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This chapter endeavours to determine whether or not there should be a duty to disclose information and to consult with the employees or their representatives in an undertaking that will be transferred (or that might be transferred) as a going concern. If such a duty is found to exist, the questions regarding what information should be disclosed and at what stage this should be done must be addressed. The issue of who the parties to the disclosure and consultation should be, must also be considered. Finally, the dilemma of non-compliance with such duties must be considered and possible dispute resolution procedures should be identified. 11.2 Comparative perspective 11.2.1 General Chapter 3 of Directive 2001/23/EC on safeguarding employees’ rights in the event of the transfer of an undertaking regulates information and consultation. Article 7(1) provides that the transferor and transferee are required to inform the representatives of their respective employees who are affected by the transfer of the following: • the date or proposed date of the transfer; • the reasons for the transfer; • the legal, economic and social implications of the transfer for the employees; and • any measures envisaged in relation to the employees.1123 The transferor must give such information to the representatives of his/her employees in good time, before the transfer is carried out. The transferee must give such information to the representatives of his/her employees in good time, and in any event before his/her employees are directly affected by the transfer as regards their conditions of work and employment.1124 Article 7(2) states that where the transferor or the transferee envisages measures in relation to his/her employees, he/she must consult the representatives of these employees on such measures in good time, with a view to reaching an agreement. 1123 The transferee is under no duty to inform or consult the appropriate representatives as such,

for although the employees are “affected employees”, the duty to inform and consult is imposed on the employer of the affected employees, and the transferee is not yet their employer. Similarly, the transferor does not have to inform or consult, as it is not the employer who is gong to take the measures. Under the TUPE regulations, reg 10(3), it is thus required that the transferee must inform the transferor and the transferor has to inform the appropriate representatives of the measures envisaged. It does not appear that either employer has any duty to consult on the measures in question. See Harvey Harvey on Industrial Relations and Employment Law F/89.

1124 Art 7(1). See also Blanpain European Labour Law 406-407.


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Member States whose laws, regulations or administrative provisions provide that representatives of the employees may have recourse to an arbitration board to obtain a decision on the measures to be taken in relation to employees, may limit the obligations laid down in subparagraphs 1 and 2 of article 7 to cases where the transfer carried out gives rise to a change in the business likely to entail serious disadvantages for a considerable number of the employees.1125 The information and consultations must at least cover the measures envisaged in relation to the employees and the information must be provided and consultations take place in good time, before the change in the business referred to in article 7(1) is effected.1126 Employee representatives cannot dictate the form in which disclosure is provided, for example, insisting that the employer produce original documents or supply copies of them.1127 In terms of article 7(4), the obligations laid down in article 7 apply irrespective of whether the decision resulting in the transfer is taken by the employer or an undertaking controlling the employer. Furthermore, in considering alleged breaches of the information and consultation requirements laid down by the Directive, the argument that such a breach occurred because the information was not provided by an undertaking controlling the employer, will not be accepted as an excuse. Member States may limit the obligations laid down in paragraphs 1, 2 and 3 of article 7 to undertakings or businesses, which, in terms of the number of employees, meet the conditions for the election or nomination of a collegiate body representing the employees.1128 The amended Directive also stipulates that Member States must provide that, where there are no representatives of the employees in an undertaking or business through no fault of their own, the employees concerned must be informed, in advance, of the date or proposed date of the transfer, the reason for the transfer, the legal, economic and social implications of the transfer for the employees, and any measures envisaged in relation to the employees.1129 1130

1125 Art 7(3). Employees in such workplaces are probably considered to have sufficient

protection, as an independent body will consider the measures to be taken with regard to the employees in the transferred undertaking.

1126 Art 7(3). 1127 Institution of Professional Civil Servants v Secretary of State for Defence 1987 IRLR 373.

Millett J, here also held that “measures” is a word of the widest import and “includes any action, step or arrangement”. It was also held that “envisages” is vaguer than “intends”. However, the employer does not have to consult about me re possibilities. Harvey (Harvey on Industrial Relations and Employment Law F/102) states that an unresolved question is whether by transferring employees to the transferee along with his business, the transferor thereby “takes measures” in respect of them. He states “[i]t is thought that he does, and that he should therefore consult, and not merely inform, his unions about the proposal to transfer those employees”.

1128 Art 7(5). 1129 Art 7(6).

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In the United Kingdom, the Transfer of Undertakings (Protection of Employment) Regulations of 1981 were amended by the Transfer of Undertakings (Protection of Employment) (Amendment) Regulations of 1995 and the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations of 1999.1131 Regulation 10 of the amended TUPE regulations has been changed to provide that if employees who may be affected are represented by an independent trade union recognised for collective bargaining purposes, that union now has an automatic right to be informed and consulted over collective redundancies and transfers of undertakings.1132 The recognised union may no longer be bypassed by the employer in favour of other employee representatives. Clear explicit rules have also been introduced for the election of appropriate employee representatives in non-union cases.1133 1134 In such non-union cases where affected employees fail to elect representatives, when they had a genuine opportunity to do so, the employers concerned may fulfil their obligations by providing relevant information to those employees direct.1135 The position can be summarised thus: • Where there is a recognised independent trade union representing employees who

may be affected by a planned collective redundancy1136 or transfer of an undertaking and elected employee representatives, the employer must inform and consult that union.1137 The employer is not required to inform and consult any other employee representatives, but may do so voluntarily.

• Where there are employees who may be affected by a planned collective redundancy or transfer of an undertaking, but who are not represented by a recognised trade union, the employer must inform and consult other appropriate representatives of those employees. These may be either existing representatives (providing that their method of election or appointment ensure that they have suitable authority from the employees concerned), or new ones specially elected for the purpose.

1130 Case law appears to be largely absent in this area. 1131 SI 1995 No. 2587. The new requirements came into effect on 28 July 1999. 1132 Amendments were effected in response to infringement actions brought against the United

Kingdom, Commission v United Kingdom 1994 ECR 2435 (ECJ) and Commission v United Kingdom 1994 ECR 2479 (ECJ).

1133 Reg 8(2A) & reg 10A(1). 1134 A Staff Association or a Works Council would probably satisfy the regulations but not, e.g.,

a Sports and Social Committee. 1135 Reg 8(8A). 1136 A collective redundancy is where 20 or more employees are to be dismissed as redundant

within a 90-day period (Trade Union and Labour Relations (Consolidation) Act, 1992 s 188). Employers are under no legal obligation to inform and consult employee representatives in cases falling below that threshold. They may, however, be at risk of successful unfair dismissal claims if they fail to inform and consult individual employees who are to be dismissed.

1137 Harvey Harvey on Industrial Relations and Employment Law F/87.


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• Employees may be affected even though they themselves are not to be made redundant or to move to a new employer.

• In the event of a dispute, whether or not any particular employee or class of employees was affected, an employment tribunal would have to decide the same in the light of all the facts.

Non-union representatives now have a right to reasonable paid time off for relevant training, and it has been made clear that union officials also have such a right under pre-existing provisions.1138 This should assist meaningful consultation. Regulation 10(7) does provide that where there are special circumstances that render it not reasonably practicable for an employer to perform a duty imposed on him/her, he/she must take all such steps towards performing that duty as are reasonably practicable in the circumstances.1139 The amounts of compensation that employers may be required to pay in cases of non-compliance have been increased and rationalised so that, in the event of an employer’s failure to consult, the maximum compensation that can be awarded has been increased so that it is 90 days in all cases involving redundancies and 13 weeks’ gross pay in cases involving transfers.1140 The liability for failure to consult in accordance with the TUPE regulations was considered by the Employment Appeal Tribunal in Kerry Foods Limited v Creber.1141 Employees were dismissed following the appointment of receivers over the business in which they were employed. There was a TUPE transfer, but consultation had not taken place with employee representatives as required. The Employment Appeal Tribunal held that liability for this failure to consult was inherited by the transferee.1142 1138 Refer to the website of the United Kingdom Department of Trade & Industry

(www.dti.gov.uk/er/consultation/redundancy.htm) (last visited 25-04-2001). See Trade Union and Labour Relations (Consolidation) Act 1992 s 168(1) and the Employment Rights Act 1996 s 61(1).

1139 See e.g. Clarks of Hove v Bakers’ Union 1978 ICR 1076 (CA) regarding the special circumstances defence where it seems that special circumstances are something out of the ordinary run of events. A situation (e.g. insolvency) will not usually be special simpliciter, but might be together with other circumstances.

1140 In cases involving both collective redundancies and transfers of undertakings, a separate award may be made in relation to each, with no provision for one to be offset against the other.

1141 EAT 1399/98 (reported in 2000 IRLR 10). Referred to in Wynn-Evans C “TUPE – some of the most important recent developments” 2000 Business Law Review 8 11.

1142 This decision has been criticised (see Wynn-Evans C 2000 Business Law Review 11). In an earlier judgement, Angus Jowett v National Union of Tailors 1985 IRLR 646 (EAT), it was held, under the old regulations, that the liability for failure to consult arose by reason of statute and not individual employees’ contracts. Consequently, this liability was not inherited by the transferee (as a liability arising out of or “in connection with” the contract of employment). A protective award for failure to comply with these consultation obligations is defined as a sum payable in connection with employment and, by analogy, falls within the scope of the liabilities that the transferee inherits under the TUPE regulations. Wynn-Evans argues that it is questionable why the transferee should inherit the liability for the transferor’s failure to consult, where the obligation to consult is expressly imposed on the transferor. However, it does not seem practicable to make a distinction here in the case of failure to consult, as other duties, e.g. not to dismiss unfairly, also rested

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In Germany, article 112(1) of the Law on Labour Relations at the Workplace provides that the works council and the head of the undertaking may agree on a social plan intended to compensate for or mitigate the detrimental economic consequences that the worker might suffer as a result of the envisaged change.1143 Hence, in Germany, one must take into account the role and functions of works councils (workplace forums) in order to understand the measures implemented regarding disclosure of information and consultation.1144 Works councils in Germany are exclusively made up of employee representatives. According to article 1 of the Works Constitution Act, every establishment with more than five employees over 18 years of age, three of them having been employed for at least six months, is required to establish a works council.1145 In principle, these councils are institutions separate from trade unions.1146 However, they are closely linked and unions influence the composition of works councils so that a large majority of works council members are union members.1147 The Works Constitution Act also grants certain rights to unions, for example:1148 initiating functions, controlling functions regarding elections, rights to attend meetings, a role in training of works council members, etc. Works councils have specific rights of participation in undertakings. These rights vary from the mere right to disclosure of information, the right to be consulted and the right of veto to a right of codetermination.1149 Participation rights of works councils can be divided into three categories:1150 personnel matters (including vocational training, hiring, transfer, or dismissal of employees),

expressly on the old employer. The fact remains that everything done by an old employer in respect of a contract is deemed to have been done by or in relation to the transferee (reg 5 (2)) – this is the effect of transfer provisions. However, it cannot be denied that it may work unfairly towards the transferee, who may not have been able to control the transferor’s failure. It is acknowledged that this is especially the case if the business is acquired out of receivership. In South Africa, s 197(2)(b) of the LRA limits the protection of that section in insolvency circumstances to the transfer of employment contracts without any accompanying rights and obligations.

1143 As described by Barnard EC Employment Law 485. 1144 See Nielsen European Labour Law (107) where it is stated, regarding worker participation at

plant level, that: “Germany is the single EU Member State which has the most elaborate institutional structures for worker participation at enterprise level. Much of the early Community discussion centered on the possibility and desirability of transferring the German model to the rest of Europe. These early proposals have failed and in the current proposals a more pluralist approach is adopted allowing Member States a considerable measure of discretion.” One of these models is information for and consultation with workers and/or workers’ representatives in advance of important decisions, but leaving the institutional structure of the workers’ representation to national practice. Nielsen suggests that this model has also been adopted in Directive 2001/23/EC.

1145 Weiss & Schmidt Labour Law and Industrial Relations in Germany 188-189. There is no sanction if the undertaking fails to establish a council, however; the employees then voluntarily abandon all the rights vested in those councils by law (ibid 189).

1146 A works council represents all employees of an establishment, not only union members. 1147 Weiss & Schmidt Labour Law in Germany 189. 1148 Ibid 193. 1149 In the latter, management cannot take any decision without the consent of the works

council. If there is a deadlock, an arbitration committee will rule on the issue. If either party is not satisfied with this decision, they can appeal to the Labour Court (Weiss & Schmidt 201).

1150 Weiss & Schmidt 201.


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economic matters (concerning economic policy of management) and social matters (those matters relating to social consequences of economic decisions). Works councils have the most extensive right to codetermination in the category of social matters.1151 In terms of article 111 of the Works Constitution Act, a works council has participation rights in specific economic decisions that may cause substantial disadvantages to the workforce. The council enjoys these rights in undertakings with a minimum of 20 employees and these rights include decisions regarding reduction of operations, partial or total closure, the transfer of an undertaking or the transfer of essential parts of it, a merger with other establishments, etc.1152 In these instances, management must provide the works council with “full information in advance”, that is, at an early planning stage.1153 The term “full information” is interpreted to mean that management need not only disclose its plans but should also disclose information on all possible alternatives and modifications which were, or are, taken into account in the particular situation.1154 In addition to the disclosure of information, the employer must also attempt to reach a “reconciliation of interests” with the works council.1155 Hence, the employer has to try to reach an agreement with the council on whether, and how, the measures envisaged should be carried out. In the absence of an agreement, an arbitration committee can make an “advisory award”, but has no power to impose a binding decision on the parties. The procedure therefore takes the form of consultation and the employer can implement its own decision in the absence of agreement . A works council is also entitled to a social plan (Sozialplan) in addition to disclosure and consultation.1156 This entails the following:1157

A social plan means nothing less than a special works agreement to compensate or reduce disadvantages for employees in the event of a substantial alteration to the establishment or in cases of insolvency. It is important to state that a social plan is not confined to financial compensation. It may also include programmes on re-training, transfer of employees to other establishments of the enterprise, etc. If an agreement on a social plan cannot be reached, either side is entitled to appeal to the arbitration committee, which then acts as a decision-maker; its

1151 See art 87 of the Works Constitution Act. 1152 Weiss & Schmidt 203. 1153 Ibid 204. 1154 Ibid. 1155 Interessenausgleich - Weiss & Schmidt 204. 1156 Weiss & Schmidt 204-205. The Act on Improvement of Employment Opportunities of 1985

has provided that newly established enterprises are released from this obligation and no social plan may be enforced in the first four years of the establishment.

1157 Ibid.

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decision is binding on both sides. Except in cases of insolvency … there is no minimum or maximum limit for a social plan.

Works councils may also conclude so-called works agreements1158 with management regarding matters in which the councils have the right to codetermination and all other matters relating to labour/management relations in the establishment.1159 Works agreements dealing with remuneration or other working conditions are only permitted to the extent that no collective agreement already covers the same. However, it is possible for the parties to a collective agreement to agree otherwise and include a so-called “opening-clause” in the agreement. These clauses are becoming more and more common.1160 11.2.2 A practical illustration – the case of Rover In May 2000, BMW sold the Rover Group to the Phoenix consortium.1161 BMW decided to sell Rover as they considered it necessary to get rid of a loss-making subsidiary. Despite great losses, Rover was not threatened with insolvency and BMW planned to liquidate Rover on the basis of a members’ voluntary winding-up if no buyer could be found for the group. This would enable BMW to pay off the creditors in full (so it was believed).1162 However, it was clear that it would be more beneficial for stakeholders, other than the shareholders and creditors, that the undertaking be sold as a going concern while preserving as many jobs as possible.1163

1158 See also chapter 8 supra . 1159 Weiss & Schmidt 205. These agreements also contain individual normative provisions that

have an automatic and mandatory effect on the parties to the individual employment relationship. See, e.g., s 23(3) of the LRA in South Africa.

1160 See Weiss & Schmidt 207. 1161 The issues of employment law that were relevant in the negotiations leading to the sale and

the effect of the sale on employees were considered by Villiers C in “The Rover case (1): The sale of Rover Cars by BMW – the role of the works council” 2000 ILJ (United Kingdom) 386 and Armour J & Deakin S “The Rover case (2) – bargaining in the shadow of TUPE” 2000 ILJ (United Kingdom) 395. BMW first negotiated with Alchemy, but this deal fell apart under threat of unions lodging for protective awards.

1162 See Armour & Deakin 2000 ILJ 395. 1163 Transfer provisions affect the process of corporate rescue in at least three ways (see also

chapter 13 infra): firstly, the compulsory novation of contracts of employment and the preservation of pre-transfer terms and conditions increase the costs of the process to the buyer/transferee. Secondly, this position affects the other creditors of the undertaking, since the income made available to them from the sale of the undertaking is reduced by the amount that the transferee has bargained to deduct from the sale price in order to comply with transfer provisions. (The idea of super-priority of employees’ claims.) Thirdly, the pre-transfer liabilities could deter the transferee from making the acquisition at all.


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Neither the Rover Group nor any of BMW’s other United Kingdom subsidiaries had entered into consultation with employee representatives over the transfers.1164 Employee representatives, being recognised unions, were aggrieved. Their dissatisfaction was strengthened by several factors: • the TUPE obligations regarding disclosure and consultation;1165 • redundancy consultation provisions;1166 • Kerry Foods v Kreber;1167 • Allen v Amalgamated Construction Co Ltd.1168 The first potential buyer, Alchemy, withdrew from negotiations with BMW as BMW insisted that Alchemy should offer it an indemnity against potential claims for breach of information and consultations laws, as well as contractual claims for wrongful dismissal.1169 The sale to the Phoenix consortium was then completed - without formally waiving their claims, the employees and their representatives did not attempt to put as many obstacles in the way of Phoenix as they did for Alchemy and certain agreements were reached regarding consultation and redundancies. The strengthening of employee rights in transfer contexts has thus been considered as “compatible with an active rescue process which takes a balanced approach to the recognition of stakeholder rights”.1170 However, things could have worked out differently if another bidder had not materialised. As far as industrial relations within the BMW-Rover group were concerned, in both of these groups, unions had a strong presence. More importantly, there was a European Works Council1171 within the group.1172 The works council agreement included a management obligation to ensure that the council members would be informed well in advance of any decisions taken over such matters as plant closures, movement of

1164 See Armour & Deakin 2000 ILJ 399, Villiers 2000 ILJ 386. Villiers states: “[w]hen BMW

announced its decision to sell Rover Cars … in March 2000 the workers and their representatives were taken by surprise. The decision appeared to be taken ‘rapidly and chaotically’, leading the Trade and Industry Committee to criticise BMW it its report … for ‘incompetence and excessive secrecy’”(386).

1165 Reg 10-11A. 1166 TULR(C)A, 1992 United Kingdom, ss 22, 188 et seq. 1167 See par 11.2.1 supra . This would mean that any failure by BMW or its subsidiaries to

consult and to disclose would be transmitted to the buyer(s) of the business. 1168 The ECJ confirmed that transfers between companies in the same corporate group could also

come under the Acquired Rights Directive. See also chapter 6, par 6.2.9 supra . 1169 See Armour & Deakin 2000 ILJ 400. 1170 Ibid 401. 1171 Under the European Works Council Directive of 1994, transnational undertakings and

groups of undertakings with at least 1000 employees within the Member States and with at least 150 employees in each of at least two Member Sates are covered. This is a labour law directive, rather than a company law directive. See chapter 2, par 2.5 supra .

1172 See Villiers 2000 ILJ 388. On the council, eight seats were allocated to the German workforce, four were allotted to Rover workers and one for a BMW subsidiary based in Austria.

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production and redundancies. However, the presence of unions and the works council did not ensure information and consultation in casu. Rover trade unionists were excluded from negotiations at board level owing to the national limits of the codetermination laws and the lack of any British representation on the supervisory board.1173 The works council was also not reconvened to discuss the decision to sell the plant. What is the implication of this scenario for the Acquired Rights Directive and the TUPE regulations? Article 5(2)(b) of the Acquired Rights Directive provides that:

the transferee, transferor or person or persons exercising the transferor’s functions, on the one hand, and the representatives of the employees on the other hand may agree to alterations, in so far as current law or practice permits, to the employees’ terms and conditions of employment designed to safeguard employment opportunities by ensuring the survival of the undertaking, business or part of the undertaking or business.1174

As stated earlier, Rover was not in a situation of insolvency in the true sense of the word. Member States may take advantage of the derogation of the full application of the Directive in the case of “any transfers where the transferor is in a situation of serious economic crisis, as defined by national law, provided that the situation is declared by a competent national authority and open to judicial supervision, on condition that such provisions already exist in national law by 17 July 1998”.1175 However, Rover did not require this kind of formal derogation. The situation in the case of Rover could thus be likened to one where employee representatives entered into concession bargaining over transfer rights in an effort to preserve jobs.1176 In this instance, the end result was arguably satisfactory. However, a worthwhile warning has been issued in this regard:1177

The difficulties posed by Article 4a [now article 5a] are intensified further if consideration is given to the potential role of employee representatives in non-union workplaces. In this respect, the example of the Working Time Regulations, which make it possible

1173 See Villiers 2000 ILJ 390. 1174 Art 5 deals with transfers that are the subject of bankruptcy proceedings or any analogous

insolvency proceedings, instituted with a view to liquidating the assets of the transferor. See chapter 13, par 13.2.1 infra.

1175 Art 5(a)(3). See also chapter 13 infra. 1176 Armour & Deakin 2000 ILJ 402. 1177 Ibid.


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for statutory labour standards to be negotiated away in non-union workforce agreements, is not reassuring. If there is to be bargaining under the shadow of employment rights, measures need to be taken to ensure the effectiveness of independent employee representation.

As will be shown hereafter, South Africa does allow for contrary agreements “under the shadow of employment rights” in terms of section 197(2) read with subsection (3). It is submitted that this warning also holds true for South African labour law. In addition, the fact that despite ostensibly good industrial relations, the works council proved powerless and without influence over BMW’s decision-making process, has resulted in a plea for “a multi-layered structure providing for involvement of workers or their representatives at board level as well as lower down the corporate hierarchy and these provisions should be backed by strong pan-European labour laws as well as genuine recognition of interests beyond those of the shareholders in company law”.1178 It has been argued earlier in this thesis that there is very little cross-fertilisation between labour and company law in South Africa and almost no genuine recognition of interests beyond those of the shareholders in company law.1179 11.3 The absence of a duty to disclose and to consult in South Africa Section 197 does not address the issues of consultation and disclosure of information and it may be quite safe to claim that most employers prefer the situation this way. However, the same cannot be said for employees.1180 The failure to regulate the same in section 197 is peculiar, as disclosure of information and consultation are covered specifically in other sections, for example those dealing with dismissal for operational requirements,1181 in addition to the regulation of disclosure of information under organisational rights.1182 There does not appear to be any sound reason why these rights should not apply in the event of the transfer of an undertaking either. The absence of such obligation seems to be inconsistent with the position in the rest of the Act and thus needs to be justified.

1178 Villiers 2000 ILJ 394. The meaning of the concept of “consultation” is addressed elsewhere

in this chapter (see par 11.3.2 infra ). Rights to disclosure and consultation do not ensure employee participation in decisions in the workplace in the full sense of the word (see chapter 2. pars 2.5 & 2.8 supra ).

1179 See chapter 2, par 2.7 supra . 1180 See par 11.3.1 infra. 1181 S 189 of the LRA. 1182 S 16.

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It appears that disclosure and consultation will occasionally be applicable in transfer situations because of other provisions in the Act. For example, if there is a workplace forum, section 84 requires consultation in the event of partial or total plant closures1183 and mergers and transfers of ownership in so far as they have an impact on the employees.1184 The result is that, on the one hand, some transfers will require compliance with disclosure and consultation, whereas on the other hand, many transfers will require no such compliance. Such a position does not seem logical or justifiable. The absence of a duty to disclose and consult in these circumstances is increasingly being questioned, in the light of the right to fair labour practices in the Bill of Rights as well as the existence of the new Promotion of Access to Information Act 2 of 2000. Since there is thus no direct general duty on an employer to disclose information or to consult with a union or with individual employees regarding the transfer or partial transfer of a business as a going concern. As a result, other sections in the Labour Relations Act must be used by way of analogy. It can be stated that the right to disclosure of information is generally available in the context of collective bargaining, dismissals, consultation and joint decision-making.1185 However, employers are often reluctant to disclose information because they view it as an undue invasion of managerial prerogative and their privacy rights. The right to consultation is available to unions and workplace forums in cases of restructuring, dismissals based on operational requirements, mergers and closures (in as far as these impact on the employees), changes in the organisation of work, job grading, etc.1186 However, section 197 does provide that certain parties can reach an agreement to the contrary (section 197(2)(a) and (b) read “… unless otherwise agreed”). The parties to this agreement are stipulated in section 197(3) and are the employer and a party as identified in a collective agreement, or a workplace forum, or a registered union, and if none of the above applies, the individual employees concerned. This seems to indicate that some form of consultation must have been foreseen; otherwise such agreement could surely never be reached. Such an agreement is neveretheless entirely voluntary

1183 S 84(1)(b). 1184 S 84(1)(d). 1185 S 16, 189 & 89 of the LRA. 1186 S 84. Arguments regarding worker participation in the workplace have been raised in the

past under the scope of the constitutional property rights of employers. However, it is quite certain that such limitation, should it be found to exist, would fall within the limitations clause of the Constitution (s 36), being reasonable and justifiable in an open and democratic society based on equality, human dignity and freedom. See also Weiss & Schmidt Labour Law and Industrial Relations in Germany 218 regarding the constitutionality of employee participation in supervisory boards of some companies in Germany.


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and, in the absence of such agreement, section 197 still does not oblige the transferor and transferee to consult with the affected workers. Without doubt, it would have been preferable if section 197 had placed an express duty on the transferor and transferee to consult with the affected employees or their representatives and if the topics for consultation as well as for disclosure of information had been listed.1187 11.3.1 Rationale for a duty to disclose and to consult If an undertaking is transferred from one employer to another as a going concern, owing to the operation of the statutory transfer provisions, there are no dismissals as there would have been at common law.1188 A right to consultation does not therefore apply automatically. However, it is submitted that there is a real need for a duty to disclose information as well as a duty to consult in these circumstances.1189 Several reasons can be advanced in favour of such a viewpoint: • The right to fair labour practices as contained in the Bill of Rights, section 23(1).1190 • Employees must have a power to object to the transfer of their contracts.1191 In

order to exercise this choice, they need to be informed about the envisaged transfer, who the transferee is and other relevant considerations.

• Employees or their representatives need to ensure that the transferor and transferee take their interests into consideration when coming to an agreement.1192 For example, a union cannot bargain for the transfer of rights and duties in a section 197(2)(b) transfer if it is unaware of a potential transfer.1193

• Employees have an interest in the person for whom they work. It is generally accepted that this is the main difference between a servant and a serf. This constitutes an important basis for an employee being informed and consulted about the fact that a new person/institution will assume the role of his/her employer.1194

1187 The Labour Relations Amendment Bill, 2001 creates a duty to disclosure of information in

the newly proposed s 197B. This duty, however, only pertains to the disclosure of information regarding the (imminent) insolvency/sequestration of an employer.

1188 See chapter 4 supra for the common-law position. See chapter 7 for the statutory provision of automatic transfer of employment contracts.

1189 See also NUMSA v Metkor Industries (Pty) Ltd 1990 11 ILJ 1116 (IC) 1123F-H, 1124A. 1190 In SACTWU and others v Discreto a Division of Trump and Springbok Holdings 1998 ILJ

1451 (LAC) the LAC noted that the fundamental right to fair labour practices provides a further justification, if this were needed, for consultation in the context of dismissals for operational requirements.

1191 See chapter 7 supra . 1192 See chapter 8 supra . 1193 See e.g. Miriam Kgethe & others v LMK Manufacturing (Pty) Ltd & another 1997 10 BLLR

1303 (LAC). 1194 See Nokes v Doncaster Amalgamated Colleries & chapter 7.

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• The transfer may result in practical consequences for employees that they may need to prepare for in advance (for example, new travelling arrangements, retirement planning, etc.).

• Trade unions need relevant information to bargain effectively and to formulate reasonable demands. A failure to disclose suitably relevant information could lead to unnecessary and hasty industrial action.

• As stakeholders of the company, the employees have a right to know the reasons for the transfer.1195

• In order to cooperate or to object to the transfer, the employees need to be informed about any steps that are envisaged and that may be taken in relation to themselves.

• Public policy requires that employees should not be kept in the dark about the transfer of their employer’s undertaking and that the transfer should not take place purely unilaterally, without any input from the employees’ side.

The role of the employee in the company has changed over the last decades to arrive at the juncture where, it is submitted, a universal duty may be imposed to inform employees about imminent transfers and give them a right to be consulted regarding the same.1196 As will be shown, this is also the accepted position internationally. Any departure from this position in South African law will thus need to be justified by the legislator. 11.3.2 What information should be disclosed and what form should

consultations assume? It is submitted that all relevant information should be disclosed. In order to determine whether information is relevant, it is necessary to consider the objects of disclosure.1197 If the information would enable the employees to participate meaningfully in consultation and if it is just and equitable to do so, it should be disclosed. A viewpoint under the previous Labour Relations Act of 1956 was that a company only had to disclose that information which enabled employees to consider the consequences of such information for them.1198 However, the current Labour Relations Act of 1995 places a high premium on collective bargaining and employee participation in the workplace. It thus seems that all relevant information should be disclosed, unless a limitation is

1195 See chapter 2 supra . 1196 As far as the duty to disclose is concerned, certain limitations do exist, as contained in s

16(5) of the LRA. Refer to Du Toit et al Labour Relations Law 176 and further regarding disclosure of information.

1197 As illustrated by the rationale for the disclosure of information and consultation (see supra). 1198 NUMSA v Metkor Industries (Pty) Ltd 1990 11 ILJ 1116 (IC) 1124A.


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applicable.1199 The limitations that are generally allowed under the Labour Relations Act refer to information that:1200 • is legally privileged; • cannot be disclosed without contravening a prohibition imposed by a law or Court

order; • is private personal information relating to an employee, unless the employee

consents to its disclosure; or • is confidential and, if disclosed, may cause substantial harm to an employee or to the

employer.1201 The first two limitations are absolute limitations, whereas the last two are not. In the event of information that is confidential and, if disclosed, may cause substantial harm to an employee or the employer, the balance-of-harm test is applicable. This test involves a discretionary enquiry into which of the parties would be worse off if the information was not disclosed or if it was indeed disclosed.1202 In the context of the transfer of undertakings, a statutory provision could, of course, also stipulate that information regarding specific topics should be disclosed. Regarding the form that consultation should assume, our case law has already established that, objectively, there is a definite distinction between “consultation” and “negotiation”. In MAWU v Hart Ltd,1203 the Industrial Court held that:

To consult, means to take counsel or seek information or advice from someone and does not imply any kind of agreement, whereas to bargain means to haggle or wrangle so as to arrive at some agreement on terms of give and take. The term negotiate is akin to bargaining and means to confer with a view to compromise or agreement.

1199 The right to dis closure of information is limited in the domestic sector (s 17). 1200 S 16(5). 1201 Under the TUPE regulations, an employer is excused from the duty to inform or consult if

there are “special circumstances” that render it not reasonably practicable for him/her to do so (reg 10(7)). He/She must, nevertheless, do what (if anything) he/she can towards compliance. In Bakers’ Union v Clarks of Hove Ltd 1978 IRLR 366 (CA), under TULR(C)A, s 188(7), it was held that circumstances must be special in the sense of being something unforeseen or unexpected: “something out of the ordinary run of … commercial or financial events”. See also Harvey Harvey on Industrial Relations and Employment Law F/106. This is something that must be adjudged objectively (Union of Construction, Allied Trades and Technicians v H Rooke & Son Ltd 1978 IRLR 204 (EAT)).

1202 For a comprehensive discussion of the limitations in s 16(5), see Du Toit et al Labour Relations Law 180-184; Van Jaarsveld & Van Eck Principles of Labour Law 194-195.

1203 1985 6 ILJ 478 (IC) 493H.

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Subsequent to this explanation, the Appellate Division in Atlantic Diesel Engines (Pty) Ltd v NUMSA,1204 took a different view of the nature of consultation and held that consultation should be seen as a “joint problem-solving exercise” with the object of reaching consensus.1205 The Labour Relations Act now endows the term “consultation” with content in such a way that “practically eliminates any formal distinction between the two processes [consultation and bargaining]”.1206 The following content is attached to the concept: • Disclosure of relevant information necessary for effective consultation.1207 • Allowance for the other party to make representations and advance alternative

proposals.1208 • Considering and responding to such representations or proposals. If the employer

is not in agreement with such representations or proposals, it must state the reasons for disagreeing.1209

• In the absence of an agreement the employer must follow the agreed procedure (if any exists) to resolve any differences before implementing any proposal.1210

With regard to the Labour Relations Act 66 of 1995, Mlambo J has held as follows:1211

I am of the view that the nature of consultation as required by section 189 is an exhaustive joint problem-solving or consensus-seeking process between the employer and the consulted parties. It is a process that is not sporadic or superficial. Furthermore, because the employer is always privy to all necessary and relevant information, it should not only disclose information which it deems relevant, it should disclose all information requested by the consulted party, subject to the limitations enunciated. To enable meaningful and effective consultation, it is necessary to give them an opportunity to consider not only the information, which, in the employer’s view, supports the view that no alternatives to retrenchment exist, but also other information which the employer has not considered to be relevant, but which might be. Furthermore, in view of the fact that the employees who might find themselves targets of the retrenchment exercise are in such a

1204 1994 15 ILJ 1247 (A). 1205 1252E. 1206 Du Toit et al Labour Relations Law 309. 1207 S 84(1) & 89(1). 1208 S 85(2). 1209 S 85(3). 1210 S 85(4). 1211 NUMSA & others v Comark Holdings (Pty) Ltd 1997 18 ILJ (LC) 516 524C-F.


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situation not because of anything they have done, it is only fair that the consultation process be as exhaustive and as meaningful as described above.

This dictum is welcomed as a purposive and correct interpretation of the duties to disclose and to consult in terms of the Labour Relations Act of 1995. In another leading judgement in this regard, Johnson and Johnson (Pty) Ltd v CWIU, 1212 the Labour Appeal Court explained the issue in the following terms:1213

But all these primary formal obligations of an employer are geared to a specific purpose, namely to attempt to reach consensus on the objects listed in section 189(2). The ultimate purpose of section 189 is this to “achieve a joint consensus seeking process”. In this manner the section implicitly recognises the employer’s right to dismiss for operational reasons, but then only if a fair process aimed at achieving consensus has failed. The achievement of a joint consensus seeking process may be foiled by either one of the consulting parties. The employer may obviously frustrate it by not fulfilling its obligations ... The other consulting party may do it by refusing to take part in any of the stages of the consultation process, or by deliberately delaying the whole process. ... It may also appear that any one of the parties simply went through the entire formal process with no intention of ever genuinely reaching agreement on the issues discussed… The important implication of this is that a mechanical, “checklist” kind of approach to determine whether section 189 has been complied with is inappropriate. The proper approach is to ascertain whether the purpose of this section (the occurrence of a joint consensus seeking process) has been achieved ... If that purpose is achieved, there has been proper compliance with the section. If not, the reason for not achieving the purpose must be sought. If the employer alone frustrated the process in some way or another, there can be no compliance. If the employer was not at fault and did all it could, from its side, to achieve the kind of consultation referred to above, the purpose of this section would also have been achieved ... In testing compliance with its provisions [that is, the provisions of

1212 1999 ILJ 89 (LAC). 1213 Pars 27-31.

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section 189] by determining whether the purpose of the occurrence of a joint consensus seeking process has been achieved or frustrated, a finding of non-compliance by the employer will almost invariably result in the dismissal being unfair for failure to follow proper procedure. It is difficult to envisage a situation where the result could be different. Non-compliance would not, however, necessarily result in the dismissal being substantively unfair, as the facts of this case show.

Even though this judgement was delivered in the context of section 189, it is very clear that it is insufficient merely to go through the motions. The Act requires that the parties attempt to reach consensus. 11.3.3 At what stage should consultation and disclosure take place? The Industrial Court and the Appellate Division of what was then the Supreme Court developed clear rules in cases of retrenchment, namely that consultation should take place “once the possible need for retrenchment is identified and before a final decision to retrench is reached”.1214 The Labour Relations Act of 1995 also requires an employer, in the context of dismissal for operational requirements, to consult, inter alia, on measures to avoid dismissals from taking place.1215 As seen earlier under the Acquired Rights Directive, the term “in good time” is used.1216 However, it is often difficult to evaluate actual compliance with these standards in practice and employee representatives often complain that consultations take place after a decision has already been reached. In South Africa, the substantive content that has been attached to the notion of “consultation”1217 results in a position where an employer has to give written reasons for disagreeing with other parties’ proposals. This strengthens the idea that consultation should take place earlier rather than later. It is thus submitted that if there is a real possibility that an undertaking may be transferred, this should be the stage at which disclosure and consultation should start to take place. 11.3.4 Who should the parties be? 1214 Atlantis Diesel Engines (Pty) Ltd v NUMSA 1994 15 ILJ 1247 (A) 1252D. S 189(1) of the

LRA stipulates that “[W]hen an employer contemplates dismissing one or more employees for reasons based on the employer’s operational requirements, the employer must consult…”.

1215 S 189(2)(a). 1216 Art 7(1). 1217 As discussed supra, in par 11.3.2.


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Since section 197 is silent on the issues of disclosure and consultation, it may be of help to make use of obligations to disclose and consult elsewhere in the Labour Relations Act in order to arrive at an acceptable arrangement in this regard. In terms of sections 16 and 89 of the Labour Relations Act, a registered majority union and a workplace forum have the right to disclosure of information. Section 84 also guarantees workplace forums the right to consultation over a number of topics. However, in terms of section 189, the right to consultations and disclosure in cases of proposed retrenchment are available to a potentialy wider array of parties. As section 197 does allow agreements to the contrary with parties mentioned in section 189(1), it is submitted that these parties are the relevant roleplayers who need to be considered. It is submitted that both the old employer and the new employer must be involved in this procedure.1218 The reason is plainly that both employers have a role to play. The old employer must inform and consult regarding its plans to transfer the undertaking, the reasons therefore, the timing thereof, any possibility of the employees remaining with the transferor and any other relevant issues. The transferee, on the other hand, must disclose and consult regarding the measures envisaged that relate to the transferring employees, its short and medium-term business plans for the undertaking, the possibility of agreements to the contrary regarding existing rights and obligations and any other relevant issue. Whereas both the transferor and transferee must undoubtedly be involved, the question regarding who the recipients of these proceedings should be, is far less clear. It appears that one option is the exclusive model in terms of which one party is chosen to be the recipient and, if full disclosure and consultation occurred between the employers and this party, their obligations will have been fulfilled. This party would commonly be a recognised trade union. However, this model seems inappropriate in casu. It is submitted that in the event of a partially non-unionised workplace it seems that this position would have to be adapted to require disclosure and consultation with these unrepresented individuals themselves as well or with their specially elected representatives. Another option is therefore a pluralist model in terms of which all affected employees and their representatives must be informed and consulted.1219 The benefit of such a model is that possible problems that could arise due to the possibility of amending the statutory regulation of transfers are avoided. It has been argued that

1218 This is also the European Community position. 1219 The Acquired Rights Directive requires, firstly, disclosure to and consultation with

employee representatives. Secondly, if there are no such representatives, disclosure and consultation should also be afforded to the individual employees (see par 11.2 supra ).

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only individual employees can have a right to object to the transfer of their contracts1220 and that, similarly, only individual employees should be able to amend/waive any of the rights afforded them in terms of section 197.1221 In order to accommodate this position, it is essential that all employees possess the necessary information to make informed decisions regarding the transfer of their contracts and the rights and duties connected thereto. It therefore appears as if the different aspects of a transfer exercise would require different parties to be involved in disclosure and consultation during the different stages of the transfer. The identity of the parties will, in particular, be influenced by the individual or collective nature of the rights/protection in question. 11.3.5 What should the result of non-compliance be? It is arguable that non-compliance with sections 84 and 89 of the Labour Relations Act constitutes an act that would render any implementation of an employer’s proposal voidable.1222 This seems to be a suitable remedy for non-compliance in the context of the transfer of undertakings as well. It is submitted that the mere threat of a compensation order1223 would not deter transferors and transferees from frustrating and escaping the duty to disclose and to consult. Because the possible sanction of invalidity of the whole transfer transaction involves great economic consequences for the transferor and transferee, it is hoped that this sanction should ensure compliance of the duty to disclose information as well as to consult. In order for such remedy to work fairly towards both employees and employer, a provision could be included to the effect that employees or their representatives must lodge a dispute regarding disclosure and consultation within a certain time period after a transfer has been effected.1224 Of course, employees will have the option of seeking an interdict before a relevant transfer compelling the transferor and/or transferee to comply with their obligations in this regard. The general dispute resolution procedure and route that exists with regard to disclosure of information,1225 also seems acceptable in these cases. 1220 See chapter 7, par 7.4 supra . 1221 See chapter 8, par 8.4 supra . 1222 Disputes regarding workplace forums are regulated in terms of s 94. This viewpoint is also

endorsed by Du Toit et al Labour Relations Law 310-311. 1223 See the position in the United Kingdom, described in par 11.2 supra . 1224 Reg 11(8)(a) of the TUPE regulations states, that a complaint about failure to inform or

consult must be presented to an industrial tribunal before the end of the period of three months beginning with the date of the transfer, unless that is not reasonably practicable.

1225 See s 16 (conciliation and arbitration at the CCMA).


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11.4 The legal position in South Africa In SACTWU v Island View Holdings Ltd & another,1226 the Labour Court declined to commit itself with regard to a duty on the employer to consult over a proposed sale of a business and the transfer of contracts of employment. The applicants requested, “to have the transfer of the business interdicted until there had been full and bona fide consultation/negotiation between itself and the first respondent”.1227 The Court held that where an applicant averred, in its founding affidavit, that no consultation had taken place, it was precluded from subsequently contending that there had been inadequate consultation. The Court thus held that, in the circumstances, it was not necessary to decide whether section 197 of the Labour Relations Act created a duty to consult over the sale of a business or its impact on affected employees. This seems to be a formalistic approach that was adopted. If an applicant cannot argue during motion proceedings that consultation and/or disclosure was unfair or inadequate, applicants will very seldom be able to find the relief they seek at an early enough stage to prevent injustice from taking place.1228 In Miriam Kgethe & others v L.M.K. Manufacturing (PTY) LTD & another1229 the Labour Appeal Court held that the rights of the appellants would depend on the precise nature and effect of the agreement concluded between the respondents, read together with the applicable statutory provisions. The Court thus ordered disclosure of the agreement of sale as the rights of the appellants depended on the precise nature and effect of the agreement concluded, read together with the applicable statutory provisions. Only when that had been determined, could the appellants take such steps as they were advised to do in order to safeguard their rights. The Court therefore did not hesitate to assume jurisdiction to order disclosure of information for this (restricted) purpose. The effect of this restrictive approach is that once a union has determined that the transfer of the undertaking as a going concern is indeed on the cards, no further information or consultation need be forthcoming. Whenever retrenchments have been on the cards in circumstances relating to transfer of undertakings, the Labour Court has required strict observance of proper consultation

1226 1998 4 BLLR 425 (LC). 1227 428H. 1228 See the reasoning behind the Court’s stance that the applicant was not permitted to argue

that consultations were not fair or adequate (432D-434B). 1229 1998 19 ILJ 524 (LAC), 1997 10 BLLR 1303 (LAC).

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procedures.1230 However, Mlambo J expressed the following view in Philips v Tedelex where section 197 was employed: 1231

The provisions of Section 197 are very clear. Consultation is obligatory where the situation in 197(1)(a) and (b) is not applicable. The phrase ‘unless otherwise agreed’ in Section 197(2) only applies where the terms and conditions with the new employer will be different. In a situation where the old employer transfers his business as a going concern without consulting the employees affected then the Act protects and maintains the same conditions of employment of those employees. [Own emphasis]

It is submitted that this viewpoint should not be endorsed. Even though employees enjoy some degree of protection under such an interpretation (their old rights and obligations remain unaffected in the absence of consultation), their statutory right to reach an agreement to the contrary is negated, as is their right to make an informed decision about whether or not to object to the transfer. 11.5 Concluding remarks The Industrial Court required disclosure of information, consultation and dealings in good faith between a transferor and transferee as early as 1987, even in the absence of a statutory provision regulating transfer of employment contracts.1232 The present South African position regarding disclosure of information in the context of transfers of undertakings is out of date and unsatisfactory. This is in particular due to the right to fair labour practices. A position that allows employees’ contracts of employment to be transferred without them being informed about this at an early stage, and without giving them an opportunity to participate in this process, is just not acceptable or compatible with international trends in this regard. Such an approach is also inconsistent with the treatment of these rights in the rest of the Act, for example in the context of dismissals for operational requirements. In addition, there seems to be unequal treatment within the context of transfers, as some employees will benefit from disclosure and consultation, i.e. where there is a workplace forum in the workplace, whereas other employees will have to make decisions about their future employment 1230 See e.g. Philips & others v Tedelex Case No P22/97, P23/97, Labour Court judgement of 11

June 1998. 1231 Par 34. 1232 Kebeni v Cementile Products (Ciskei) Pty Ltd (discussed in chapter 4, par 4.3.1).


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and the amendment of prior existing rights and obligations without an express obligation on the transferor and transferee to inform and consult them. Simple obligations of disclosure and consultation will not result in the democratisation of the workplace on its own, but at least these could be said to contribute to the achievement of harmonisation in the workplace.1233 It is thus submitted that the legislator must, as a matter of urgency, amend the current position to explicitly include a duty to disclose and to consult with affected individuals and/or their representatives.1234 Not only should workplace forums be approached as is presently the case, but other interested stakeholders should also benefit from disclosure and consultation. Workplace forums, unions and non-unionised employees should be approached in this regard - an inclusive approach is thus supported, which may differ depending on the particular rights involved. It is further recommended that the result of non-compliance should be sufficiently severe as to ensure compliance with such duties. A mechanical checklist approach to these duties of disclosure and consultation should not be accepted1235 and the Courts should be able to evaluate whether the parties genuinely attempted to reach an agreement.1236 Even though it has been shown that the content of a “duty to consult” has a relatively well-established meaning in South African labour law (added to by the jurisprudence of the Labour Court and Labour Appeal Court), it is finally argued that the “duty to disclose information”, as it is regulated currently,1237 should be further elaborated upon in transfer circumstances in order to stipulate the issues that a transferor and transferee must disclose to affected employees and their representatives.1238

1233 See chapter 2, par 2.8 supra . See also Villiers 2000 ILJ 392. 1234 The Labour Relations Amendment Bill, 2001 does not address this situation. 1235 See Johnson & Johnson discussed earlier in par 11.3.2. 1236 See also Comark Holdings discussed earlier in par 11.3.2. 1237 Ss 16, 89 and 189 require disclosure of all relevant information. 1238 The provision of the Acquired Rights Directive could be used as a starting point in this

regard (see par 11.2 supra).

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CHAPTER TWELVE

DISMISSALS BY THE TRANSFEROR AND/OR TRANSFEREE IN CIRCUMSTANCES INVOLVING THE TRANSFER OF AN

UNDERTAKING 12.1 General The transfer of an undertaking would normally have the effect of terminating the employment relationship of the employees and the transferor owing to operational requirements of the transferor. This means that the affected employees would retain their common law and statutory rights that are available in the event of termination of employment, including notice entitlements and access to severance pay. Transfer of employment contracts in terms of the statutory regulation of the transfer of undertakings changes this whole position. Continued employment with the transferee is now provided for. Section 197 of the Labour Relations Act 66 of 1995 does not regulate dismissals in the context of the transfer of an undertaking or part thereof as a going concern. However, section 188 of the Act only allows three grounds for dismissal. These include misconduct, incapacity/incompetence and operational requirements.1239 The latter is defined as “economic, technical, structural or similar needs of the employer”.1240 Certain types of dismissal can be classified as being automatically unfair.1241 However, dismissal in contravention of the spirit of section 197 is not expressly included in the list of automatically unfair dismissals. It is thus uncertain whether an old or new employer who dismisses because of a transfer is guilty of an unfair dismissal (or perhaps an automatically unfair dismissal), and whether such a dismissal is effective even while being unfair, or whether such a dismissal is of no effect. Since this is a fundamental question, it is regrettable that neither section 197 nor the rest of Chapter VIII (Unfair Dismissal) of the Act regulates this issue.1242 Our Courts have not yet decided this specific issue. It is submitted that a purposive interpretation of section 197 would require that a dismissal because of a transfer should not be allowed and should either constitute an 1239 It is quite peculiar to have individual labour law matters regulated in such an Act. However,

it is foreseen that chapter 8 (and its Code of Good Conduct in schedule 8 to the Act) will at some time be repealed and replaced with a separate statute. How realistic this expectation is, is debatable. The Labour Relations Amendment Bill, 2001 now includes unfair labour practices in chapter 8 of the Act.

1240 S 213 of the LRA. 1241 S 187 of the LRA. 1242 See, however, the proposed s 187(f) in the Labour Relations Amendment Bill, 2001.


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automatically unfair dismissal or be ineffective and of no effect.1243 Furthermore, it becomes evident that a narrow (and, it is suggested, the proper) interpretation of the term “operational requirements” will play a crucial role in preventing the transferor and transferee from escaping the duties imposed by the Act. In this regard there will also be an investigation into the question of when dismissals should be allowed in the context of transfers of undertakings. The remedies, the route to be followed for disputes and the procedure applicable in the event of wrongdoing by either transferor or transferee in circumstances involving a dismissal will also be considered. The effect of statutory transfer provisions on transfer situations must be considered as a whole. The price to be paid for an undertaking, in the event of a sale, may very well be negatively affected by whether or not the transferee inherits the transferor’s pre-existing liabilities to its employees. The price may also be higher if the transferee has a free hand, after the transfer, to employ whom it wishes and on whatever terms it deems fit. It is thus often argued that the prospective obligations that are imposed may result in the sale not going ahead. Where this is the case, the employees of the transferor may lose their chance of continuing employment (especially in insolvency circumstances) and the transfer provisions may thus be counterproductive. A proper response to such an argument is clearly impossible without the availability of empirical research in this regard. It can be stated though, that where the obligations contained in transfer provisions are applied to all transfers, the potential would-be buyers have for “shopping around” is severely curtailed. 12.2 The history of the law of unfair dismissal (including a constitutional

perspective) In terms of common law, an employee did not have a great measure of job security.1244 Before the Labour Relations Act 66 of 1995 was enacted, which encompasses detailed rules regarding the law of dismissal and which has a wide scope of application, employees mainly depended on the unfair labour practice jurisdiction of the Industrial Court for protection against unfair dismissals. A statutory right not to be unfairly dismissed, as contained in section 185 of the Labour Relations Act, has significant consequences.1245 In 1994, labour law scholars of South Africa asked the following

1243 The approach followed by the House of Lords in Litster v Forth Dry Dock and Engineering

Co Ltd 1989 ICR 341 (HL) can be said to amount to a purposive interpretation of the TUPE regulations in the United Kingdom.

1244 See Jordaan & Rycroft Handleiding tot die Suid-Afrikaanse Arbeidsreg 197-198. Rycroft & Jordaan A Guide to South African Labour Law 189-191.

1245 The International Labour Organisation (ILO) has at least three important instruments that deal with unfair dismissal. These are: the Termination of Employment Recommendation No.

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question:1246 Do statutory limitations on the employer’s traditionally wide ability to discipline and dismiss grant employees a legally protected right to their job? The authors stated that if it were to be so, one would expect that an employee could only be deprived of it (his/her job) if an employer had a good reason for the dismissal and if a correct procedure were followed before a dismissal. Furthermore, one would then expect that reinstatement would be the automatic remedy for an unfair dismissal. As these conditions were not met at that stage of our labour law history, the authors concluded that, at most, an employee could have had “a right not to be unfairly dismissed”. To reach this conclusion, they also relied on the inability to pinpoint a right to work under traditional property notions. In this regard they referred to Hepple on the legal position in England:1247

This idea of “property in the job” is intelligible as an attempt to create a basis for compensating the worker for his relative lack of property in the capital which employs him but it is not a true property right because workers do not control their jobs in the way that an owner of tangible or intangible possessions can control or dispose of his property.

So where do we currently stand in South Africa regarding this question? It seems that we do now have a statutory limitation that provides that employees can be fairly dismissed only for three substantive grounds and only if in accordance with a fair procedure.1248 Furthermore, reinstatement and re-employment are now the primary remedies in the event of an unfair dismissal.1249 It is also true that the interim South African Constitution introduced the notion of “rights in property”1250 and that this differs from the traditional notion of pure property rights.1251 Constitutional law authors will,

119, 1963; Convention 158 (Convention concerning Termination of Employment at the Initiative of the Employer 1982); and Recommendation 166 (Recommendation Concerning Termination of Employment at the Initiative of the Employer 1982). As far as the European Community is concerned, see Council Directive 75/129/EEC on the approximation of the laws of the Member States relating to collective redundancies; and Directive 80/987/EEC relating to the protection of employees in the event of the insolvency of their employer.

1246 Jordaan & Rycroft Handleiding tot die Suid-Afrikaanse Arbeidsreg 198 (A Guide to South African Labour Law 190).

1247 Jordaan & Rycroft 198 (A Guide to South African Labour Law 190) (quoting Hepple B “Job security – a legal myth?” 1985 4 Journal of the Irish Society of Labour Law 1 at 3).

1248 S 188 of the LRA. 1249 S 193. 1250 S 28(1) of the interim Constitution of 1993 provided that “every person shall have the right

to acquire and hold rights in property …”. S 25(1) of the final Constitution of 1996 provides that “no one may be deprived of property except in terms of law of general application, and no law may permit arbitrary deprivation of property”.

1251 Even though s 25 uses the traditional term “property”, Van der Walt AJ (Constitutional Property Clauses (Juta & Kluwer Law International 1999) 351) states that “[I]t is generally assumed that “property” is not a narrower term than “rights in property”, and it seems


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however, argue that even though the property concept in section 25 of the Constitution will be interpreted more widely than in private law, it is still restricted to rights that:1252 • are demonstrably vested1253 • in the claimant1254 and • that have some patrimonial value. It is debatable whether “the right to a job” can satisfy these requirements.1255 However, it seems that if workers still do not have a right to work, in the sense of a right vis-à-vis the employer,1256 they have something quite similar in the sense that they may not be refused employment on any discriminatory grounds,1257 they may not be dismissed without good reason and without a fair procedure being followed1258 and, if there is an unfair dismissal, the primary remedy is reinstatement or re-employment.1259 It is therefore submitted that regardless of whether or not it is found that an employee has a “right to work” or a “right not to be dismissed unfairly”, earning capacity and the potential to earn1260 must be recognised as the crucial conditions for social inclusion and cohesion. The introduction of a fundamental right to fair labour practices in section 23 of the Bill of Rights also adds to this argument. It is consequently argued that these principles must be acknowledged and recognised in the law of unfair dismissal,1261 whether it be in the development of the law or in the interpretation and limitation thereof.

more than likely that the eventual meaning of the two terms will be very similar if not exactly the same.”

1252 See Van der Walt Constitutional Property Clauses 353. 1253 In the sense that the right has accrued according to the relevant principles of common law or

statute (Van der Walt 353 fn 155). 1254 As opposed to rights or interests that are no more than expectation that may or may not vest

in future (Van der Walt 353 fn 156). 1255 See Devenish A Commentary on the South African Bill of Rights 352-353 where the

following is said in the paragraph dealing with the definition of property: “In Transkei Public Servants Association v Government of the Republic of South Africa the view was expressed, without deciding so, that property within the meaning of s 28 of the interim constitution encompassed a broader field than the category of things recognised by the common law as capable of being owned. Therefore, property could possibly extend to social benefits, such as state contracts, pension and medical benefits and employment rights.”

1256 This right could also refer to a right against the State to maintain a full employment policy and a right against an employer to be provided with work and to be utilised productively after being employed.

1257 The Employment Equity Act 55 of 1998 also applies to job applicants (s 9). 1258 S 188 LRA. 1259 See Ver Loren Van Themaat AH “Reinstatement and security of employment – part one:

South Africa” 1989 ILJ 205 207 where it is stated that security of employment can never be guaranteed in an absolute sense since there always has to be some sort of trade-off between protection of jobs and the business interest of the employer. However, the principle does involve that the worker’s employment should not be terminated unless there is a valid reason for this.

1260 See Hawker v Life Offices Association of SA 1987 8 ILJ 231 (C). 1261 See e.g. the judgement of NUM v Atlantis Diesel Engine 1993 14 ILJ 642 (LAC), where the

LAC held that fairness in the context of retrenchment goes beyond that of a bona fide

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It has been shown that where a business is sold as a going concern, a contract of employment cannot be ceded without the consent of the employee.1262 This was acknowledged in South African law in the case of East Rand Exploration Co v Nel & others where the Court stated:1263

Now, speaking generally, the question of whether one of two contracting parties can by cession of his interest, establish a cessionary in his place without the consent of the other contracting party depends on whether or not the contract is so personal in its character that it can make any reasonable or substantial difference to the other party whether the cedent or the cessionary is entitled to enforce it.

Even though this position is concurred with (hence the support of a power to object to transfer)1264 it is submitted that, owing to the statutory possibility of the transfer of an employee’s contract of employment, any action on the part of the transferor or transferee to prevent this transfer from occurring, must be seen as a dismissal.1265 In this regard, the applicant in any unfair dismissal claim must, of course, first show that he/she was indeed an employee and that he/she was dismissed.1266 It is submitted that the burden of proof to show that the dismissal was not because of the transfer should then rest on the entity that dismissed the employee.1267 In most instances it is not particularly difficult to ascertain whether the parties are involved in an employment relationship. However, some practical manifestations and “fanciful” contracts can lead to doubt.1268 It has long been accepted that there are no

commercial justification. The LAC held that as in the case of termination for disciplinary or performance reasons, termination for operational requirements should be a measure of last resort. This position came very near to recognising a property right in the job.

1262 See chapter 1 and Le Roux PAK & Van Niekerk A The South African Law of Unfair Dismissal (Juta 1994) 274.

1263 1903 TS 42. 1264 See chapter 7. 1265 Le Roux & Van Niekerk (The Law of Unfair Dismissal 276 and case law referred to in fn 24)

state that in the few reported decisions up to 1994 regarding the effect of a merger, the Industrial Court had adopted the view that where employees are offered employment with the merged company on suitable terms or the same terms and conditions, no unfair labour practice was committed where employment is terminated to give effect to the merger. The authors argue that this position trivialises an employee’s fundamental freedom to choose an employer, especially having regard to the emphasis placed on this right by the Industrial Court in circumstances of the sale of a business. The effect of such a “dismissal” still needs to be considered.

1266 S 186 of the LRA codifies certain actions that will constitute a dismissal. 1267 See s 192 of the LRA. 1268 Atypical employment is becoming more common (including flexitime, part-time employment,

temporary employment, tele-workers, dependent contractors, etc). See also s 83 of the BCEA 75 of 1997.


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fixed criteria for determining whether an employment relationship exists. The Courts have therefore endorsed a flexible approach.1269 The South African Courts are tackling these cases by using the dominant impression test, as was the case in the recent matter of SA Broadcasting Corporation v McKenzie.1270 In terms of this test, the Courts have regard to the whole picture. The contract is used as the starting point but all other surrounding circumstances are also taken into consideration. It has been stated that the object of the contract should play a vital role. If the object is the production of a result rather than the rendering of personal services, it cannot be a contract of employment.1271 It should be clear that the employer’s right to control and his/her right to authority are still regarded as important indicia of such a relationship, although these are not the only factors to be considered. In McKenzie, the Labour Appeal Court again enforced the principle that the legal relationship between the parties must be gathered primarily from a construction of the contract concluded by them. The parties’ own perceptions of their relationship and the manner in which the contract is carried out in practice may assist in determining the relationship in areas not covered by the strict terms of the contract.1272

1269 Smit v WCC 1979 1 SA 51 (A) and Ongevallekommissaris v Onderlinge

Versekeringsgenootskap AVBOB 1976 4 SA 446 (A). 1270 1999 20 ILJ 585 (LAC). See also Niselow v Liberty Life Association of Africa Ltd 1989 19 ILJ

752 (SCA). 1271 The Smit case and Borcherds v CW Pearce & Sheward t/a Lubrite Distributors 1993 14 ILJ

1262 (LAC). See also Midway Two Engineering & Construction Services v Transnet Bpk 1998 19 ILJ 738 (SCA) where the Court held that the control test is outdated for establishing vicarious liability in cases where the employee who had committed the unlawful act had been supplied by a labour broker. The Court proposed a multifaceted test that takes into account all relevant factors to determine, as a matter of policy and fairness, who had been the mo st closely associated with the risk-creating act.

1272 The LAC assisted practitioners, employees and employers by holding that some important characteristics of the contract of employment and the contract of work are as follows: The object of the contract of employment is the rendering of personal services by the employee to the employer. The object of the contract of work is the performance of specified work or the production of a result. In the contract of employment, the employee will be at the beck and call of the employer to render personal services at the employer’s behest. The independent contractor is not obliged to perform work personally, unless specifically agreed upon. The services to be rendered in a contract of employment are at the disposal of the employer who, subject to repudiation, may or may not decide to have them rendered. The independent contractor is bound to perform specific work or to produce a specified result. The employee is subordinate to the will of the employer. The independent contractor is on the same footing as the employer. The independent contractor is bound to produce in terms of the contract of work and not by the orders of the employer. The independent contractor is his or her own master. The contract of employment is terminated by the death of the employee. The death of the independent contractor does not necessarily terminate the contract of work. A contract of employment terminates on expiration of the period of service. The contract of work terminates when the work is completed (590F-591D). See Smit N “Individual labour law and selected jurisdictional matters” 2000 TSAR 328.

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12.3 Comparative perspective Directive 2001/23/EC provides that the transfer of an undertaking, business or part of an undertaking or business cannot in itself constitute grounds for dismissal by the transferor or the transferee.1273 However, the provision does not proscribe dismissals that may take place for economic, technical or organisational reasons entailing changes in the workforce. In addition, Member States may provide that this protection may not apply to certain specific categories of employees who are not covered by the laws or practice of the Member States in respect of protection against dismissal. If the contract of employment or the employment relationship is terminated because the transfer involves a substantial change in working conditions to the detriment of the employee, the employer will be regarded as having been responsible for termination of the contract of employment or of the employment relationship.1274 The Collective Redundancies Directive 98/59/EC is often also applicable in these circumstances.1275 1276 The Acquired Rights Directive did not originally define the term “employee”. The question thus arose whether this concept was a concept with a Community meaning, for which national Courts could depend on the European Court of Justice to provide guidance as far as its interpretation is concerned.1277 The essential feature of an employment relationship under European Community law is that, for a certain period of time, a person performs services for and under the direction of another person in return for which he/she receives remuneration.1278 In Foreningen af Arbejdsledere I Danmark v A/S Danmols Inventar, in liquidation,1279 the European Court of Justice held that the Directive is aimed only at achieving partial harmonisation, essentially by extending the protection guaranteed to workers independently by the laws of the individual Member States. The aim, it was further held, is to ensure, as far as possible, that the contract of employment or the employment relationship continues unchanged with the transferee so that the employees affected by the transfer of the undertaking are not placed in a less favourable position solely because of the transfer. However, the 1273 Art 4(1). 1274 Art 4(2). 1275 Directive of 20 July 1998, consolidating the amended Directive 75/129/EEC. 1276 For a discussion of the scope and most important provisions of this Directive, refer to

Nielsen European Labour Law 345-352. 1277 The term “worker” under art 48 of the European Community Treaty may not be interpreted

differently according to the law of Member States since it defines the scope of the fundamental freedom of movement of workers.

1278 See Engels C & Salas L “Cause and consequence, what’s the difference in respect of the EC Transfer Directive?” in Engels C & Weiss M Labour Law and Industrial Relations at the Turn of the Century (Kluwer International 1998) 275 277.

1279 1985 ECR 2639 (ECJ).


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aim is not to establish a uniform level of protection throughout the European Community on the basis of common criteria. In the amended Directive, “employee” is now expressly defined to mean any person who, in the Member State concerned, is protected as an employee under national employment law.1280 However, the Directive also provides that, without prejudice to national law as regards the definition of a contract of employment or employment relationship, Member States may not exclude from the scope of the Directive contracts of employment or employment relationships1281 solely because:1282 • of the number of working hours performed or to be performed; • they are employment relationships governed by a fixed-duration contract of

employment within the meaning of article 1(1) of Council Directive 91/383/EEC of 25 June 1991 supplementing the measures to encourage improvements in the safety and health at work of workers with a fixed-duration employment relationship or a temporary employment relationship; or

• they are temporary employment relationships within the meaning of article 1(2) of Directive 91/383/EEC, and the undertaking, business or part of the undertaking or business transferred is, or is part of, the temporary employment business which is the employer.1283

In the United Kingdom, the TUPE regulations provide that where, either before or after a relevant transfer, any employee of the transferor or transferee is dismissed, that employee must be treated as unfairly dismissed if the transfer or a reason connected with it is the reason or principal reason for the employee’s dismissal.1284 However, the TUPE regulations recognise that where an economic, technical or organisational reason entailing changes in the workforce of either the transferor or the transferee before or after a relevant transfer is the reason or principal reason for dismissing an employee,1285 such an employee is not regarded as having been unfairly dismissed but will, subject to

1280 Art 2(1)(d). 1281 This reliance on the existence of a contract of employment or an employment relationship

could in principle result in the workers of some public enterprises being excluded from the protection of the Directive as the “employees” of such enterprises are (in some jurisdictions) seen as civil servants whose relationship with the State as employer is regulated by public law and not labour law, thereby effectively excluding them from our view of an “employment relationship” (e.g. Germany). They are thus not protected under national law and subsequently do not benefit from the protection granted by the Directive. See also the ILO Proposed Convention on Contract Labour.

1282 Art 2(2)(a)-(c). 1283 For a discussion of these concepts refer to chapter 3, par 3.2.4.1 supra . 1284 Reg 8(1). By virtue of this regulation it is automatically unfair to dismiss an employee of

either the transferor or transferee because of the transfer. This applies irrespective of whether the dismissal takes effect before or after the transfer.

1285 The ETOR exception.

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the ordinary laws of unfair dismissal,1286 be regarded as having been dismissed for a substantial reason of a kind such as to justify the dismissal of an employee holding the position which that employee held.1287 This justification, however, only includes those economic reasons “entailing changes in the workforce” of either employer. As a result, dismissals that would usually be classified as falling under the ETOR exception,1288 because their aim is job flexibility or cost-cutting, fail to qualify as potentially fair.1289 Employees enjoy the protection of regulation 8, regardless of whether the employee in question is employed in the undertaking or part of the undertaking transferred or to be transferred.1290 Since new owners of undertakings do not necessarily want the whole workforce of the old employer, and the old employer wants its business to be as attractive as possible to the new employer, the parties tried to find a way around regulation 8. Since the regulations, in terms of regulation 5(3), only applied to someone “employed immediately before the transfer”, a possible escape seemed to be to make sure that the old employer dismissed the unwanted employees before that time.1291 However, the House of Lords put an end to this practice in the well-known case of Litster v Forth Dry Dock and Engineering Co Ltd.1292 In this case the respondent company, FDD, was in receivership.1293 A new company, Forth Estuary Engineering, had been set up with a view to taking over FDD’s business, but the promoters had no wish to take over FDD’s workforce as they were planning to employ the redundant workforce of another shipyard who would come and work for lower rates. The two companies therefore agreed that FDD should dismiss the workforce before the transfer, and this in

1286 See Milligan v Securicor Cleaning Ltd 1995 IRLR 288 (EAT), where the EAT held that no

qualifying period of employment (two years in casu ) was required. This judgement was criticised (see Barker JC “TUPE, unfair dismissal and two years’ continuous employment” 1995 ILJ (United Kingdom) 371) and was later reversed by the inclusion of reg 8(5), which expressly excludes the dismissal of a person who in terms of s 54 of the 1978 Employment Protection (Consolidation) Act does not qualify, from the scope of reg 8(1). In MRS Services Ltd v Marsh 1997 ICR 995 (CA) the CA held that it was unnecessary for the legislator to have amended the regulations as the draftsman had already made it clear that reg 8 did not apply to employees falling within the two -year exception (1006H).

1287 Reg 8(2). 1288 For a case where this defence was allowed, see Whitehouse v Chas A Blatchford & Sons Ltd

1999 IRLR 492 (CA). It was confirmed that a desire to obtain an enhanced price for the business or a desire to achieve a sale would not fall within the exception. However, where the need for a reduction in staff numbers was the reason for the dismissal (i.e. the need to make a redundancy was directly connected with the provision of the relevant services) it was an ETOR exception.

1289 Deakin Employment Law 464-473. 1290 Reg 8(3). 1291 See Pitt Cases and Materials in Employment Law 377-380. This could occur in

circumstances of a “hiving-down” or otherwise. Regarding the practice of hiving-down, see chapter 13, par 13.2.4.1 infra .

1292 1989 ICR 341 (HL). For a judgement with a similar effect regarding art 4(1) of the Directive by the ECJ, see Jules Déthier Èquipement SA v Jules Dassy and Sovam SPRL 1998 ECR 1061.

1293 See chapter 13, par 13.2.4.1 infra regarding receivership and administration.


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fact occurred an hour before the transfer went through. The House of Lords held that a dismissal effected before the transfer and solely because of the transfer of the business is, in effect, prohibited and is, for purposes of considering the application of article 3(1) of the Directive, required to be treated as ineffective. Thus the transferee, Forth Estuary Engineering, was liable to the applicants for unfair dismissal. It therefore seems that where there is collusion between transferor and transferee, any dismissals before the transfer will be ineffective.1294 However, dismissals that were not linked to the transfer do not fall under this prohibition. The position under the Directive, as interpreted by the United Kingdom Courts, is therefore as follows:1295 • The purpose of the Directive is to ensure, as far as possible, that the employment

relationship continues unchanged with the transferee and to protect workers against dismissals motivated solely (or principally) by the fact of the transfer.

• The existence or otherwise of the contract of employment on the date of the transfer within the meaning of article 3(1) must be established on the basis of the rules of national law, subject however to observance of the mandatory provisions of the Directive (particularly article 4 concerning the protection of employees against dismissal by the transferor or transferee by reason only (or mainly) of the transfer).

• It is for the national Courts to decide whether or not, on the date of transfer, the employees in question were linked to the undertaking by virtue of a contract of employment or an employment relationship.

• Under article 4, the transfer does not by itself justify dismissal by the transferor or transferee unless such dismissal is for economic, technical or organisational reasons entailing changes in the workforce.

• In order to determine whether the only reason (or main reason) for dismissal was the transfer itself, the objective circumstances in which the dismissal occurred must be taken into account, in particular whether it took place on a date close to the transfer and whether the workers concerned were re-engaged by the transferee.

• A dismissal effected before the transfer and solely (or mainly) because of the transfer is in effect prohibited and, when considering the application of article 3(1), is required to be treated as ineffective.

• The crucial question deals with what is meant by a contract of employment being terminated “by” a transfer. To answer this question, it is necessary to decide what the effective reason was for the termination of the contracts of employment.

1294 Litster was applied in the joined appeals of Wilson v St Helens BC and Meade v British

Fuels Ltd 1997 IRLR 505 (CA). 1295 See Beldam LJ in Wilson and Meade (1997 IRLR 505 CA), concurring with the opinion of

Lord Oliver in Litster.

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The United Kingdom Courts have thus rejected an argument that a transferor may validly, albeit unfairly, terminate his/her employees’ contracts of employment on the basis of the transfer so that they are not employed “immediately before the transfer”.1296 In Germany, the dismissal of an employee by the transferor or transferee because of the transfer of the undertaking is void.1297 1298 However, here too the possibility of a dismissal for operational reasons remains unaffected (for example, if it is necessary to dismiss employees in order to rationalise the business after the transfer). Therefore, the transfer of an undertaking alone may not be the reason for termination of the contract of employment.1299 Even though the purpose of article 613a(4) is to prevent a transferor and transferee from using the transfer to get rid of certain employees, the situation can be different where the undertaking had already been overstaffed before the sale or a rationalisation is necessary for other reasons and the transferee is thus able or willing to employ only a part of the work force.1300 In Germany, article 613a(4) contains an independent prohibition of dismissal. This means that the three-week referral period of section 4 of the Act on the Protection Against Dismissal does not have to be observed and that ineffectiveness of the dismissal may be claimed even if there are less than six employees in the transferred undertaking and the employee has had less than six months’ employment with the undertaking.1301 However, if an employee does not bring a claim within a reasonable time, right of action may be forfeited if a claim is only brought after a relatively long period and the employer may safely have assumed that he/she would no longer be sued.1302 If action is taken within the three-week period (within good time), the employer has to explain and, if need be, prove the social justification of the dismissal. The onus thus rests on the employer to prove the fairness of the dismissal.1303 The employee must prove that the reason for the dismissal was the transfer of the undertaking. However, if the dismissal and the transfer of the undertaking took place very soon after each other, a presumption exists that the transfer was the

1296 See also chapter 5, par 5.2 supra . 1297 Art 613a(4) BGB. 1298 The term “void,” means that such dismissal is of no effect whatsoever, i.e. it is ineffective. 1299 According to Halbach et al Labour Law in Germany 157 (referring to a judgement of the

Federal Labour Court, judgement of 26 May 1983 in BB 1983 2116) a dismissal is not ineffective just because “the transfer of the business is the cause of the dismissal but only if the transfer of the business is the reason for the termination. Therefore, if the motive of termination is substantially determined by the change of ownership of the undertaking”. This could be interpreted to mean that the transfer should be the reason for the dismissal and factual and juridical causation should therefore be present between the transfer and the dismissal.

1300 Halbach et al Labour Law in Germany 157. 1301 Federal Labour Court, judgement of 31 January 1985 in BB 1985 1913. 1302 Halbach et al Labour Law in Germany 157-158. 1303 S 1(2) of the Act on the Protection against Dismissal. This is regardless of whether or not

notice of the dismissal had been given because of the transfer of the business.


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reason for the dismissal. The employer then has to try and invalidate this presumption by indicating other reasons for the dismissal.1304 It should also be mentioned that in an infringement action against Belgium,1305 the European Court of Justice held that article 4(1) of the Acquired Rights Directive is designed to ensure that employees’ rights are maintained by extending the protection against dismissal by the employer afforded by the national law of Member States to cover the case in which a change in employer occurs due to the relevant transfer of an undertaking. This protection applies to any situation in which employees affected by a transfer enjoy some, albeit limited, protection against dismissal under national law. The result under the Directive is that protection under national law may not be curtailed or taken away from them solely because of the transfer. 12.4 The legal position in South Africa As explained earlier, South African legislation does not expressly forbid dismissals due to a transfer.1306 However, general dismissal provisions can be applied, even though it is submitted that the provisions relating to dismissal for reasons based on operational requirements1307 are generally inapplicable because section 197 regulates the continuation of services. Nevertheless, in the absence of a statutory prohibition, the other yardsticks contained in chapter 8 of the Labour Relations Act will have to cover transfer dismissals.1308 A dismissal for a substantively fair reason (for example, a bona

1304 Halbach et al Labour Law in Germany 158. 1305 Commission v Belgium 1986 ECR 1247 (ECJ). 1306 In Manning v Metro Nissan a Division of Venture & others (Case no J 1034/97, 1998 19 ILJ

1181 (LC)) the Court held that the Act does make provision in s 197(2)(a) for the parties (the seller and the purchaser) to contract out of the consequences of s 197 (par 43). The Court held that this would mean that there would have to be a specific agreement between the purchaser and the seller that the contracts of the individual employees are not being transferred. The result of such agreement is said to be “that the individual employees are being dismissed by the seller in which event the seller will be obliged to comply with the provisions of the Act to ensure that the dismissal(s) are fair both procedurally and substantively” (par 43). It is submitted that such collusion between transferor and transferee could never result in a substantively fair dismissal and that this is a patently wrong decision. Du Toit et al Labour Relations Law 402 also view such a dismissal as substantively unfair.

1307 S 189 of the LRA. 1308 It could be argued that a dismissal due to a transfer is an automatically unfair dismissal if a

transferor and transferee, e.g., state that an employee who does not agree to come over on different terms and conditions will be retrenched (s 187(1)(c) provides that a dismissal to compel an employee to accept a demand in respect of any matter of mutual interest between the employer and employee is an automatically unfair dismissal). See also s 187(1)(d). The Labour Relations Amendment Bill of 2001 now introduces a new s 187(g), which stipulates that an automatically unfair dismissal also includes a dismissal of which the reason is “a transfer, or a reason related to a transfer, contemplated by section 197 or section 197A of this Act”. This will also include the situation where an employee terminated a contract

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fide economic reason other than the fact of the transfer) and in accordance with a fair procedure will thus not be unfair only because it takes place simultaneously with or pursuant to the sale or the transfer of a business.1309 However, it is submitted that the Courts will be expected to scrutinise these transactions closely in order to ensure that section 197 is not circumvented. How have our Labour Court and Labour Appeal Court approached dismissals in these circumstances? As a general rule, the specific policy and legal issues involved in the context of dismissals and transfers have not yet been finecombed by our Courts. The following cases indicate the same: a) A post-transfer dismissal based on incapacity and incompatibility In SSM Manufacturing v I Snell,1310 the Commission for Conciliation, Mediation and Arbitration held that the dismissal of a transferred manager on the grounds of incompatibility, disloyalty and insubordination was unfair. The arbitrator held that the new employers should have developed appropriate systems and procedures in consultation with the manufacturing staff, should have provided information and training on these systems (and on new expectations or a change of modus operandi) and that they should have allowed for a period of a few months during which the operation could adapt to the clearly defined set of new requirements. In the absence of such measures, the dismissal was unfair. This judgement places definite restraints on a transferee’s options to fairly implement a post-transfer dismissal. b) Failed negotiations regarding the transfer of employees on amended terms

and conditions Section 197(2)(a) guarantees continued employment after a transfer on the same terms and conditions of employment and with continuity of employment.1311 However, it is possible to reach an agreement to the contrary.1312 The result of the decision in Mdluli

because the transferee offered substantially less favourable conditions of work (see the proposed s 186(f)).

1309 See Du Toit et al Labour Relations Law 401-402. 1310 1997 2 BLLR 240 (CCMA). See also Kissopersad Rugnath v A Timber Freight (Pty) Ltd &

another Case No D345/97, judgement of the Labour Court of 22 May 1998. In this case the Labour Court held that the second respondent (the transferee) did its best to get rid of the applicant. Various charges were laid against him, but none were followed through by the transferee. Instead, the Court held, the transferee chose to follow the redundancy route, and in this respect failed dismally in conforming to and complying with the requirements of s 189 of the LRA (par 33). The Court approached it as a substantively unfair dismissal with a maximum of 12 months’ compensation being available.

1311 S 197(4) - for the effect of transfer provisions, see chapter 7 supra. 1312 In this regard, see chapter 8 supra .


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& others v Tillmor (Pty) Ltd1313 represents an extremely unsatisfactory outcome of this issue in point. The applicant employees had worked for the respondent who was then sold to Cronimet (RSA)(Pty) Ltd. Cronimet offered the employees jobs on certain conditions that were less favourable than those they had enjoyed with the respondent. The employees were only prepared to take these “lesser” jobs if the old employer paid them severance pay. When they thus “refused the alternative employment” they were summarily dismissed. Other employees who were not offered jobs by Cronimet were retrenched and paid severance benefits. The applicants alleged that they had been unfairly retrenched and sought an order reinstating them in employment with their old employer. However, the Court held that they had not been retrenched but dismissed for refusing to accept alternative employment.1314 1315 The Court stated that:1316

Surely there must be something I am missing here. Otherwise there is something wrong with the law. The applicants committed no misconduct. The respondents committed no wrong either. But applicants lost their jobs not because of their own making. The employees who were offered the retrenchment were better off. Those whose jobs became redundant and were offered alternative employment, the applicants in this case, ended up with a raw deal. This is so because I can find no relief in the Labour Relations Act to which they are entitled.

The Court did not even consider the argument that in terms of section 197(2)(a) of the Labour Relations Act, if a transfer of business as a going concern does take place, the existing rights of the employees are transferred unchanged unless there is an agreement to the contrary. What should an employee do who is faced with an offer to transfer to a buyer of the undertaking but on far less significant terms than those he/she enjoyed previously? One option is probably to accept such an offer, but surely an employee would be entitled to bargain in this regard (for example requesting a severance package from the old employer). This is the case since the provisions of section 197(2) do not prevent “an agreement to the contrary”.1317 In the absence of successful

1313 1999 20 ILJ 2626 (LC). 1314 The Court came to this conclusion regardless of having accepted that “[t]he applicants

were dismissed for refusing to accept alternative employment, albeit that they would have been worse off. Therefore they were not retrenched.” (2631D).

1315 This is, of course, not a recognised ground for dismissal as provided for in s 188 of the LRA. 1316 2631E-F. 1317 However, this would only be the case if it were accepted that an employee could validly

waive the protection contained in s 197.

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negotiations, the issue centres on an employee’s right to object to transfer and, also, an employee’s right to enforce specific performance of section 197(2). It is submitted that the more preferable route would probably be that the employees should have demanded the transfer of their contracts and then should have enforced their rights and obligations that existed prior to the transfer, as they were entitled to do in accordance with section 197(2)(a) in the absence of a contrary agreement having been reached.1318 Those employees who were not offered jobs by Cronimet were also entitled to demand the transfer of their contracts with preservation of rights, duties and length of service, as long as the undertaking was transferred as a going concern.1319 The Court, with respect, erred in finding that the applicants were fairly dismissed for refusing alternative employment.1320 They were dismissed for insisting on the rights afforded them in terms of section 197, alternatively, for exercising their power to object to transfer, and were therefore entitled to legal relief.1321 At the very least, the employees should have been seen as exercising their right to object to transfer on reasonable grounds, which would have required the employer to address their situation by, inter alia, giving notice and paying severance benefits.1322 c) Retrenchments owing to outsourcing, closing down of an undertaking and

employees’ refusal to transfer In another context, the dismissal of employees (based on the contention that the transfer of parts of an undertaking, which amounted to outsourcing, did not fall under section 197), enabled an employer to dismiss employees owing to operational requirements. In NEHAWU v UCT & others,1323 the respondent (UCT) took a decision to outsource certain duties and this led to the termination of the services of about 267 staff members. The Court found that outsourcing was not the same as the transfer of an undertaking or part thereof and that section 197 was thus not applicable.1324 The University was thus found to have been entitled to dismiss the workers for operational requirements, subject to the provisions of section 188 and 189 of the Labour Relations Act. It is submitted

1318 The alternative employment offered would have recognised the applicants’ previous

conditions of service and benefits except that the new rate of pay was far lower (2630 E-F). On average, each applicant would have lost 50% of his/her hourly rate of pay.

1319 It could even be argued that s 197 results in an automatic transfer of contracts and it should not be possible to contract out of this protection, unless an employee exercises his/her individual choice to object to transfer.

1320 Firstly, this is not an accepted ground for dismissal (see s 188) and, secondly, there was no mention of a “reasonable alternative offer of employment” in casu (see supra that the offer involved a substantial reduction in remuneration).

1321 See s 187(d). 1322 If it is accepted that objection to transfer results in continued employment with the

transferor. See chapter 7 supra . 1323 2000 21 ILJ 1618 (LC). 1324 For criticism of this view, see chapter 6, par 6.3.4 supra .


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that this judgement is a good example of when pre-transfer dismissals should not be allowed. An employer should not be able to outsource activities and terminate its employees’ employment on the basis of operational requirements. However, this unsatisfactory situation is brought about by the incorrect interpretation of the requirement “the transfer of a business, trade or undertaking or part thereof as a going concern”.1325 In Maloba v Minaco Stone Germiston (Pty) Ltd & another,1326 the Labour Court held that there had been no transfer of a going concern but only the sale of assets and a closure of the company’s operating division. Consequently, the employee could not ask for the transfer of his employment contract to the buyer. Even though the old employer acknowledged that there had been an unfair dismissal, it offered the applicant’s unconditional reinstatement. The employee did not want this remedy, as he wanted to be employed by the second respondent who retained a skeleton staff to dispose of a final contract of the old employer. However, as the Court had found that no going concern had been transferred, the employee’s only relief to which he was entitled was to be reinstated by the first respondent who, for all purposes, had ceased to exist. The Court thus held that the first respondent had validly reinstated him and that his employment had thereafter been validly terminated for operational reasons. It is clear that where no going concern is transferred, the old employer is absolutely entitled to dismiss employees for operational reasons in accordance with the provisions of the Act. In Fourie & another v Iscor Ltd,1327 the employees complained about an alleged unfair retrenchment. The respondent sold off the information technology division as a going concern. All employees were made an offer to transfer to the transferee on the same terms and conditions. Those who refused the transfer were not paid severance packages, as it was viewed that they had been offered reasonable alternative employment. The Court accepted that the respondent’s offer and conduct had been fair and reasonable. Regarding the effect of section 197, the Court held that the respondent could have compelled the applicants to transfer against their consent.1328 The respondent, however, chose not to and gave the applicants a choice to continue being employed, with the proviso that they may be redundant and they may face retrenchment.1329 Because they exercised this choice, there was no resignation and section 189 of the Labour Relations Act was applicable.1330 Even though the facts 1325 See chapter 6 supra . 1326 2000 21 ILJ 1795 (LC). 1327 2000 21 ILJ 2018 (LC). 1328 See chapter 7, par 7.4.3 supra. 1329 2032D-2033D. 1330 2033A-D. The Court did not accept that the decision of Young & another v Lifegro

Insurance Ltd 1991 12 ILJ 1256 (LAC) was still valid. Having regard to s 197 and new labour legislation, the Court accepted that a refusal to transfer may not amount to a redundancy, but it would not be accepted as a resignation.

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pointed towards continued employment with the transferor, the Court did indicate that it would not regard a refusal to transfer as a resignation, but rather as a refusal to work, which would entitle an employer to “dismiss” the employee on the basis of breach of contract.1331 1332 However, it is submitted that the mere refusal to transfer should not, on its own, be sufficient reason for the dismissal of an employee. The refusal to transfer constitutes a refusal to work for the transferee, after all, and not a refusal to work for the transferor. One of the grounds in section 188 should be present for a substantively fair dismissal. d) Selection criteria The Labour Court previously held that where the old employer had unfairly dismissed an employee, it is incumbent on the new employer to give effect to the order of reinstatement, if the business was acquired after the dismissal but before the unfair dismissal finding.1333 Furthermore, it has now been held by the Labour Appeal Court that a section 197(2)(a) transfer does not allow for contracting out of the transfer of the contract or of the non-interruption of continuity of employment.1334 This has serious implications for transferees when considering appropriate selection criteria, such as the LIFO criterion, as they will have to take employees’ previous service with the transferor into account. e) Interim relief based on an imminent pre-transfer or post-transfer dismissal The Labour Court heard an urgent application for interim relief in transfer circumstances in March 2000. The applicant in the matter of Communications Workers Union v Telkom SA Ltd & another1335 required an order, inter alia, declaring the first respondent’s offers of voluntary retrenchment (retirement) and severance packages that were made pursuant to or in contemplation of the transfer (between the first and second 1331 This would then arguably require notice of the employer but would not constitute an unfair

dismissal or a retrenchment. See ss 37, 38, 39 & 40 of the BCEA 75 of 1997. 1332 In the absence of reasonable grounds for an objection to transfer, it is thus arguable that a

transferor will not be liable for severance pay, as a “reasonable alternative offer” of employment was refused. An objection should thus be objectively justifiable, e.g. an employee who resigns because he perceives the employer as being rude to him will not necessarily succeed with a claim of constructive dismissal. Objectively, any employee must have considered the employer so rude so as to make continued employment intolerable. See chapter 7, pars 7.4.3 & 7.5 supra .

1333 NUMSA & another v Success Panelbeaters & Service Centre CC t/a Score Panelbeaters & Service Centre 1999 ILJ 1851 (LC) (confirmed in Success Panel Beaters & Service Centre CC v NUMSA & another 2000 6 BLLR 635 (LAC)) and Manning v Metro Nissan a Division of Venture & others 1998 19 ILJ 1181 (LC). See also par 12.5.2.1 infra.

1334 Foodgro a Division of Leisurenet Ltd v Keil 1999 20 ILJ 2521 (LAC) 2527I-J, 2528. The LC accepted an agreement varying the severance benefits the employees would receive upon future retrenchment (SACWU v Engen Petroleum (Pty) Ltd 1999 1 BLLR 37 (LC)).

1335 Case No J 1333/00, judgement of the Labour Court of 31 March 2000.


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respondent), as being contrary to section 189 of the Labour Relations Act. The applicant also asked for an interdict to restrain the first respondent from transferring the business as a going concern until the first respondent had complied with its obligations in terms of section 189 and 197 of the Act. However, even though observations made by representatives of the employer and minutes from meetings held in this regard related to the possibility of “compulsory retrenchments” in the event of the voluntary packages not being popular, the Court held that remarks to this “possible future restructuring exercise” were not evidence that such exercise was being undertaken and, more importantly, that this would have meant that the dismissal of the said employees was on the cards, so to speak.1336 The Court considered that what was contemplated was retirement packages to be offered on a voluntary basis. It was not proper to make an inference that if too few accepted this option, the employer contemplated dismissing them.1337 In any event, the Court felt that as any rights that the employees may have had against the old employer can also be exercised in regard to the new employer, any possible harm that they may have suffered because of the transfer was thereby greatly diminished.1338 Accordingly, they were not granted any relief. The Court did not consider what would be the legal effect of a dismissal in these circumstances and thus the possible harm to the employees and the rights of the employees against the transferee. The Court was thus not in favour of “preventative steps” in this scenario. f) Post-transfer dismissal A typical practical situation was illustrated by the facts of the arbitration award of Zelda Titus v Van Jaarsveld t/a Pie Society.1339 The business was sold as a going concern, and the employees stayed on, but signed a one-month fixed period contract. This contract indicated that they might have been re-employed after that period on a permanent or temporary basis. The employee was absent towards the end of the contract period for reasons that were unacceptable to the employer and her services were terminated. The employer averred that the employee’s services were terminated by the previous owner, who had paid over her leave pay to him, requesting him to pass the leave pay on to her. According to the employer, the employee was employed in a temporary capacity and her services ended on the expiry of her contract.

1336 Par 10. 1337 Par 14. 1338 Par 23. 1339 Case No WE10807, award of 4 August 1998.

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The employee testified that when the business was sold, the previous owner assured employees that their jobs were secure. He indicated that they should report to work as usual and he had paid their leave pay to the new owner. The employee had 2 years’ service at the time, received no notice pay or leave pay, but all the employees’ unemployment cards were “signed off” by the old employer. The arbitrator accepted that the employee signed a new fixed period contract but held that a reasonable expectation of continued employment existed as referred to in section 186(b) of the Labour Relations Act and that there had in fact been a dismissal. The procedures as set out in schedule 8 of the Act were not followed and the dismissal was thus found to be procedurally unfair. The arbitrator then referred to section 197 of the Act, which states that all the rights and obligations between the old employer and the employees at the time of the transfer continue in force against the new employer. The arbitrator stated that he did not consider the act of signing off the unemployment insurance card as sufficient proof that the employment relationship was terminated.1340 Given the fact that the employee had been in service for two years, dismissal was therefore too harsh a sanction and the dismissal was found to be substantively unfair. It is clear that the arbitrator did not consider the effect of the new fixed-term contract that had been concluded1341 and it is equally clear that the provisions of section 197(2)(a), allowing an agreement to the contrary, were not considered either. 12.5 Theoretical and policy issues 12.5.1 The status of a dismissal because of a transfer There are primarily two scenarios that must be considered. First, it is quite possible that a transferor will want to terminate the employment of all its employees, or some of its employees, in order to achieve a higher purchase price from a prospective buyer or on request of a prospective buyer who is not interested in taking over the workforce. Secondly, a transferee might want to affect changes to terms and conditions of transferred employees.1342 This could bring about either an express dismissal or a constructive dismissal on account of: • the transferor’s termination of the contracts; or • the transferee’s termination of the employees’ contracts; or

1340 Earlier in his award, the arbitrator stated that he accepted that the old employer had intended

the employment contract to continue. 1341 The LAC judgement in Foodgro a Division of Leisurenet Ltd v Keil 1999 20 ILJ 2521 (LAC)

(see below) had not been delivered at this stage. 1342 See McMullen J “Takeovers, transfers and business re-organisations” 1992 ILJ (United

Kingdom) 15 18-25.


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• an employee’s objection to transfer, on reasonable grounds; or • an employee’s objection to a unilateral change and his/her resulting resignation. The legal status of a pre-transfer dismissal and a post-transfer dismissal respectively must be determined. The question of when a transferee can be liable for pre-transfer dismissals by a transferor is also relevant. 12.5.1.1 Pre-transfer dismissals Dismissal by transferor/transferee On the European continent and in the United Kingdom, as shown supra, it is accepted that employees cannot effectively be dismissed by a transferor because of a transfer. The requirement of actual employment at the point of transfer1343 is subject to the mandatory terms of article 4 of the Directive with regard to dismissals not being allowed in connection with transfers.1344 Furthermore, most of the transfer instruments on the continent and in the United Kingdom provide that such a pre-transfer dismissal is automatically unfair, except when there is a defence relating to economic, technical or organisational reasons entailing changes in the workforce. It is submitted that there must be a prohibition on dismissals because of a transfer. It would otherwise be a matter of choice for the transferor and transferee to comply with transfer provisions and to safeguard employees’ rights in these circumstances. However, it is also recognised that genuine operational requirements may necessitate dismissals prior to a transfer. If operational dismissals are to be allowed simultaneously or shortly before a transfer, it seems implicit that causality will play the crucial role in determining whether or not the dismissals are unfair or not.1345 The Labour Appeal Court followed a two-stage causality test for determining the fairness of dismissals of protected strikers in SACWU v Afrox Ltd .1346 It is submitted that this test could also be suitable in determining whether a dismissal was in connection with or because of a relevant transfer. With regard to the dismissal of protected strikers for operational requirements, the Court held in principle that:

1343 As required in the United Kingdom by the Court of Appeal in Secretary State for

Employment v Spence 1987 QB 179. 1344 P Bork International v Foreningen af Arbejdsledere I Danmark 1990 CMLR 701 (ECJ). 1345 See Western Cape Workers Association v Halgang Properties CC 2001 22 ILJ 1421 (LC)

where the Court found that it is the operational requirements of the old employer that are relevant and not the operational requirements of the purchaser who will become the employer in future.

1346 1999 20 ILJ 1718 (LAC).

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• In determining the reason for the dismissal, a two-fold test for causation is applicable.

• The first test is to determine factual causation: Would the dismissal have occurred if there was no participation in the strike (i.e. if there was no transfer)?

• If the answer is no, factual causation is established, and the Court will continue to enquire into legal causation: Was participation in the strike (i.e. was the transfer) the “main”, “dominant”, “proximate” or “more likely” cause of the dismissal?

• If it was, the dismissal is automatically unfair. • If it was not, the dismissal can be proved to be fair by the employer by indicating

the operational grounds for the dismissal. In this event, the general requirements apply with regard to dismissals for operational requirements.1347

It is thus argued that dismissals due to a transfer should, for the sake of legal certainty, be included in the list of automatically unfair dismissals contained in section 187 of the Labour Relations Act of 1995. It is further argued that such a dismissal should not be able to prevent the employee’s contract of employment from transferring to the transferee. The current legislation should thus be amended to provide that the principle that reinstatement is the primary remedy, as contained in section 193 of the Labour Relations Act, should be strictly adhered to in the event of a transfer dismissal. The transferor can carry out the reinstatement order if the undertaking has not been transferred at the time of the unfair dismissal finding, or the order may have to be carried out by the transferee if the undertaking has indeed been transferred before such a finding. This will result in a transfer-connected dismissal being of no effect. A transferee will thus be liable for pre-transfer dismissals effected by a transferor because pre-transfer dismissals that are connected with the transfer and that are not linked to a business need to dismiss certain members of the labour force will be automatically unfair.1348 The argument is thus in favour of an ineffective dismissal as is found in the German system.1349 It is thought that the inclusion of this type of dismissal in the list of automatically unfair dismissals will achieve such a result, as such a dismissal

1347 S 189 of the LRA. In particular, the selection criterion should not be aimed at employees

who are employed in the part of the undertaking to be transferred. 1348 McMullen (1992 ILJ 21) states that pre-transfer dismissals to ensure that employees are not

in employment at the time of the transfer, so as to avoid the application of transfer provisions (usually done at the wish of the purchaser who may want to recruit those employees with a break in continuity or recruit from a fresh pool of cheaper labour) will be automatically unfair. The transferee is thus expected to continue with the employment relationship in the United Kingdom. See also the discussion of Litster in par 12.3 supra .

1349 See par 12.3 supra .


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will always be substantively unfair and reinstatement or reemployment will thus always be on the cards.1350 It is perhaps necessary to redefine and reinterpret the term “operational requirements” in these circumstances. This would prevent a wide interpretation thereof that could bring transfer-connected dismissals within the scope of no fault dismissals without bona fide operational grounds pertaining to the workforce being present.1351 It is submitted that a buyer, for example, should not be able to stipulate to an employer that a condition of him/her making an offer for the undertaking is that the transferor should retrench some or all of the employees or otherwise no offer will be forthcoming. If such a “threat” were allowed and included under the concept of “operational requirements”, the whole purpose of section 197 would be defeated. All potential buyers would, as a matter of course, require that employees be dismissed before a transfer. It is submitted that if all potential buyers are bound by section 197, this is enough of a guarantee to a prospective seller that his/her chances of selling the undertaking are not prejudiced, since a prospective buyer will not be able to find a “better deal” elsewhere. “Operational requirements” should thus be interpreted and defined narrowly.1352 The possibility of a constructive dismissal because of objection to transfer based on a substantial change in working conditions to the detriment of the employee There is another possibility of a pre-transfer dismissal: A constructive dismissal owing to the employee’s objection to transfer to the transferee on reasonable grounds. It has been argued that an employee must have a power to object in order to ensure that an attack of unconstitutionality will not succeed.1353 It has also been indicated that, under the Acquired Rights Directive, Member States must provide that where there are reasonable grounds for an employee’s refusal to transfer (there must be a substantial change in working conditions to the detriment of the employee) and the contract of

1350 See s 193 of the LRA. See also the proposed s 187 of the Labour Relations Amendment Bill,

2001 (discussed in chapter 14). 1351 See the requirement in the TUPE regulations (reg 8) and the Acquired Rights Directive (art 4)

that the operational requirements must entail changes in the workforce. 1352 In the United Kingdom, the defence was at first in terpreted to be extremely wide and in

Anderson v Dalkeith Engineering Ltd (1985 ICR 66 (EAT)) and Forth Estuary Engineering Co Ltd v Litster (1986 IRLR 59 (EAT)), dismissals by a transferor prior to a transfer, with a transfer in mind and at the request of the transferee, were held to be justified under the defence. However, the House of Lords in Litster and other EAT judgements followed showing that pre-transfer dismissals should be automatically unfair (see e.g. Wheeler v Patel 1987 ICR 631 (EAT) and Gateway Hotels Ltd v Stewart 1988 IRLR 287 (EAT)). In these latter cases, employees were again dismissed prior to the transfer and were not taken on by the transferee, even though the transferee still required labour. It was held that there was no economic, technical or organisational reason under reg 8(2) as the economic reason must be one that relates to the conduct of the business and that entails changes in the workforce.

1353 See discussion supra , and chapter 7.

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employment or the employment relationship is terminated, the employer must be regarded as having been responsible for the termination.1354 This position results in the application of the protection granted by transfer provisions subject to any individual’s inherent right to consider his/her own best interests on objective grounds.1355 It is consequently submitted that a statutory provision must be enacted to the effect that an objection to transfer must either result in continued employment with the transferor or provision must be made that any reasonable refusal to transfer due to a substantial change to the employee’s detriment, will be treated as a constructive dismissal and not as a resignation. It is far from easy to exercise a choice between these two options (continued employment with the old employer1356 or constructive dismissal1357).1358 A statutory provision is necessary as it is unclear which ground would suffice for a termination of employment if the employee prefers continued employment but is faced with substantially less significant terms and conditions.1359 One also needs to consider what the position should be where an employee objects to transfer on grounds that are not necessarily reasonable when considered objectively, but that are of personal importance to the employee. If the right to object has any intrinsic worth, this person surely could not merely be perceived as resigning from employment.1360 However, it could be strongly argued by employers that in the event of such an “irrational” refusal, a finding of a constructive dismissal could not be considered as fair towards both the employee and employer.

1354 Art 4(2). 1355 See e.g. in the United Kingdom, Securicor Guarding Ltd v Fraser Security Services Ltd

1996 IRLR 552 (EAT) where it was acknowledged that reg 5(5) states that reg 5(4A) is without prejudice to any right under reg 5(5) to terminate the employment contract if a substantial change is made to the employee’s working conditions to his/her detriment. In casu employment was offered with Fraser at reduced rates of pay. Therefore, the employees could trigger reg 5(5) and not reg 5(4A), resulting in the objection being treated as a constructiv e dismissal and not a mere resignation. See also Harvey Harvey on Industrial Relations and Employment Law F/71-F/72.

1356 E.g. as is the case in Germany. 1357 E.g. as is the case in the United Kingdom under reg 5(5). Any other objection to transfer

falls under reg 5(4A), which results in the objection being treated as a resignation by the employee (see chapter 7, par 7.4 supra).

1358 In chapter 7, preference was accorded to the principle of continued employment with the transferor.

1359 I.e. where the employee does not want to object to the transfer, but the transferee offers substantially lesser terms and conditions. Such a change, being contrary to the transfer provisions, will be ineffective in law, and the question arises whether it provides a satisfactory basis for anticipatory breach and an employee’s right to terminate employment on the basis of a constructive dismissal.

1360 The second part of reg 5(5) of the TUPE regulations in the United Kingdom requires that an employee shows that the change in identity of the employer is both significant and to his/her detriment. See McMullen Business Transfers 6/21, who states that the right to claim constructive dismissal by reason of reg 5(5), may, in exceptional cases, include a resignation by reason of the detrimental change in identity of the employer itself, e.g. a transfer to an undertaking that is on the verge of insolvency etc.


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Perhaps, if only for the sake of legal certainty, the better option would be to provide for continued employment with the transferor in all cases where an objection to transfer is made. Where an employee objects on reasonable grounds, he/she can expect further protection in the event of possible dismissal for operational reasons. This protection should take the form of a severance package and the application of objective selection criteria. However, where an employee objects without reasonable grounds, such action may perhaps allow a transferor to terminate employment on operational requirements, if the transferor can prove a bona fide economic rationale, without the payment of a severance package,1361 but with full entitlement to all notice pay and outstanding leave pay, etc.1362 If employment continues with the transferor there is a very real possibility of retrenchment. However, general provisions regarding substantive and procedural fair dismissals, including the payment of severance pay, will then apply. It is also submitted that principles regarding fair selection criteria will be very important, as an objecting employee cannot be targeted for retrenchment on the basis of the transfer or because of his/her objection to transfer alone. An objective criterion must be utilised by the transferor. There is, however, a possible problematic aspect involved in such regulation, namely: what is the position where the transferor no longer exists? Thus, where an employee refuses to transfer on reasonable grounds or otherwise and it is provided that such employee should continue in employment with the transferor, it is pre-supposed that such prior employment is still available. It is submitted that, as this is a case of a pre-transfer dismissal, it would seldom transpire that a transferor could vanish or cease to exist without concluding transactions for the transfer of the undertaking and so forth. Thus, even though the transferor may be winding up its business, he/she will then have to address the fact of remaining employees by either securing reasonable alternative employment for them or following the prescribed procedures for a dismissal for operational requirements. The employee must also consider this when making his/her election to transfer or not to transfer. The remarks regarding reinstatement as the primary remedy in transfer-connected dismissals will not necessarily be applicable if an objection to transfer is classified as a constructive dismissal,1363 unless the legislator uses such a compulsory reinstatement provision to ensure a similar outcome as that which is achieved by a provision that such objection to transfer results in the employment contract continuing with the old

1361 S 41 of the BCEA, an offer of alternative employment was unreasonably refused. 1362 A fair and objective selection criterion should also be applied here. 1363 Thus, if the objection does not result in continued employment with the transferor.

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employer.1364 However, it is submitted that it is unnecessary to enact such a complicated legal regulation if the same result could be achieved by simply providing for continued employment with the transferor. Thus, if the legislator should decide against continued employment with the transferor, this implies that the goal of continued employment is not upheld in cases where an employee objects to transfer. A constructive dismissal will thus follow, which if found to be unfair, could result in either reinstatement or re-employment or compensation. 12.5.1.2 Post-transfer dismissals It should be made clear that the actions of the new employer are also covered by section 187 and that a transfer-connected dismissal should always be automatically unfair. The scope of section 187 should therefore cover all transfer dismissals, irrespective of whether the old or new employer effected such a dismissal or whether a constructive dismissal applies. Regarding a transferee’s ability to change terms and conditions of transferred employees, one must consider whether resulting dismissals, constructive or express, are connected to the transfer and, whether, if so, they should also be automatically unfair. The first question, whether or not the dismissals are connected to the transfer, is a question of fact.1365 The amendment of contracts of employment has been discussed earlier.1366 It was shown that an employer cannot unilaterally amend a contract owing to the common law requirement of consensus. However, in terms of the common law, an employer could terminate the contract with notice and then offer a new contract with fresh terms and conditions. Legislation now curbs this managerial prerogative. As dismissal can only take place for certain reasons, an employer would have to indicate that he/she dismissed the employee for operational requirements and not because of a refusal to accept a demand, which could amount to an automatically unfair dismissal.1367

1364 If an objection to transfer is treated as a constructive dismissal and such a compulsory

reinstatement provision does not exist, it would be possible for a transferor and/or transferee to “get rid” of employees by not dismissing them but by altering working terms and conditions in order to tempt employees into objecting to transfer.

1365 See the causality approach implemented in Afrox as discussed in par 12.5.1.1. 1366 See chapter 8. 1367 S 187(1)(c). See also Alert Employment Personnel (Pty) Ltd v Leech 1993 14 ILJ 655 (LAC).


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A well-known case on this subject is that of Berriman v Delabole Slate Ltd in the United Kingdom.1368 The applicant’s terms of employment included a guaranteed weekly wage. The business in which he was employed was transferred to the respondent and the employee was transferred in terms of the TUPE regulations. The respondent then offered new terms that removed his previous guaranteed wage. As this was in breach of contract, the employee resigned, claiming constructive dismissal. The Industrial Tribunal accepted this and also held that the dismissal was connected to the transfer. It went on to hold, however, that the dismissal was not automatically unfair under regulation 8(1) as there was an ETOR defence under regulation 8(2) for the imposed harmonisation of terms and conditions.1369 The Employment Appeal Tribunal and the Court of Appeal, however, went on to hold that no economic, technical or organisational reason applied to the dismissal. This was held because the defence under regulation 8(2) also had to entail a change in the workforce. As no change occurred in the workforce in casu (as would usually occur in express workforce reduction dismissals) and all that was changed were merely the terms and conditions enjoyed by the workforce, the defence could not be upheld. It was thus required that there must have been a change in the composition of the workforce. Without such a change in the workforce, the dismissal was automatically unfair. The Court of Appeal adopted the test that for regulation 8(2) to apply, there must be a change in the numbers of the workforce (or possibly a change in their job functions),1370 which although involving no overall reduction in numbers, involves a change in the individual employees who make up the workforce.1371 It is important to note that the policy objection (that a finding of an automatically unfair dismissal will have undesirable effects on proposed employer re-organisation programmes) was not accepted. The approach was followed that regardless of the fact that the law of unfair dismissal is generally sympathetic to business re-organisations, it could not prevail over subsequent legislation with the express aim of safeguarding

1368 1985 ICR 546 (IT). This is a constructive dismissal case, but the principles apply to express

dismissals as well. 1369 The dismissal was then also found to be fair under s 57(3) of the EPCA. 1370 In a short evaluation of this matter, McMullen (1992 ILJ 24) argues that the (obiter) remark

about a change in job function has strange results. This means, that a dismissal arising from a more drastic change in terms than the present case (e.g. issue of a completely new job description) could entail a change in the workforce. This has the strange result that the more disadvantaged the employee is by the change, the less his/her protection is. However, this distinction has in fact been adopted and applied (McMullen refers to two cases: Lane v Dyno Rod plc (an area manager required to be a senior engineer after a transfer) and Crawford v Swinton Insurance Brokers Ltd (an employee originally doing typing and clerical work, being required to become an insurance seller after a transfer)).

1371 In casu the transferee argued that there was indeed a change in the workforce, as Mr Berriman had left. However, in this case the reason for the transferee’s conduct was to standardise pay norms and not to reduce the workforce. Reduction of the workforce by one employee and his replacement by another was only a consequence of the conduct.

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employee rights in transfer circumstances. It thus seems that there is a marked difference in the Court’s approach to transfer cases in the United Kingdom. The commercial outcome of such an approach is not uncomplicated. Insolvency practitioners, in particular, will argue that such an approach will deter potential purchasers from taking over an undertaking. Furthermore, it could be argued that it may well affect the price a purchaser contracts to pay for an undertaking. What, then should a country’s legislator do if it has the luxury of formulating a legal result with the hindsight of years’ of case law in other jurisdictions? It is submitted that a dismissal should not be allowed if it was effected in order to attain agreement from employees to the amendment of terms and conditions. Such a position is consistent with the aims of transfer provisions and should constitute an automatically unfair dismissal.1372 In addition, it is submitted that operational requirements must be interpreted in a similar way as Berriman. The result is that a transferee, who will face substantial economic losses due to pre-existing terms and conditions that he/she is unable to provide, might be able to dismiss because of operational requirements. However, a transferee who wants to implement changes only in order to effect standardisation for the sake of convenience, will not be able to use the operational requirements defence. It could, of course, be possible to reach an agreement to the contrary regarding prior rights and obligations. It has been submitted, however, that the new terms and conditions should, as a whole, not be less favourable than the ones the employees enjoyed before.1373 12.5.1.3 Possible solutions to the Berriman problem1374 Regarding the possible need of a new employer for re-organisation, McMullen argues that “every rule has its exception; every legal problem generates devices and practical suggestions to circumvent it if found to be inconvenient”.1375 He thus proposes six possible solutions for the problem of diverging terms and conditions after a

1372 Being a dismissal due to a transfer. S 187(1)(c) could also be applicable if the transferee’s

conduct amounted to compelling an employee to accept a demand in respect of any matter of mutual interest between the employer and employee. However, it might be argued that a “matter of mutual interest” should pertain to a dispute of interest; see Du Toit et al Labour Relations Law 206-207.

1373 See chapter 8, par 8.4 supra . 1374 In this case it was held that the ETOR defence under regulation 8(2) could not be upheld.

This was because the ETOR defence under reg 8(2) also had to entail a change in the workforce, where no change occurred in the workforce (as would usually occur in express workforce reduction dismissals) and all that was changed were merely the terms and conditions enjoyed by the workforce, the defence could not apply.

1375 McMullen 1992 ILJ 25.


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transfer and post-transfer dismissals, the usefulness of which can be considered for South African purposes as well:1376 • Post-transfer harmonisation by agreement • Red circling • Delaying the harmonisation • Vendor dismissals • Short-serving workers • Changing the employee’s function As stated supra, the most simplistic way to go ahead in this regard is for the transferee to impose change by agreement. This would not constitute a contracting out of the protection of transfer provisions if it were possible to waive such rights to the same extent against the former employer.1377 However, it is submitted that if agreement to amendments is also allowed due to a transfer, the qualification should apply that these amendments ought to, as a whole, not be less favourable than those that existed before the transfer.1378 The second solution involves maintaining the workers’ rights but “red circling” their conditions. This means that the transferee could continue to honour the higher-paying (for example) conditions of the transferred employees but freeze them by awarding no pay increases (or smaller increases) until such time as the terms and conditions of the existing workforce have caught up.1379 The third option relies on the interpretation that only transfer-connected dismissals are prohibited. Thus, it is argued, even if there is no time limitation as to when dismissals will be connected with the transfer, it will ultimately be a question of fact and degree. Hence, the more time that elapses after the transfer, the less likely it is that there will be a finding that the dismissal was connected to the transfer. It could thus be argued that a dismissal could possibly more easily pass muster as a dismissal for operational requirements, once a longer period of time has elapsed after a transfer. Insolvency practitioners1380 have, in particular, implemented this approach. It has thus been argued that a dismissal should not be transfer connected if:1381

1376 See 1992 ILJ 25-29. 1377 See Foreningen af Arbejdsledere I Danmark v Daddy’s Dance Hall 1989 CMLR 517 (ECJ). 1378 See chapter 8. 1379 Our LC has endorsed this concept in the context of equal pay law (see Ntai & others v

South African Breweries Ltd 2000 2 BLLR 186 (LC)). This would, of course, only be valid if there is no contractual entitlement to pay increases.

1380 See chapter 13 infra. 1381 See Pollard D “Insolvent companies and TUPE” 1996 ILJ (United Kingdom) 191 201-202.

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• the reason for the transfer is not solely the prospect of a transfer, but rather forms part of a general restructuring (for example, reducing on-going costs, seeking to trade out of insolvency, etc);1382

• the dismissal is not connected with an identified purchaser (thus it is not at the request of a potential purchaser), as the identity of the potential purchasers is still unknown.1383

The transferee’s liability can, of course, be avoided in theory if the vendor should dismiss the workforce before the transfer, either expressly or constructively. However, this will simply have the effect that the liability will be on the transferor, which liabilities will plainly pass on to the purchaser due to the principle in Litster. This will also be the case in South Africa, as our Labour Court has already accepted that a transferee is responsible for the reinstatement of an employee who was unfairly dismissed before the transfer.1384 This will be the case to an even greater extent if transfer-connected dismissals are categorised as being automatically unfair. The fifth solution regarding employees with less than two years’ service is not helpful in the South African context because South African unfair dismissal law applies uniformly to all employees, regardless of their period of service. Finally, the very problematic issue of changing the employee’s function needs to be considered. As shown supra, if the new employer is able to revise the job of the transferred employee completely, he/she may be able to avoid a determination of an automatically unfair dismissal and be left with only the duty to justify a dismissal under the general principles pertaining to operational requirement dismissals.1385 The idea of completely revising the jobs of employees should be approached with care. In a recent comment,1386 reference was made to an important unreported arbitration award that dealt with a common practice in merger exercises. This practice requires employees in the newly merged companies to apply for positions in the restructured enterprise, and to retrench the unsuccessful applicants. Grogan states that individual employers sometimes do the same by generally restructuring their operations. The theoretical basis for this strategy is that the restructuring has rendered all positions in the merged entities

1382 However, this results in a subjective enquiry into each dismissal, which is of course difficult. 1383 Therefore, even though the dismissal may be connected with a possible transfer, it is not

connected with the ultimate transfer. See art 4 of the Acquired Rights Directive that prohibits dismissals for reason of “the transfer”.

1384 See the matter of Success Panelbeaters as discussed supra. 1385 This includes the duty to consult, to attempt to avoid retrenchments and to use fair and

objective selection criteria. 1386 Labour Law Sibergramme (9/2001, 26 July 2001 by John Grogan).


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redundant. The question that arises, according to the award of Grieg v Afrox Ltd,1387 is when, in a restructuring exercise, must the employer take steps to avoid retrenchment? In Grieg v Afrox Ltd, Afrox argued, in essence, that permitting its employees to apply for positions in the restructured organogram rendered the exercise fair. However, Mr Grieg argued that Afrox only targeted those employees for retrenchment who failed to secure positions in the new structure. It was thus contended that this was unfair since the fate of employees then lay in the hands of the managers of departments concerned. The arbitrator (Professor Rycroft) observed that, although the restructuring of Afrox was a bona fide attempt to improve efficiency, its business remained the same. All that had happened was that a different “organisational template” had been imposed on the old structure. The arbitrator also noted:

The declaration that all jobs were redundant avoided the need to decide selection criteria up front for those who would be ultimately retrenched. It is important to note that … the employer admitted no overt role in linking employees to the restructured jobs to facilitate a smooth transfer. The onus was on the employees to apply for jobs. Ultimately the selection criteria for retrenchment were that (a) an employee’s job as previously defined was declared redundant and the employee either (b) failed to apply for a job, or (c) failed to be appointed to a job.

Grogan thus concluded that if employees failed to apply for a job, they had only themselves to blame. However, if an employee who, like Grieg, did apply for a new job, he or she had the right to be considered according to criteria that would have had to be applied if he had been selected for retrenchment in the normal way, i.e. criteria that are either agreed upon or, if there are no agreed criteria, criteria that are fair and objective. This could not be said to be true for Afrox. According to the company’s evidence, the manager responsible for filling the post for which Grieg had applied considered the “corporate fit” and the “future value” of applicants. These certainly are very subjective criteria. In addition, since both criteria must inevitably be based on the applicants’ past performance, they should have been given an opportunity to influence the selection. Grieg was not given such an opportunity. Grogan states that “[i]n short, by selecting applicants on the basis of their past performance, Afrox crossed the threshold from a “no fault” dismissal to one based on poor performance. This, said the arbitrator, amounted to an abuse of the retrenchment process”. The

1387 An unreported private arbitration award dated 23 June 2001.

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arbitrator sounded a warning to employers who use the stratagem of requiring all employees to apply for jobs in a restructured organisation:

It is difficult not to see the device of making all positions redundant as more than a mechanism to avoid the basic purpose of retrenchment law, namely the protection of em ployees from dismissal over which they have no control and for which they are not at fault. The mechanism is open to abuse because jobs can be redefined in a way that deliberately excludes existing employees, whilst in reality the functions performed by those employees are not redundant but simply allocated to another position. This mechanism all too easily lends itself to retrenching employees who are perceived to be ‘dead wood’ or ‘difficult’ but who would be difficult to dismiss by means of an ordinary disciplinary hearing.

Much of the effectiveness of this final solution will depend on the interpretation attached to the concept of “operational requirements”. As it has been argued in favour of a narrow interpretation of the concept, it is submitted that the Labour Court will scrutinise such dismissals in order to ensure that the re-organisation is not merely a sham to get rid of the transferred employees. In this regard, the two-stage test of causation, as explained in Afrox, should be applicable.1388 Cosmetic changes should thus not be condoned and this might make this solution impracticable for transferees. Furthermore, any “retrenchments” will have to comply with the relevant provisions of the Labour Relations Act 66 of 1995. 12.5.2 Remedies in the event of a dismissal due to a transfer 12.5.2.1 General The appropriate remedy in the event of a dismissal owing to a transfer depends on the effect of such a dismissal (i.e. whether such a dismissal is void (ineffective) or voidable).

1388 See also par 12.5.5.1.


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It has been submitted that such a dismissal should be ineffective and that this could be achieved by providing that it is an automatically unfair dismissal coupled with the provisions of section 193(1)-(3) of the Labour Relations Act.1389 In terms of the current law if a dismissal is found to be unfair, the Court may: • order to reinstate the employee from any date not earlier than the date of

dismissal;1390 • order the employer to re-employ the employee, either in the work in which the

employee was employed before the dismissal or in other reasonably suitable work on any terms and from any date not earlier than the date of dismissal;1391 or

• order the employer to pay compensation to the employee. Reinstatement or re-employment are the primary remedies; a Court must thus require the employer to reinstate or re-employ unless one of the exceptions under section 193(2) exists. If a dismissal is automatically unfair, or if the dismissal is based on the employer’s operational requirements, the Labour Court may, in addition, make any order that it considers appropriate in the circumstances.1392 This could be a useful tool in circumstances of a transfer-connected dismissal.1393 It is submitted that it would perhaps be expedient to add another subsection to this section regulating remedies for unfair dismissals. As stated above, a pre-transfer dismissal should not have the effect of denying an employee the option of having his/her contract transferred to a transferee. It may therefore be convenient to provide that, in the event of a pre-transfer or post-transfer dismissal because of a transfer, the Labour Court must order reinstatement unless the employee does not wish to be reinstated or it is not reasonably practicable for the employer to reinstate the employee. This order can be made against the transferor or transferee. Since all the rights and obligations that existed between the old employer and each employee transfer to the new employer, unless otherwise agreed in terms of section 197(2)(a), the new employer will be required to carry out the reinstatement order.1394 The Labour Court had previously held that where the old employer had unfairly dismissed an employee, it is incumbent on the new employer to give effect to the order of reinstatement where the business was acquired after the dismissal but before the unfair dismissal finding.1395 In order to 1389 See the proposed s 187(g) of the Labour Relations Amendment Bill, 2001. 1390 S 193(1)(a). 1391 S 193(1)(b). 1392 S 193(3). 1393 E.g. the Court could make an order regarding the obligation of the transferee to reinstate the

dismissed employee. 1394 However, see the position in the event of a dismissal in s 197(2)(b) circumstances infra.

This issue will be particularly problematic in the event of a compensation order. 1395 NUMSA & another v Success Panelbeaters & Service Centre CC t/a Score Panelbeaters &

Service Centre 1999 ILJ 1851 (LC) (see also Success Panel Beaters & Service Centre CC v

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protect himself/herself, the transferee would thus be well advised to obtain a right of redress from the transferor or to negotiate the purchase price in order to take into account any unsettled disputes that might exist against a transferor.1396 In the event of compensation being payable, it must be just and equitable but not more than the equivalent of 24 months’ remuneration. No minimum amount of compensation is set.1397 The Labour Relations Act expressly provides that compensation is in addition to any amount that the employee may be entitled to in terms of law, collective agreement or contract.1398 In Construction & Allied Workers Union obo Biya & others v All Weather Coatings,1399 the respondent company (AWC) decided to close down due to financial troubles. The company entered into an agreement with William Scott Contractors (WSC) in terms of which WSC would take over certain of its contracts on the understanding that employees who transferred from AWC to WSC would perform the work. The applicants thus transferred to WSC in terms of this agreement. The arrangement did not work out, and the employees were retrenched. Both AWC and WSC denied responsibility for the payment of severance pay. In the CCMA arbitration proceedings between the applicants and AWC, it was found that the applicants’ contracts of employment had been transferred to WSC and that they could thus not claim severance pay from AWC. That award was rescinded, WSC was joined as a respondent and the matter was again referred to arbitration (the present award). The new arbitrator held that there was, without a doubt, a transfer to WSC, in terms of

NUMSA & another 2000 6 BLLR 635 (LAC)) and Manning v Metro Nissan a Division of Venture & others 1998 19 ILJ 1181 (LC). However, see Hugo v Shandelier Hotel Group cc (in liquidation) & others 2000 21 ILJ 1884 (CCMA) where it was held, even in the face of reliance on Success Panelbeaters, that where the employee was dismissed before the actual transfer, the dismissed employee was entitled to compensation against the old employer (1909G-I). The arbitrator further held that s 197 does apply to people employed during a period of provisional liquidation, and that the legal entities in liquidation were the old employer for purposes of relief. However, the CCMA did follow the approach that the transferee is liable for an unfair dismissal effected before the transfer in HM Jordaan v R&M Spares Case No FS8870, award of 27 September 1999.

1396 In Western Cape Workers Association v Halgang Properties CC 2001 22 ILJ 1421 (LC) the LC considered it appropriate to order relief (an order of reinstatement) against the old employer (Halgang)(1431D). The Court considered that Halgang still existed and that relief should be ordered against the respondent who failed to discharge the onus in s 192(2) of the LRA. The Court did state that it may well be necessary for the applicant to bring an application for an appropriate declaratory order, declaring that on the basis of the judgement, the rights and obligations of the two unfairly dismissed employees have been transferred to Wembley (the transferee) when the whole of the business of Halgang was transferred as a going concern in terms of s 197(2)(a)(1431B-C). This was necessary, according to the judge, as Wembley was not a party to the proceedings. It seems implicit that if Wembley had been a party to the proceedings, the relief would have been ordered against the transferee.

1397 S 194(3). 1398 S 195. E.g. severance pay. 1399 2001 22 ILJ 526 (CCMA) before Grogan.


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section 197(2)(a) of the Labour Relations Act, of all rights and obligations that existed between AWC and the applicants.1400 The arbitrator then went on to hold that the only thing that could have prevented such a transfer was an agreement in terms of section 197(3). Since the parties in section 189(1) were not consulted nor involved in any agreement, this was not the case. It was therefore unequivocally held that any agreement between employers regarding their responsibility to pay severance pay was immaterial. The employees were entitled to severance pay from the new employer in terms of statute.1401 In casu, the agreement between the old employer and new employer was disputed. However, if a clear agreement can be shown to exist to this effect, the new employer can exercise a contractual claim against the old employer for any severance pay paid out to the transferred employees. 12.5.2.2 Partnerships as employers: principles affecting severance pay In Burman Katz Attorneys v Floors Brand No & others,1402 the Labour Court did not review the decision of the arbitrator, finding that there had indeed been a transfer of an undertaking as a going concern. The Court did, however, consider the correctness of the relief awarded. Mr Burman did not dispute that Mrs Watson was entitled to severance pay for the period 1 August 1998 to 31 August 1999. However, the period prior to this date was said to be irrelevant for purposes of calculating severance payment. Starting with Ntuli v Hazelmore Group t/a Musgrave Nursing Home,1403 the Industrial Court had opined that, on retrenchment, an employer should pay the retrenchees severance pay. This approach culminated in the enactment of section 196 of the Labour Relations Act of 1995, which compelled the payment of severance pay in the circumstances outlined in the section. This section was subsequently repealed and replaced by section 41 of the Basic Conditions of Employment Act (BCEA) 75 of 1997. The BCEA came into operation on 1 December 1998 and section 41(2) reads:

1400 The commissioner did not indicate which factors led to this conclusion (529A). 1401 528D-G. 1402 2001 22 ILJ 128 (LC). For the facts of this case refer to chapter 6, par 6.3.2 supra , where the

facts are set out in detail. In brief, two secretaries worked for lawyers for many years, during which time different partners came and went. However, there was continuity in the person of Mr Burman himself who remained a partner of the different partnerships over this extended period. The employees were eventually earmarked for retrenchment and there was a dispute regarding the transfer of previous rights and obligations as well as continuity of employment under s 197(4) of the LRA.

1403 1988 9 ILJ 709 (IC).

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An employer must pay an employee who is dismissed for reasons based on the employer's operational requirements severance pay equal to at least one week's remuneration for each completed year of continuous service with that employer, calculated in accordance with section 35.

In Burman Katz, the Labour Court stated that the provisions of section 41(2) link the amount of severance pay to “each year of completed service with that employer”.1404 The Labour Court held that section 197 of the Labour Relations Act provides that a contract of employment may not be transferred from the old to the new employer without the employee’s consent unless the whole or part of the business, trade or undertaking is transferred as a going concern. The implication, according to the Court, is that if the whole or the part of the business, trade or undertaking is transferred as a going concern, then the contracts of employment are automatically transferred without a break in the continuity of service.1405 However, the fact that the undertaking in question concerned a partnership, led the learned judge to explore the nature of a partnership, its termination and the effect thereof on contracts of employment. The Labour Court affirmed that a partnership is not a legal person. An employee who is employed by a partnership enters into a contractual relationship with each of the partners jointly and severally. When the partnership terminates and is dissolved by the resignation of a partner or otherwise, contracts are not terminated but remain in force.1406 Our legislature seems to have proceeded from the assumption, which the Court believed to be a partially incorrect one, that a contract of apprenticeship entered into with a partnership terminates on the death or retirement of a partner. The Court held that this was probably true in the case of death. In any event, the legislature provided in section 22(5)(a) of the Manpower Training Act 56 of 1981 that a contract of apprenticeship is not terminated by the death or retirement of a partner if the business of the partnership is continued by another person or partnership and the rights and obligations of the employer are deemed to be transferred to the person or partnership continuing the business. If, on the resignation of a partner, a partnership between the remaining partners is constituted specifically or in terms of an existing partnership agreement, the employee 1404 In determining service, it may be permissible to ignore breaks in service with the employer

(see s 84 of the BCEA). However, the Court held that it need not consider this issue due to the working of s 197 of the LRA (132A-C).

1405 S 197 has no application to disputes that occurred prior to 11 November 1996, being the date that the LRA came into effect.

1406 Cf Whitaker v Whitaker 1931 EDL 122 and Baldinger v Broomberg and Rowe 1949 (3) SA 258 (C) at 268 regarding a lease of property.


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may expressly or tacitly enter into a new contract of employment with the new (remaining) partners. The retiring partner’s liability to the employee remains but may be overlooked in practice and may prescribe. When another partner joins the partnership, a new partnership is constituted and the employee expressly or tacitly enters into a new contract of employment, although here too the previous contract is not terminated. The Court thus considered that the partners are liable singuli in solidum for the partnership debts on dissolution of the partnership. This would include the obligations of the partnership regarding contracts of employment.1407 (Such an interpretation of the legal position prima facie results in an unsatisfactory position where an employee could in fact be working under several contracts, since previous contracts are not terminated when a new partner joins the partnership.) The Court referred to English law (which has wrestled with the problem of continuous service and whether it has been with the same employer) and referred to Michael Rich et al,1408 who expresses the view that: “At common law a change in the partnership is a change of employer”. In order to address the problem, inter alia of partnerships that dissolve and the service of employees contracted to partnerships, English law has enacted “deeming” provisions.1409 However, in the absence of the enactment of such a “deeming” clause, it seems that, in terms of common law, a change in the partnership constitutes a change of employer. This void could be covered by the provisions of section 197 where the partnership, as an undertaking, is transferred as a going concern. On behalf of Mr Burman, it was submitted that section 41(2) of the Basic Conditions of Employment Act of 1997 does not operate retrospectively. Nevertheless, the arbitrator had applied it to events that took place 27 years previously. The Court observed, firstly, that the infringement of existing rights is limited as regards the period from 11 November 1996 to 1 December 1998. Section 41 is similar but not identical to section 196 of the Labour Relations Act, which has been repealed. Employers were therefore aware, at least from the date that the Labour Relations Act came into operation, namely 11 November 1996, that they would be liable for severance pay. Section 41 thus only interferes with existing rights prior to this date. But, the Court held, section 196 should be read against the backdrop to its introduction, namely the dispute about whether severance pay should be paid. There was no argument that if it should be paid, it should be calculated from the date of commencement of service.1410 Since parliament

1407 132F-133A. 1408 Rich M et al Meads Unfair Dismissal 5th ed 60. 1409 In this regard (continuity being unaffected due to the deeming clause), the Court considered

par 9(5) of the Schedule to the Contracts of Employment Act of 1972 and its successors and the case law heard under it.

1410 See Imperial Cold Storage and Supply Company Ltd v Field 1993 14 ILJ 1221 (LAC).

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is deemed to know the law and it can safely be assumed that parliament clearly intended to address the issue of severance pay and to link it to completed years of service served before section 196 of the Labour Relations Act came into operation, the Court considered that the same holds good for section 41 of the Basic Conditions of Employment Act and so the point raised regarding the retrospectivity of section 41 could not be sustained. Section 41(2) of the Basic Conditions of Employment Act, which links severance pay to each year of service, was thus applicable to years of service served before the Basic Conditions of Employment Act was enacted. The next complaint was that the contracts of employment terminated when “the previous employer ceased to exist”. The Court stated that it had demonstrated (during the course of discussing the law relating to partnerships) that this proposition was untenable, save in the instance of the death of a partner. The contracts of employment were capable of transfer. The arbitrator had surveyed the evidence and had held as follows:

In the circumstances, I am of the view that the evidence shows that although there were changes in the identity of the employers over the years prior to 1996 (when section 197 came into operation) the ‘new employers’ took over the contracts of employment of the two Applicants with their consent and that the periods of employment with the dissolved partnerships were and should be recognised as continuous service.

The Court held that in so far as there is a question of law involved, the commissioner was obliged to determine the law objectively, as he had no discretion in this regard.1411 The Court considered that although there may have been continuity in practice, in law there were a series of contracts of employment, entered into tacitly, with different employers. The different partnerships constituted different employers. The mere fact that there was a common denominator in the person of Mr Burman having been a partner throughout the period from 1 June 1972 until 1996 did not mean that the same employer employed the employees. Given the evidence, the arbitrator’s finding that the new employers took over the contracts of employment of the employees was held not to have been justified.1412 The remaining complaint raised by Mr Burman related to the period commencing on 11 November 1996 when the Labour Relations Act (and therefore section 197) came into operation. With regard to the arbitrator’s finding, the Court held that section 197 was

1411 See Hira and another v Booysen and another 1992 4 SA 69 (A). 1412 135H-I.


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applicable to the facts1413 and that the finding was justifiable on the facts in relation to the evidence. However, the Court did not expressly consider the retrospectivity or otherwise of section 197 in this instance. It is, however, submitted that in view of the discussion regarding retrospectivity under section 41, the finding of applicability by the arbitrator would only be applicable to the periods of service that existed on 11 November 1996. Accordingly, the Court ordered that the applicant, Mrs Greenblatt, was entitled to severance pay calculated as though she had been employed since 11 November 1996. Evaluation It is submitted that the result of this decision is patently unfair. An employee with 27 years’ service was awarded 3 years’ severance pay.1414 The consideration of the Court that “[t]he mere fact that there was a common denominator in the person of Mr Burman having been a partner throughout the period 1 June 1972 until 1996 did not mean that the same employer employed the employees” causes discomfort. This discomfort is added to by the notion that an employee’s previous contract with the “old employer” is not terminated, whilst a new contract is tacitly concluded with a “new employer”. Thus, there is continuity in the sense that one or more of the partners remain the employer and the original contract of employment is also still alive. However, regardless of these factors and irrespective of the principle that the employee entered into the contract with each of the partners jointly and severally, no continuity of employment is recognised. Section 197 now alleviates the harsh effect of this legal position. This is, however, little comfort for employees whose employment stretches across a substantial period of time prior to November 1996. 12.5.3 Dispute route and procedure In all cases of disputes under the Labour Relations Act of 1995, whether a dispute of right or of interest, the dispute must firstly be referred to conciliation. Disputes can be conciliated by any accredited council or the Commission for Conciliation, Mediation and Arbitration.1415 If a dispute is still unresolved after the conciliation phase, and if it is a dispute of right, it can then either be referred to arbitration or to the Labour Court for adjudication.1416 1413 For the reasons of this finding, refer to chapter 6 supra . 1414 The applicant joined the first partnership/firm in 1972 and the practice was closed in 1999. 1415 S 133 & s 135. 1416 S 136 & s 157.

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In the event of an express dismissal because of a transfer, whether it is a pre-transfer or post-transfer dismissal, the dismissal will be referred to the Labour Court after unsuccessful conciliation, as it will be a dispute regarding an automatically unfair dismissal (as suggested earlier). It is submitted that in the event of a constructive dismissal due to the employee’s objection to transfer on reasonable grounds,1417 the dismissal will ultimately also be classified as automatically unfair.1418 (However, it might be appropriate to include another step in the dispute resolution procedure to avoid unnecessary litigation. If the parties are obliged to refer the unconciliated dispute to advisory arbitration, the arbitrator can make an advisory award regarding the nature of the changed terms and conditions of employment and the reasonableness of the refusal to transfer.1419 Thereafter, either of the parties may still refer the dispute to the Labour Court for adjudication. Unfortunately, this procedure will not be worth much if the awards made are not of a high enough standard to convince parties to abide by them.) It is submitted that the normal referral period of 30 days for a claim of unfair dismissal could remain unaffected in these cases. 12.6 Dismissals and transfers in insolvent circumstances1420 Section 197 is applicable in insolvency circumstances as well as in the case of a scheme of arrangement or compromise.1421 However, section 38 of the Insolvency Act of 1936 still provides that all contracts of employment terminate upon insolvency of the employer. Even though section 210 of the Labour Relations Act grants the Act higher ranking in the hierarchy of statutes, some commentators have argued that the legislator could not have intended such an anomaly. Because section 197 is such a huge deviation from the common law position, it has also been suggested that section 197 should be interpreted as not being applicable in the said circumstances.1422 It is submitted that, on the strength of the stated purpose of the said section as well as section 210 of the Act,

1417 That is if the suggestion in chapter 7, i.e. that the employee should remain in the

employment of the transferor, is not implemented. 1418 E.g. where an employee resigns due to sexual harassment, it is a constructive dismissal (s

186 (e)) but it is also an automatically unfair dismissal based on sex discrimination (s 187(1)(f)). Similarly, where the constructive dismissal is connected to a transfer, it should then also be classified as automatically unfair.

1419 See s 143(1) for the effect of arbitration awards. 1420 See also chapters 13 & 14 infra. 1421 Transfers and insolvent undertakings and rescue proceedings will be discussed fully infra

in chapter 13. 1422 See Oelofse N and Schlemmer E “Konflik tussen die Wet op Arbeidsverhoudinge en die

Insolvensiewet” 1996 TSAR 559. See also SA Agricultural Plantation & Allied Workers Union v HL Hall & sons (Group Services) Ltd 1999 ILJ 399 (LC) and Roelofsz v The PGA Club / The PGA Amateur Club 2000 22 ILJ 1442 (CCMA).


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the transfer of employment contracts as envisaged in section 197 must be given effect to. This could, for example, be achieved by treating employment contracts like all other incomplete contracts, thus continuing until the liquidator exercises a decision as to whether or not to transfer the business as a going concern. This is clearly a situation where the legislator will have to intervene, whether it is by amending the Insolvency Act or by clarifying section 197.1423 The Labour Appeal Court has held that section 197(1)(a) and (b) provides for the automatic transfer of an employee’s contract of employment upon the transfer of a business, trade or undertaking in the circumstances set out in the section. The Labour Appeal Court has also held that whereas section 197(2)(a) does not allow for the contracting out of the transfer of the contract itself, section 197(2)(b) does.1424 Accordingly, under the current regulation of transfer of contracts, as interpreted by the Labour Appeal Court, it is possible for parties to contract out of the automatic transfer of employment contracts in insolvent circumstances. The insolvent undertaking can thus try to obtain the agreement of employees to terminate the employment relationship.1425 It is, however, doubtful whether many employees would agree to such a result, owing to the poor protection available to employees in terms of current South African insolvency law. The problematic nature of dismissals in insolvency circumstances is compounded by the fact that there is, as a matter of course, not much money to distribute and the body of creditors is treated uniformly, with only very limited employee claims enjoying preference. A case in point was that of Hugo v Shandelier Hotel Group CC (in liquidation) & others.1426 The respondent close corporation and the respondent company owned and ran a hotel. In November 1998, the close corporation was placed under final liquidation and the company under provisional liquidation. Liquidators were appointed in terms of the Companies Act 61 of 1973, and one Shapira was appointed to manage the hotel. In January 1999 Shapira appointed the applicant employee as assistant manager. According to the employee, three agreements were entered into. The first was a verbal agreement offering a permanent position if the hotel was successful. The second, in writing, specified her remuneration and that her employment would be subject to three months’ probation. The third, which she was asked to sign on 31 May 1999, described her employment as a “fixed-term contract 1423 See the proposed Insolvency Bill discussed in chapter 13 infra. 1424 Foodgro, A Division of Leisurenet v Keil 1999 20 ILJ 2521 (LAC) 2528I-J. 1425 It was submitted in chapter 8 that this is not a position that benefits employees of insolvent

undertakings and, considering the fact that very little insolvency protection exists for employees and that contracts already transfer without prior rights and obligations, an amendment of this situation should be considered by the legislator.

1426 2000 21 ILJ 1884 (CCMA).

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for such time as the business is sold as a going concern or failing that, at expiry of [our] attempts to sell the business as a going concern or part thereof”.1427 On 28 June 1999, the liquidators and Shapira signed an agreement for the sale of the hotel as a going concern to Shapira, acting on behalf of a company still to be formed. The agreement purported to transfer the hotel as from midnight on 31 May 1999. Shapira terminated the employee’s services on 1 June 1999. She referred an unfair dismissal dispute to the Commission for Conciliation, Mediation and Arbitration. The arbitrator held that the applicant’s employer were in fact the legal entities in liquidation and not Shapira or the liquidators in their personal capacities. It was held that, for public policy reasons, the liquidators should not be held responsible as employers as they act primarily in the interests of the creditors of the company in liquidation. The company itself (albeit in liquidation) should be considered the employer.1428 As there was found to have been a dismissal, the arbitrator went on to consider the substantive and procedural fairness of the dismissal. The third agreement was declared to be void due to misrepresentation.1429 Even though Shapira did not actually have the power to conclude a permanent contract of employment with the applicant, the close corporation was estopped from claiming the same.1430 The employer was thus bound by the terms of the first and second contracts and her employment was not subject to a fixed term. The applicability of section 197 was then eventually considered. It was undisputed that the hotel was transferred by the liquidators as a going concern. What remained to be determined was whether the applicant’s employment would have been transferred in terms of section 197, had she not been dismissed. Put differently, does section 197 apply to people employed during a period of provisional liquidation? The arbitrator was of the opinion that if only the provisions of section 197(1)(b) and (2)(b) needed to be scrutinised in the event of an insolvency or threatened insolvency transfer, the contract of the applicant would not have been transferred to the new employer, even if she had been in the employment of the old employer on the date of the transfer, as she had not been in the employment of the company immediately before a provisional liquidation order had been given.1431 The arbitrator was of the view that such an interpretation cannot be correct. (It is not at all clear how the wording of section 197(1)(b) (read with section 197(2)(b)) can lead to such an interpretation (that it only covers the transfer of contracts of people who were in the employ of the company before a provisional liquidation order had been given).1432)

1427 1892B-E. 1428 1896B-1897B. 1429 1903H. 1430 1906C. 1431 1908B-D. No authority was given for this view. 1432 1908A.


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The arbitrator, according to his belief, thus had to rely on section 197(1)(a) and (2)(a) in order to include the applicant under the protection of section 197.1433 The arbitrator followed the approach of the Labour Appeal Court and accepted that section 197 provides for an automatic transfer of contracts. The only issues left to decide were thus what the appropriate remedy should be and against whom the award should be given. Here the arbitrator made a decision in conflict with previous Labour Court judgements as well as international case law. It was held that, as the applicant had been dismissed prior to the transfer, irrespective of the fact that it was because of the transfer, the award had to be given against the old employer, (i.e. the legal entities in liquidation). This finding seems particularly strange as the basis for the applicant’s protection was found to lie in section 197(1)(a) and (2)(a) in terms of which rights and obligations existing at the time of the transfer between each employer and employee transfer to the new employer.1434 An order for compensation of 12 months’ remuneration was accordingly given against the old employers. In this instance, the applicant did not want reinstatement. However, if the facts were different, the decision to make the old employer responsible for the unfair dismissal would have led to a result where the employee would certainly have faced dismissal for operational requirements owing to the insolvency of the old employer. It would, naturally, be more helpful if the employee could claim reinstatement against the new employer. It is submitted that even where the dismissal was not transfer related, the employee can expect the transferee to give effect to the reinstatement order because his/her contract would have transferred if it had not been for the unfair dismissal.1435 1436 Nevertheless, if one deals with a transfer in circumstances under section 197(2)(b), then the prior rights and obligations remain enforceable only against the transferor. The question is then whether it would be incumbent on the transferee to give effect to a compensation order for an unfair dismissal prior to the transfer. It has been argued that the transferee would have to reinstate the employee as the contract would have transferred but for the dismissal. But what is the position if an employee does not want

1433 This he did by adopting a purposive interpretation of s 197 in terms of s 3 of the Act. 1434 Contra to s 197(2)(b) where the rights and obligations remain valid only against the old

employer. Such an interpretation seems especially strange in view of the earlier remarks made by the arbit rator regarding a purposive interpretation being required by the LRA.

1435 See chapter 5, par 5.2 supra . 1436 S 197(2)(b) does provide for the transfer of the employment contracts in these

circumstances, even if without prior rights and obligations. If the reinstatement order is not executable against the transferee, it would be easy for transferees and transferors to prevent the transfer of contracts in insolvent circumstances by negotiating a price for the transferor’s liability for an unfair dismissal.

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to be reinstated? Against whom must the compensation order then be awarded? The old employer will likely aver that the transferee is liable (unless an agreement existed between the transferor and transferee), whilst the transferee will claim that prior rights and obligations are enforceable against the transferor.1437 It seems, prima facie, that owing to the disparate regulation found in section 197(2)(b), compared to section 197(2)(a) of the Labour Relations Act, a compensation order will only be enforceable against the old employer. Since no guaranteed system of payments exists at present in South Africa, employees are severely prejudiced by this legal regulation.1438 The Commission for Conciliation, Mediation and Arbitration considered a case where a voluntary liquidation was initiated by the employer. In Hammond & Others v L Suzman Distributors (Pty) Ltd,1439 section 38 - the termination of the contracts of employment on provisional liquidation - was applicable. The employer applied for voluntary liquidation and thus initiated the process, culminating in the termination of the contracts. The commissioner accepted jurisdiction to categorise such conduct as dismissal for operational reasons. In the previous case of SA Agricultural Plantation and Allied Workers Union v HL Hall and Sons (Group Services) Ltd and others,1440 the contracts of employment were found to have been terminated by operation of law and the judge held that the Labour Relations Act was not applicable since the law of insolvency, administered by the High Court, took over.1441 This is prejudicial for employees since South Africa’s insolvency law grants minimal protection to the claims of employees and there is no guaranteed wage fund as yet.1442 In the Hammond case, the arbitrator was willing to consider the voluntary liquidation as a dismissal on the basis of equity considerations, since “for an employee who had faithfully served an employer for almost 40 years to be given one week’s salary and [be] sent on his way was inequitable in the extreme”.1443 The fairness of the dismissal as well as the fairness of the severance pay could thus be evaluated. It is

1437 See also Pollard 1996 ILJ 198-203 (Dismissals by insolvency practitioner). 1438 Even though an employee may sometimes prefer compensation, there are other

circumstances when compensation will be the only option, e.g. if the dismissal was only procedurally unfair.

1439 1999 20 ILJ 3010 (CCMA). 1440 1999 ILJ 399 (LC). 1441 In Roelofsz v The PGA Club/The PGA Amateur Club 2001 22 ILJ 1442 (CCMA) the arbitrator

considered himself bound by the statement by the Court in Hall to the effect that s 38 of the Insolvency Act operates to terminate contracts of employment. It was also alleged that there was no transfer of an undertaking as a going concern but only the transfer of assets of the company. This argument was not taken further as the arbitrator felt that the effect of s 38 of the Insolvency Act was that the applicant was never employed by the respondent (the company which, after the liquidation, purchased the assets of the old employer company).

1442 See chapter 13 infra regarding guaranteed payments. 1443 3017F-H.


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submitted that such a purposive and equitable interpretation should also be followed when dealing with the apparent conflict between section 197 and section 38.1444 12.7 Concluding remarks The manner in which the law regulates dismissals in the event of the transfer of an undertaking as a going concern is complex. On the one hand, it should not appear that employees in these circumstances are granted more extensive protection against dismissal than employees in undertakings that are not being transferred. However, a scenario that involves a transfer has been identified as a situation where employees’ rights need to be especially safeguarded. It could become a thorny issue if arguments regarding unequal protection should arise. The key seems to lie in finding the thin dividing line where it can be said that employees in transfer circumstances do not enjoy any more or less protection than any other employees, except for the fact that the dismissal because of the transfer cannot be condoned and that public policy requires that such dismissal should be ineffective. It has been submitted that the legal effect of a pre-transfer dismissal as well as of a post-transfer dismissal must be of such importance, for example being automatically unfair and ineffective, that the goal of transfer provisions is acknowledged and that the protective effect of transfer provisions is not made voluntary and dependant on the transferor and the transferee’s acceptance thereof. Such a dismissal should thus be ineffective and should not prevent the transferring of the employment contract to the transferee. In this regard, attention was drawn to the well-known principle that the employment relationship is wider in scope than that of the employment contract. If this position exists it will of necessity involve that a constructive dismissal (due to a substantial change in terms and conditions of employment because of the transfer), or due to the unilateral harmonisation of conditions with those of the transferee’s employees, will also have to qualify as automatically unfair and carry the same consequences and remedies as an express dismissal for reason of a transfer. To regulate otherwise would make it possible for a transferor or transferee to disguise their dismissals due to the transfer as something other than what they actually are. The causality that exists between the ultimate dismissal and the amendments of terms and conditions due to the transfer, should mean that these dismissals are treated as automatically unfair.

1444 See the recent judgement of National Union of Leatherworkers v H Barnard NO & another

(LAC) Case no. DA 14/2000, unreported judgement of 29 June 2001. In this judgement the LAC confirmed that a voluntary sequestration/liquidation can be treated as a dismissal.

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As illustrated, the importance of defining and interpreting the concept of “operational requirements” cannot be overemphasised.1445 It is submitted that just as a purposive interpretation requires a dismissal because of a transfer to be automatically unfair and to be ineffective in the sense that it should not prevent the contract from transferring to the transferee,1446 a purposive interpretation will require a narrow interpretation of the concept of “operational requirements” in the context of transfers. The present definition, which refers to “needs of the employer”, is clearly problematic in this regard. An employer could, for example, argue that it is an operational requirement to dismiss employees in order to get a more attractive offer for the undertaking. The Labour Courts could also assist practitioners greatly if they were to provide guidelines on when to regard a dismissal as a dismissal because of a transfer. Finally, it is common cause that a right is worth only as much as its remedy. Enforcement is of crucial importance. In pre-transfer or post-transfer dismissals it is not only the appropriate remedy that is important but also the entity against whom such an order for relief can be made. The legislator would do well to regulate this issue without ambiguity. Two scenarios must be catered for: firstly, dismissals due to a transfer and, secondly, other unfair dismissals. The regulation of this issue is further complicated by the fact that the transfer of solvent and insolvent undertakings is currently not treated uniformly in South Africa. It is debatable whether employees involved in the transfer of an insolvent employer (or an employer being wound up, etc) should be granted less protection than their counterparts in solvent undertakings, especially in view of the poor protection that employees enjoy under the law of insolvency.1447 The primary remedy in transfer dismissals must always be reinstatement or re-employment, as the statutory intervention contained in section 197 of the Labour Relations Act envisages the continued employment of employees, regardless of a change in the legal identity of their employer. The transferee will be liable to give effect to such an order after a relevant transfer has taken place. In cases of other pe-transfer unfair dismissals (i.e. an unfair dismissal that was not for reason of the transfer), it cannot be said to necessarily be the case. There can be an argument, for example in the United Kingdom, that only transfer-connected dismissals still result in the transfer of employment contracts. It is submitted, however, that it would be preferable if the transfer of employment contracts could not be prevented by any unfair dismissal and, in particular, not by an automatically unfair dismissal.

1445 See par 12.5 supra . 1446 See the Litster case in the United Kingdom. 1447 See chapter 13 infra.


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CHAPTER THIRTEEN

TRANSFERS, INSOLVENT UNDERTAKINGS AND RESCUE PROCEEDINGS

13.1 General The interaction between insolvency principles and employment rights raises difficult problems. A liquidator will be seeking to maximise recovery for creditors of the insolvent undertaking whereas employees will be concerned with preserving their jobs and recovering any claims that they have against the insolvent undertaking and that originate from the employment relationship before and after the advent of insolvency. The principle of the concursus creditorum 1448 has resulted in debates about supposed “super priority” of some employee claims against an insolvent undertaking. It has been recognised that the potential for employee claims is reduced if jobs are safeguarded and the business continues. Selling all or part of the business as a going concern can achieve this.1449 It has become evident through this thesis that transfer provisions provide, firstly, that the substantive scope of rights that employees enjoyed against a transferor also applies against the transferee. Secondly, it is widely accepted that employees should be able to influence the decision to transfer control of an undertaking to a transferee.1450 Two main challenges face the application of transfer provisions, or stated otherwise, the theory of acquired rights: the contractual argument and the law of insolvency. The argument about contractual freedom was dealt with earlier.1451 This chapter deals with the argument of the law of insolvency. The law of insolvency challenges the acquired rights theory as follows: As the liquidation or imminent liquidation of a company naturally involves the realisation of assets of the company by the liquidator for distribution amongst creditors of the company, the amount of realised money available is of utmost importance to all creditors. Creditors of a company can be categorised in different classes. These include secured creditors, preferential creditors and concurrent creditors. All claims against the insolvent company must be proved, but they can only be satisfied according to the amount realised by the sale of assets and the collection of outstanding debts. The 1448 See Olivier et al Social Security Law: General Principles 407-410 regarding the concursus

creditorum. 1449 See Pollard D “Insolvent companies and TUPE” 1996 ILJ (United Kingdom) 191. 1450 For a formulation of the narrow and broad form of the acquired rights theory see Davies PL

“Acquired rights, creditors’ rights, freedom of contract, and industrial democracy” 1989 Yearbook of European Law 21 21-25. See, howe ver, in chapter 2, par 2.5 supra , the discussion about the vacuum that exists with regard to industrial democracy.

1451 See chapters 1,4 & 7 supra .


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gist of the argument against the transfer of employees and of prior existing rights and obligations in insolvent circumstances is that the transferee will pay less for the transferred business if it comes with the acquired rights of the employees attached, thus diminishing the pool of assets in the transferor’s company against which secured and other creditors can claim.1452 This clash between the property rights of other creditors and those of employees is not limited to transfer situations. There is also a clash where employee entitlements are accorded preference in the liquidation process.1453 In South Africa, transfer provisions also apply to companies in insolvent circumstances.1454 However, in these circumstances it is only the bare skeleton of the contract of employment that transfers and none of the accompanying rights and obligations (subject to the possibility of an agreement to the contrary). Two issues must thus be considered: firstly, whether it is justified to treat employees in insolvent companies differently from employees in solvent companies and, secondly, whether the specific regulation pertaining to this situation in South African law is acceptable or not. It must be expressly stated that this chapter does not attempt to cover the whole field of employees’ claims and protection in the event of the sequestration or liquidation of their employer. It is too wide a field to attempt to include in this research which deals with the transfer of undertakings. 13.2 Comparative perspective 13.2.1 Directive 2001/23/EC Article 5 of Acquired Rights Directive 2001/23/EC, stipulates that unless Member States provide otherwise, articles 3 and 4 of the Directive will not apply to any transfer of an undertaking, business or part of an undertaking or business where the transferor is the subject of bankruptcy proceedings or any analogous insolvency proceedings that 1452 Davies 1989 YEL 23-24. Davies, however, recognises that: “True, the transfer of acquired

rights will lead the transferee to pay less for the business. That is of concern to the secured creditors, no doubt, but it hardly affects the policy of job preservation, unless the lower price means the transfer does not take place. However, except on the principle of cutting off one’s nose to spite one’s face, it will still be in the secured creditors’ interests to sell the business as a going concern, even at a reduced price, unless the reduced price is less than that realisable through the sale of the assets on a break-up basis. That the value of the employees’ acquired rights should make the difference between the going concern and the break -up value of the business in a large number of cases seems implausible and, in any event, it is something that has yet to be demonstrated”.

1453 However, in several European countries (e.g. the United Kingdom) this protection has never prevailed against creditors secured by fixed charges, and even creditors secured by floating charges are protected by means of the limited scope of the employee preference.

1454 See s 197(1)(b) of the LRA.

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have been instituted with a view to the liquidation of the assets of the transferor and are under the supervision of a competent public authority (which may be an insolvency practitioner authorised by a competent public authority).1455 It is thus accepted that employees in solvent and insolvent companies may receive different levels of protection in the event of the transfer of an undertaking. Where articles 3 and 4 apply to a transfer during insolvency proceedings that have been opened in relation to a transferor (whether or not those proceedings have been instituted with a view to the liquidation of the assets of the transferor) and provided that such proceedings are under the supervision of a competent public authority (which may be an insolvency practitioner determined by national law) a Member State may provide that: (a) Notwithstanding article 3(1), the transferor's debts arising from any contracts of

employment or employment relationships and payable before the transfer or before the opening of the insolvency proceedings will not be transferred to the transferee, provided that such proceedings give rise, under the law of that Member State, to protection at least equivalent to that provided for in situations covered by Council Directive 80/987/EEC of 20 October 1980 on the approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of their employer and, or alternatively, that

(b) the transferee, transferor or person or persons exercising the transferor's functions, on the one hand, and the representatives of the employees, on the other hand, may agree to alterations, in so far as current law or practice permits, to the employees’ terms and conditions of employment designed to safeguard employment opportunities by ensuring the survival of the undertaking, business or part of the undertaking or business.1456

A Member State may apply the position in (b) supra to any transfers where the transferor is in a situation of serious economic crisis, as defined by national law, provided that the situation is declared by a competent public authority and open to judicial supervision and on condition that such provisions already existed in national law on 17 July 1998.1457 1458 It is expressly provided that Member States must take appropriate measures with a view to preventing misuse of insolvency proceedings in such a way as to deprive

1455 Art 5(1). 1456 Art 5(2). 1457 Art 5(3). 1458 The European Commission must present a report on the effects of this provision before 17

July 2003 and must submit any appropriate proposals to the European Council (art 5(3)).


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employees of the rights provided for in the Directive.1459 As the provisions of article 5(2) are dependant on protection provided to employees in terms of Directive 80/987/EEC, it is necessary to consider that protection which has been provided to employees of insolvent undertakings as well. It is apparent that not only is the protection of employees in insolvent companies in transfer situations not compulsory, but where the Member States do decide to include insolvent transfers under the scope of their transfer provisions, these transfers may be regulated differently to solvent transfers. Provision may be made that previous debts1460 that are payable remain valid against the transferor and not the transferee.1461 In addition, the parties may agree to vary the employment contracts due to the transfer.1462 Finally, employees do have significant information and consultation rights in these circumstances.1463 13.2.2 Directive 80/987/EEC In the Preamble to Council Directive 80/987/EEC of 20 October 1980 on the approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of their employer, it is pointed out that the differences in protection offered by Member States may directly affect the functioning of the Common Market. Article 1 provides that the Directive applies to employees’ claims arising from contracts of employment or employment relationships and existing against employers who are in a state of insolvency within the meaning of article 2(1).1464 An insolvency situation is defined in essentially two ways:

1459 Art 5(4). 1460 This does not affect the transfer of the contracts of employment. 1461 However, the safeguard then applies that the employees’ claims must be protected at least

to the extent provided for in the Insolvency Directive (including guaranteed payments). 1462 In this regard, see chapter 8 supra . 1463 See chapter 11 supra . 1464 Art 2 provides that: “for the purposes of the Directive, an employer shall be deemed to be

in a state of insolvency: (a) where a request has been made for the opening of proceedings involving the employer’s assets, as provided for under the laws, regulations and administrative provisions of the Member State concerned, to satisfy collectively the claims of creditors and which make it possible to take into consideration the claims referred to in Art 1(1), and (b) where the authority which is competent pursuant to the said laws, regulations and administrative provisions has: - either decided to open the proceedings, - or established that the employer’s undertaking or business has been definitively closed down and that the available assets are insufficient to warrant the opening of the proceedings”. (1)OJ No C 135, 9.6.1978, p. 2. (2)OJ No C 39, 12.2.1979, p. 26. (3)OJ No C 105, 26.4.1979, p. 15 2. The Directive is without prejudice to national law as regards the definition of the terms “employee”, “employer”, “pay”, “right conferring immediate entitlement” and “right conferring prospective entitlement”. See Pollard (1996 ILJ 195-196) on which insolvencies are outside the scope of the Acquired Rights Directive.

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• Where a request has been made for the opening of proceedings involving the employer’s assets according to national law in order to satisfy the claims of creditors, making it possible to take into account the rights of workers protected in the Directive.

• where an authority is competent under national law either to open insolvency proceedings or to establish that the employer’s undertaking or business has definitely been closed down and that the viable assets are insufficient to warrant the opening of the proceedings.1465

The Directive provides for the following levels of protection:1466 • The insurance of the payment of employees’ outstanding claims resulting from

contracts of employment (or employment relationships) by guarantee institutions. The assets of these institutions must be independent of the employer’s operating capital and inaccessible to proceedings for insolvency.

• The safeguard that the non-payment of compulsory contributions due by the employer within the framework of the national statutory social security schemes does not adversely affect the employee’s benefit entitlements.

• The position that the employees’ entitlement to old age and survivors’ benefits under supplementary company or inter-company schemes outside the statutory social security schemes is protected.

Member States may, by way of exception, exclude claims by certain categories of employees from the scope of this Directive. This can happen by virtue of the special nature of the employee’s contract of employment or employment relationship (or by virtue of the existence of other forms of guarantee offering the employee protection equivalent to that resulting from the Directive). The categories of employees referred to in article 1(2) are listed in the annex to the Directive.1467 1468 Article 3 obliges Member States to take the measures necessary to ensure that, subject to article 4, guarantee institutions1469 guarantee payment of employees’ outstanding claims resulting from contracts of employment or employment relationships and relating to pay for the period prior to a given date. At the choice of the Member States, the date referred to will be: (a) either that of the onset of the employer’s insolvency; or

1465 See Nielsen European Labour Law 339-340. 1466 Blanpain European Labour Law 359. 1467 Art 1(2). The Directive thus only protects those employees faced with a situation in which

their employer is insolvent in accordance with the definition in art 2. 1468 Regarding these exclusions, see Commission v Greece Case C53-88, 1990 ECR 3917 (ECJ). 1469 Guarantee institutions must comply with certain principles contained in art 5.


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(b) that of the notice of dismissal issued to the employee concerned on account of the employer’s insolvency; or

(c) that of the onset of the employer’s insolvency or that on which the contract of employment or the employment relationship with the employee concerned was discontinued on account of the employer’s insolvency (the combination choice).

Member States have the option of limiting the liability of guarantee institutions referred to in article 3.1470 However, when Member States exercise this option they must:1471 • in the first instance, see (a) above, ensure the payment of outstanding claims relating

to pay for the last three months of the contract of employment or employment relationship occurring within a period of six months preceding the date of onset of the employer’s insolvency;

• in the second instance, see (b) above, ensure the payment of outstanding claims relating to pay for the last three months of the contract of employment or employment relationship preceding the date of the notice of dismissal issued to the employee on account of the employer’s insolvency;

• in the third instance, see (c) above, ensure the payment of outstanding claims relating to pay for the last 18 months of the contract of employment or employment relationship preceding the date of onset of the employer’s insolvency or the date on which the contract of employment or the employment relationship with the employee was discontinued on account of the employer’s insolvency. In this case, Member States may limit the liability to make payment to pay corresponding to a period of eight weeks or to several shorter periods totalling eight weeks.

However, in order to avoid the payment of sums going beyond the social objective of this Directive, Member States may set a ceiling to the liability for employees’ outstanding claims. When Member States exercise this option, they must inform the European Commission of the methods used to set the ceiling. Regarding social security, Member States may stipulate that articles 3, 4 and 5 will not apply to contributions that are due under national statutory social security schemes or under supplementary company or inter-company pension schemes outside the national statutory social security schemes. 1472 However, article 7 provides that Member States must take the measures necessary to ensure that non-payment of compulsory contributions due by employers, to their insurance institutions under national statutory social security schemes, before the onset of their insolvency, does not adversely affect employees’ benefit entitlement in respect of these insurance institutions, provided that

1470 Art 4(1). 1471 Art 4(2). 1472 Art 6.

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the employees’ contributions were deducted from their remuneration.1473 In addition, Member States must ensure that the necessary measures are taken to protect the interests of employees and of persons having already left the employer’s undertaking or business at the date of onset of the employer’s insolvency in respect of rights conferring on them immediate or prospective entitlement to old-age benefits, including survivors’ benefits, under supplementary company or inter-company pension schemes outside the national statutory social security schemes.1474 Member States remain able to apply or introduce laws, regulations or administrative provisions that are more favourable to employees.1475 1476 13.2.3 Case law of the European Court of Justice In Jules Déthier Èquipement SA v Jules Dassy and Sovam SPRL,1477 the European Court of Justice held that article 1(1) of Directive 77/1871478 applies in the event of the transfer of an undertaking that is being wound up by the Court if the undertaking continues to trade during that insolvency procedure. But in HBM Abels v The Administrative Board of the Bedrijfsvereniging voor de Metaalindustrie en de Electrotechnische Industrie,1479 it was made clear by the European Court of Justice that the Acquired Rights Directive does not apply to the transfer of an undertaking where the transferor has been adjudged insolvent and the undertaking in question forms part of the assets of the insolvent transferor. However, Member States are at liberty to

1473 The ECJ held in Commission v Italy (Case 22/87, 1989 ECR 143) that art 7 subjects the the

guarantee of employees’ entitlement to benefits to only one condition, namely that the employees’ social security contributions have been deducted from the remuneration paid to the employees (par 28). See Nielsen European Labour Law 343-344.

1474 Art 8. 1475 Art 9. 1476 ILO Convention No. 173 on Protection of Workers’ Claims (in the event of their employer’s

insolvency) 1992 is also relevant. This Convention expressly notes that increasing value is placed on the rehabilitation of insolvent enterprises and that, because of the social and economic consequences of insolvency, efforts must be made where possible to rehabilitate enterprises and safeguard employment. The Convention envisages that a member, which ratifies the convention, may either accept the obligations in Part II (relating to a system of preferent claims) or the obligations in Part III (relating to the establishment of a guarantee fund) or both (art 3(1)). Preferent claims arising out of an employee’s employment contract or employment relationship should cover at least those claims stipulated in art 6. These include: wages in arrears (for a period not less than three months prior to insolvency or termination of employment); holiday pay (relating to the year in question and the preceding year); claims relating to other types of paid absence (for a period not less than three months prior to insolvency or termination of employment); and severance pay. Although these claims may be limited (art 7), the limitation may not place the amount of the protected claim below a socially acceptable level and the prescribed amount must be adjusted so as to maintain its value.

1477 Case C319-94, 1998 ECR 1061 (ECJ). 1478 As it was then, now replaced by Directive 2001/23/EC. 1479 Case 135/83, 1985 ECR 469 (ECJ).


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apply the principles of the Directive to such a transfer on their own initiative.1480 The European Court of Justice also had regard to the insolvency challenge explained earlier1481 and confirmed its reasoning in the later cases of Botzen v Rotterdamsche Droogdok Maatschappij 1482 and Industriebond FNV v The Net herlands.1483 In Abels, the European Court of Justice held that the argument that insolvency is an exception to the Directive is prima facie a tenable one as:

Insolvency law is characterised by special procedures intended to weigh up the various interests involved, in particular those of the various classes of creditors; consequently, in all Member States there are specific rules which may derogate, at least partially, from provisions, of a general nature, including provisions of social law.1484

The Court thus argued that whether or not an exclusion was intended by the Acquired Rights Directive depended on whether its purpose, the protection of employees, would be furthered by applying or not applying the Directive to insolvent transferors.1485 The Court concluded that:

It is apparent from the foregoing considerations that a serious risk of general deterioration in working and living conditions of workers, contrary to the social objectives of the Treaty, cannot be ruled out. It cannot therefore be concluded that Directive 77/187 imposes on Member States the obligation to extend the rules laid down therein to transfers … taking place in the context of insolvency proceedings instituted with a view to the liquidation of the assets of the transferor under the supervision of the competent judicial authority.1486

1480 In Abels there was also the question whether the Directive applies at all to transfers by

insolvent transferors, since it applies to “a legal transfer or merger” - if found that it did not apply, no exception would be necessary for a transfer because of insolvency to escape the full effect of the Directive. Some Member States have interpreted the concept of “legal transfer or merger” as meaning that the Directive only applies to contractual transfers that result in the notion that, as transfers by insolvent transferors are not consensual, they fall outside the scope of the Directive. The ECJ approached this as a policy issue and examined whether the application of the Directive to such transfers would reduce the chances of the business being saved and jobs being preserved. The ECJ thus accepted the exception argument, rather than restricting the concept of a “legal transfer or merger”. See Davies 1989 YEL 45-48 in this regard.

1481 See par 13.1. 1482 Case 186/83, 1985 ECR 519 (ECJ). 1483 Case 179/83, 1985 ECR 511 (ECJ). 1484 1985 ECR 483. 1485 Davies 1989 YEL 46. 1486 1985 ECR 485.

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This conclusion has been criticised1487 and the Danish Government argued that “employees whose employer has been adjudged insolvent are precisely those who are most in need of the protection”.1488 The Court, however, accepted arguments not to apply the Directive as it “might dissuade a potential transferee from acquiring an undertaking on conditions acceptable to the creditors thereof, who, in such a case, would prefer to sell the assets of the undertakings separately”.1489 The transferor in Abels was not in fact in liquidation. Although it was insolvent it had claimed the benefit of a pre-liquidation procedure temporarily staying its creditors’ claims.1490 The Court held that:

[Suspension of payments procedures are] different from liquidation proceedings in so far as the supervision exercised by the Court over the commencement and the course of such proceedings is more limited. Moreover, the object of such proceedings is primarily to safeguard the assets of the insolvent undertaking and, where possible, to continue the business of the undertaking by means of a collective suspension of the payment of debts with a view to reaching a settlement that will ensure that the undertaking is able to continue operating in the future.1491

The Court thus draws a line between pre-liquidation procedures and insolvent companies in liquidation. However, Davies argues convincingly that the choice should have been between not applying the Directive to either liquidation or pre-liquidation procedures and applying it to all transfers by insolvent transferors.1492 The argument for such a proposition is simply that if the Court accepts that the reason for not applying the Directive to liquidations is that it “might dissuade a potential transferee from acquiring an undertaking on conditions acceptable to the creditors thereof, who, in such a case, would prefer to sell the assets of the undertaking separately”, it must be remembered that the choice between selling the undertaking as a going concern, or on a break-up basis, always rests with the controllers of the insolvent undertaking.1493 Davies argues that the controllers will presumably always choose the method that would be of most benefit to the creditors, whether the company is in

1487 See Davies 1989 YEL 46, who describes the reasoning of the Court as rather weak and,

unfortunately, also rather illogical. 1488 1985 ECR 484. 1489 1985 ECR 485. 1490 I.e. judicial leave to suspend payment of debts. 1491 1985 ECR 486. 1492 1989 YEL 47. 1493 See Davies 1989 YEL 46-47.


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liquidation or in the course of some other pre-liquidation procedure. If this is so, why does the argument for limitation or exemption from the Directive not apply equally to these pre-liquidation procedures than to insolvent companies? Davies concludes as follows:1494

There can certainly be no suggestion that insolvent companies that are put into pre-liquidation procedures are necessarily any the less insolvent than companies that go straight into liquidation. What is usually indicated by such a course of action is that there is a greater chance of selling off at least part of the insolvent’s business as a going concern, but this, of course, is precisely the situation that is said to justify excepting the transfer from the operation of the Directive. It is suggested that the appropriate choice is between not applying the Directive to either liquidation or pre-liquidation procedures and applying it to all transfers by insolvent transferors. It may be that the Court, in drawing the line it did, was also influenced by the doctrinal point (that transfers in liquidations are not genuinely consensual because of the degree of judicial supervision), but it is in fact doubtful whether, as an invariable rule, pre-liquidation procedures are subject to less judicial control than liquidation procedures.

In Foreningen af Arbejdsledere I Danmark v A/S Danmols Inventar,1495 the European Court of Justice held that the mere fact that the transfer of an undertaking occurred after the transferor suspended payments of his/her debts does not, on its own, exclude the transfer from the scope of the Directive. The Directive applies to a transfer that is effected in the course of a procedure or at a stage prior to the commencement of liquidation proceedings. This is an important qualification to the restrictive application of the Acquired Rights Directive in circumstances involving insolvent undertakings. 13.2.4 Application in the United Kingdom and Germany1496 13.2.4.1 The United Kingdom

1494 Ibid. 1495 Case 105/84, 1985 ECR 2639. 1496 For the position in Belgium and Canada, see Olivier MP Employment Claims in Insolvency

and Rescue Proceedings: A Legal and Comparative Enquiry (CICLA 1997) 28-38.

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The Transfer of Undertakings Protection of Employment (TUPE) regulations in the United Kingdom apply to transfers in insolvent situations.1497 The result is that the claims of the employees enjoy preference over the claims of other creditors, as these claims are enforceable against the transferee.1498 Subject to this provision that employees of an insolvent employer that is transferred as a going concern transfer to the transferee, the English law provides that the appointment of a liquidator in a compulsory winding-up (or bankruptcy) terminates employment.1499 Employment contracts are also terminated by the appointment of an administrator or administrative receiver by the Court.1500 However, the appointment of an administrator, an administrative receiver or a liquidator by, for example, creditors of a company does not per se terminate a contract of employment. This is because they are regarded as agents of the company.1501 In the United Kingdom, there are thus two ways (short of winding-up) by which insolvent companies can be dealt with: appointment of an administrator or administrative receiver by the Court or appointment of an administrator, liquidator or administrative receiver by creditors.1502 If an insolvency practitioner decides that it is in the interests of the proceedings that the insolvent business should be transferred as a going concern,1503 there are two ways of effecting such a transfer in the United Kingdom. Such a transfer can either be: • by way of a disposal of the business to an unconnected third party; or

1497 Reg 4; Belhaven Brewery Co Ltd v Berekis 1993 IDS Brief 494 (EAT) (June 1993). 1498 Consequently, the claims of transferred employees enjoy preference, as the transferee will

pay them in full after reducing the price paid for the business to reflect the fact of the discharging of liabilities. See Collins H “Transfer of undertakings and insolvency” 1989 ILJ (United Kingdom) 144 158.

1499 See Olivier Employment Claims 21. Olivier refers to the following authority for the termination of employment: Re General Rolling Stock Co (Chapman’s Case) 1866 LR 1 Eq 346; Re Oriental Bank Corp Ltd (MacDowall’s Case) 1886 32 Ch D 366; Re Associated Dominions Assurance Society (Pty) Ltd 1962 109 CLR 516.

1500 Olivier Employment Claims 22. Authority referred to there includes Reid v Explosives Co Ltd 1987 LR 19 QBD 264 and Re Foster Clark Ltd’s Indenture Trusts 1966 1 All ER 43.

1501 See Olivier 22; The Insolvency Act 1986 (United Kingdom) s 14(5) (deeming an administrator to be an agent of the company) & s 44(1)(a) (deeming the administrative receiver to be an agent of the company). Olivier ibid states that there are, however, exceptions to this rule. Continuation of the contract may, for example, be inconsistent with the appointment of a receiver due to the nature of the employment, as may be the case with a managing director.

1502 It is mainly the receivers appointed by creditors that developed a rescue culture. This is because they realised that the most effective way of realising the full value of the business is to continue the undertaking rather than disposing of assets on a break-up basis. See Davies “Employee claims in insolvency: corporate rescues and preferential claims” 1994 ILJ (United Kingdom) 141 142. The administrator has similar powers to the administrative receiver but is appointed by the Court and thus has to further the general interests of all creditors and the company (Davies 1994 ILJ 142-143).

1503 The insolvency practitioners’ primary duty is to the creditors of the company; they must thus balance the potential increased recovery for the creditors if the company’s business continues as a going concern against the costs of continuing to trade. See Pollard D “Adopted employees in insolvency – orphans no more” 1995 ILJ (United Kingdom) 141.


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• by way of a hive-down of the business from the insolvent employer company to a subsidiary company newly formed for this purpose.1504

As stated earlier, these transfers, whether to a third party or by means of a hive-down, will be covered by the TUPE regulations as relevant transfers. All liabilities owed by the insolvent company to its employees will thus be transferred to the transferee1505 and employees in insolvent undertakings are treated in exactly the same way as employees of solvent undertakings that are transferred. However, two circumstances deserve special attention: • the express provisions made in the TUPE regulations relating to hive-downs in

insolvency;1506 and • the question of liability for dismissals made before the relevant transfer by the

insolvent company. The precondition for these issues to arise is, however, that the insolvent undertaking must be rescued. When deciding whether to continue carrying on business, insolvency practitioners (receivers) will firstly determine whether the undertaking has enough funds to meet its ongoing expenses.1507 This also implies that there will have to be an arrangement for payment of employees’ ongoing wages. In the case of liquidators and administrators, being officers of the Court, they have the benefit that legal proceedings against the company are stayed while they are in office. However, this also means that the Courts impose an “insolvency expenses” principle whereby liquidators and administrators will be liable to meet the costs of claims that relate to services provided to the company while they are in office (e.g. rent, etc).1508 The position outlined here does not apply to receivers. The House of Lords heard the combined appeals of three cases in Paramount Airways, Powdrill v Watson.1509 These cases dealt with the priority of claims of employees in an insolvency where the insolvency practitioner arranged for the company to continue to carry on business and to employ some or all of the employees. In Paramount Airways, administrators had been appointed.1510 The 1504 See Pollard 1996 ILJ 192. Pollard states that hive-downs have become less frequent since

the previous favourable tax position has been changed by the Finance Act 1986, United Kingdom. However, it is still thought desirable where, e.g., the company is in liquidation and the liquidator considers that the power to continue the business given to the liquidator is insufficient (Pollard ibid).

1505 Pollard (1996 ILJ 192-193) states that if the company ceases to have any liability to the transferred employees, due to the effect of a TUPE transfer, there can be no preferential debt remaining against the insolvent company, as there is no debt and there is thus no place for a secondary liability (e.g. a guarantee given by a third party) to remain either.

1506 In this regard, see the discussion infra. 1507 Otherwise there is a possibility of incurring liability for fraudulent trading under s 213 of the

Insolvency Act 1986. 1508 See Pollard 1995 ILJ 142. 1509 1995 2 WLR 312 (HL). 1510 See Pollard 1995 ILJ 143-144.

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administrators arranged to serve all employees with a letter denying that the administrators should be considered to have “adopted” the employment contracts of the employees. However, the letter confirmed that the employees would be paid during the period that they continued in actual employment. These payments were made, but when the administrators discovered that they could not succeed in selling the business as a going concern, they arranged for the company to dismiss all the remaining employees without notice. One of the employees claimed certain amounts due to his dismissal, claiming that these liabilities enjoyed “super priority” by virtue of section 19(5) of the Insolvency Act, 1986 on the basis that his contract had been “adopted” by the administrators.1511 The decision in Paramount Airways was said to have:

… in effect, forced administrators and receivers to a crucial choice within the first 14 days after their appointment. Subject to this statutory grace period, the receivers and administrators were in effect being required to weigh on the one hand the prospect of a greater recovery for creditors (and also probably the preservation of jobs) if the business of the insolvent company could be continued and perhaps sold as a going concern … and on the other hand the fact that, if such a rescue failed, any dismissal liabilities of the employees concerned (in particular damages to breach of contract) would in effect be given a “super priority” ranking ahead of other claims on the assets of the company (i.e. in effect to the detriment of the other creditors).1512

The United Kingdom Parliament reacted by adopting the Insolvency Act, 1994, which amended the provisions of sections 191513 and 441514 of the Insolvency Act, 1986 that deal with administrators and administrative receivers.1515 In terms of this, the

1511 The employee was successful at first instance and also before the Court of Appeal. The

Courts held that a “ liability incurred while the administrator was in office” clearly enjoyed priority and that a unilateral notice to the contrary served by the administrators was ineffective. However, only claims under the employment contract qualified, thus excluding statutory claims, e.g. unfair dismissal and protective awards.

1512 Pollard 1995 ILJ 144. 1513 Regarding an administrator. 1514 Regarding an administrative receiver. 1515 Pollard 1995 ILJ 144 shows that the position of receivers who are not administrative

receivers was not amended. The position under the Insolvency Act 1986 was as follows (see Belcher A Corporate Rescue (Sweet & Maxwell 1997) 204-206): “All receivers appointed under debentures [not those appointed by Court – automatically terminating employment contracts] were made personally liable on contracts of employment which they ‘adopted’, but with a right of indemnity out of the assets of the company. In administration, the consequence of ‘adopting’ a contract of employment was that employee claims were ranked in priority above the administrator’s remuneration and expenses. All three categories (receiver, administrative receiver and administrator) had 14 days in which to decide whether to adopt a contract of employment because nothing


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Insolvency Act, 1986 was amended by limiting the claims by employees under “adopted” contracts to “qualifying liabilities”.1516 However, the 1994 Act did not operate retrospectively, as it only applies to contracts of employment adopted on or after 15 March 1994 and, as indicated earlier, left the position of “ordinary” receivers unchanged.1517 Thus, for administrators and administrative receivers, the consequences of retaining employees and trying to salvage the business by continuing to trade are known and limited, at least since March 1994. However, it is debatable whether this encourages the practice of rescues, as it is still clear that a simple letter cannot avoid the adoption of contracts to that effect. In the case of ordinary receivers, commentators believe that rescue attempts will have been discouraged as the potential personal liabilities that can arise from retaining employees beyond 14 days are apparently much larger than what was believed prior to Paramount Airways.1518

done or omitted to be done within the 14 days after appointment was to be taken as adopting the contract” (204-205).

1516 Defined as wages, salaries and occupational pension contributions. Leave pay and sick leave pay are only included in respect of services rendered wholly or partly after the adoption of the contract.

1517 Belcher Corporate Rescue 206. 1518 Ibid.

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If a rescue is indeed attempted, regulation 4 determines that where the: • receiver of the property (or part thereof) of a company; or • the administrator of a company appointed under the Insolvency Act, 1986; or • in the case of a creditor’s voluntary winding up, the liquidator of a company transfers the company’s undertaking, or part thereof to a wholly owned subsidiary of the company, the transfer will be deemed not to have been effected until immediately before the transferee company ceases to be a wholly owned subsidiary of the transferor or the relevant undertaking is transferred by the transferee company to another person, whichever occurs first. The following is therefore the legal position when one of the parties in regulation 4 transfers the company or part thereof to a wholly-owned subsidiary of the insolvent company:1519

[t]he statutory novation of employment liabilities under regulation 5 from the insolvent company to the wholly-owned subsidiary does not take place on the transfer, but rather is delayed until immediately before either the wholly-owned subsidiary ceases to be a wholly-owned subsidiary … or the relevant undertaking is transferred by the wholly-owned subsidiary to another person.

There were two main reasons for such “hive-downs”. Firstly, the employees remain creditors of the insolvent undertaking and do not become creditors of the solvent undertaking. Thus, if the undertaking is not sold, their claims are not preferred because they are payable out of the assets of the insolvent company. They are still claims against the insolvent parent company. Secondly, this provision was originally intended to give insolvency practitioners more time to arrange the dismissal of some or all of the employees before the undertaking was ultimately sold to a third party. This resulted in the position where the liabilities to the dismissed employees remained liabilities of the insolvent company and did not pass on to the purchaser. However, this approach was severely curtailed by the decision of the House of Lords in Litster.1520 In Secretary of State for Employment v Spence,1521 the transferor company entered receivership. Under threat from the company’s major customer to withdraw its work unless a transfer was agreed to, it started to negotiate a business transfer. The deadline imposed by the customer expired and the receivers decided to dismiss the employees of

1519 Pollard 1996 ILJ 197. 1520 Litster v Forth Dry Dock & Engineering Co Ltd (in receivership) 1990 1 AC 546 (HL). This

decision results in the position that employees dismissed unfairly before the transfer due to the transfer alone, still have their employment transferred automatically to the purchaser. See also chapter 12 supra .

1521 1987 QB 179 (CA).


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the transferor company. However, the negotiations for the sale were successful and the business was sold later that very day. The transferee took on all the employees and it was held that there had been no collusion between the receivers and the transferee. The Court of Appeal held that the reason for the dismissals by the receivers was the fact that there was no prospect of any work for the undertaking until a contract could be negotiated with the company’s major customer. The dismissals were thus for a reason unconnected to the transfer.1522 In appropriate circumstances the insolvent company might, of course, be able to prove that any pre-transfer dismissals were for operational reasons as allowed in terms of regulation 8(2). This could especially be the case where the insolvent company is doing less business than before. However, it is very doubtful whether a pre-transfer dismissal made at the request of a prospective purchaser would be for an economic reason and hence within regulation 8(2).1523 The decision in Litster is clear that if the dismissal is because of the transfer, employees so dismissed will still be transferred to the transferee in terms of a purposive interpretation of the TUPE regulations.1524 13.2.4.2 Germany Contrary to the position in South Africa, employment contracts are not automatically terminated in German law with the insolvency or sequestration of the employer. The insolvency of the employer has no effect on the continued existence of the contracts of employment.1525 However, the curator as well as the employees can terminate the contract by giving the prescribed notice.1526 1527 An employee has a claim for Insolvenzgeld for the wages that are in arrears for the first three months before insolvency. The claim for months four to six before the insolvency is a

1522 In this regard, refer to the following cases as well: Ring & Brymer Ltd v Cryer unreported

judgement of 28 January 1993, (EAT/670/92); Harrison Bowden Ltd v Bowden 1994 ICR 186 (IT); Longden and Paisley v Ferrari Ltd 1994 IRLR 157 (EAT); Ibex Trading Co Ltd v Walton 1994 IRLR 564 (EAT); Michael Peters Ltd v Farnfield 1995 IRLR 190 (EAT).

1523 The EAT allowed the defence in Anderson v Dalkeith Engineering Ltd 1994 IRLR 429 but it has not been accepted in other EAT decisions (see Wheeler v Patel and J Golding Group of Companies 1987 IRLR 211, Gateway Hotels Ltd v Stewart 1988 IRLR 287 and Ibex Trading v Walton 1994 IRLR 564). See chapter 12 supra.

1524 See the discussion of Litster in chapter 12, par 12.3. 1525 See Gottwald (ed) Insolvenzrechtshandbuch (1990) 95 RdNr 13 (902) 56 (914) as referred to in

to Schlemmer EC & Oelofse AN “Konflik tussen die Wet op Arbeidsverhoudinge en die Insolvensiewet” 1996 TSAR 559 566.

1526 Schlemmer & Oelofse ibid. 1527 A dismissal by the liquidator prior to the transfer can be valid if not connected to the

transfer but if for operational reasons.

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Masseforderung.1528 If the employee does not apply for Insolvenzgeld, the claim for arrear wages for the first six months before insolvency will also be a Masseforderung. The claim for wages that are in arrears for months seven to twelve before insolvency is a bevorrechte Konkursforderung. Any claim for wages prior to twelve months before insolvency is a concurrent claim.1529 Any claim for wages for services delivered after insolvency is part of the costs of insolvency, as is the case in South Africa.1530 Article 613a BGB is applicable to the transfer of insolvent undertakings by a liquidator.1531 However, article 613a is only partially applicable where a liquidator transfers the business, since the transferee is burdened with the contracts of employment, but is not liable for employees’ claims that arose before the date on which the proceedings commenced.1532 With regard to claims for occupational pensions, the transferee is only liable for that proportion of the pensions that relates to the period after the commencement of the proceedings.1533 The German Federal Labour Court came to this conclusion by adopting a purposive approach and by considering the different functions of article 613a. The three functions of article 613a, according to the Court, can be described as:1534 • securing employees’ jobs; • the preservation of continuity of works councils; and • the transfer of the vendor’s pre-existing liabilities arising from the employment

relationship. When considering these three functions in the context of insolvency, the Court held as follows:1535

1528 Masseschulden. See Hess H & Knörig K Das Arbeitsrecht bei Sanierung und Konkurs

(Luchterhand Frankfurt 1991) 208; Kilger J & Schmidt K Konkursordnung (CH Beck´sche Verlagsbuchhandlung 1993) 324, 325.

1529 Kilger Konkursordnung 325; Hess Das Arbeitsrecht bei Sanierung und Konkurs 206. 1530 Kilger Konkursordnung 324. It does thus not qualify as Insolvenzgeld (see Stander AL

“Die regposisie van werknemers by die likwidasie van hulle werkgewer of die sekwestrasie van hulle werkgewer se boedel” 2001 TSAR 442).

1531 See BAG AP Nr. 18, judgement of 17 January 1980. 1532 See Schumacher R “Business transfers and insolvency: case law of the German Federal

Labour Court” 1994 ILJ (United Kingdom) 101 102. 1533 See Halbach et al Labour Law in Germany 225-227, regarding the protection of pension

rights in case of insolvency of the employer. The authors state (227) that if a company or a part of a company is transferred “the new employer does not have to meet the claims of the old-age pensioners or of the other employees who resigned previously and who had a vested right to future pension payments”. Rather, the transferee must meet the pensions claims of those employees who are still employed when the company is transferred. Halbach et al ibid also state that special provisions apply if an undertaking is transferred by the official receiver or after judicial composition proceedings have been instituted. This is because the transferee does not become liable for the full pension, as the insolvency distribution rules apply.

1534 See Schumacher 1994 ILJ 102. 1535 Schumacher 1994 ILJ 103.


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• The protection and securing of employees’ jobs in insolvency proceedings are of particular importance. The Act on Protection against Dismissal could otherwise be circumvented too easily if the insolvency-related transfer automatically terminated the employment relationships, resulting in the transferee being free to elect who to re-engage or not. Article 613a must thus ensure the transfer of jobs in these circumstances as is the case in solvent undertakings as well.

• The Court could see no legal or economic reasons why the preservation of the continuity of works councils should not occur in insolvency-related transfers.

• Regarding the transfer of pre-existing liabilities of the transferor, the Court held that the application of this function to insolvency-related transfers would be incompatible with basic principles of insolvency law. The Court based this finding on the fact that the principle of equal treatment of creditors (par conditio creditorum ) would be undermined. The Court considered that employees did enjoy protection in these circumstances through laws providing for preferential claims in insolvency proceedings and for claims against guarantee institutions. Only claims arising after the date of the bankruptcy order (individual as well as corporate insolvencies) are thus transferred.1536

A balance is therefore struck in Germany between preserving employment, on the one hand, and the basic principles of insolvency law, on the other hand. Such an approach attempts to encourage the rescue or salvaging of insolvent undertakings. It should, however, be accepted that this approach will not prejudice employees unduly as their claims are very well protected by guarantee payments from the Federal Labour Agency out of a fund that is financed by employers.1537 However, in the event of composition proceedings, it is considered that the protection of the employee is weaker.1538 Nevertheless, it is argued that the purpose of the composition proceedings in Germany can only be achieved if the liability of the transferee for pre-existing liabilities is limited. 13.2.4.3 Evaluation

1536 The BAG has extended this limitation of the transfer principle in art 613a to transfers arising

out of composition proceedings. However, the restriction of the Acquired Rights Directive is not applicable to transfers that do not take place within formal insolvency proceedings. See authority referred to in Schumacher ibid.

1537 Art 141a Employment Promotion Act, Germany. The main beneficiaries of an approach where art 613a applied fully to insolvency-related transfers would thus be the guarantee institutions who could then reclaim payments made to the employees from the solvent transferee instead of the insolvent transferor.

1538 See Schumacher 1994 ILJ 103.

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One important result of the different positions under United Kingdom and German law pertains to liability for dismissals. Under German law, a dismissal because of a transfer is void1539 whereas, under English law, such a dismissal is effective but unfair.1540 Where dismissals are carried out by the insolvency practitioner after the the proceedings have commenced, the restrictive application of article 613a will therefore not lead to fundamentally different results, as the claims of employees arising after that date can be brought against the transferee. But, where the dismissals are carried out before that date, the liability of the vendor will not be transferred under the TUPE regulations if they were to be applied restrictively1541 and the employees will be left with claims against the insolvent employer.1542 In Germany, the employees’ dismissal would be invalid and their contracts will thus be transferred to the transferee. In Germany, bankruptcy proceedings are instituted and controlled by the Court. In the United Kingdom, an administrative receiver can, for example, be appointed out of Court. It should be remembered that the European Court of Justice held in Abels v The Administrative Board of the Bedrijfsvereniging voor de Metaal Industrie and de Electrotechnische Industrie1543 that the Acquired Rights Directive does not apply to insolvency proceedings instituted with a view to the liquidation of the assets of the transferor under the supervision of the competent judicial authority.1544 It is evident that the Directive will indeed apply in the case of a procedure of which the principal aim is to ensure that the undertaking achieves the stability that is necessary if the company is to have a future. In this regard, German composition proceedings may require the unrestricted application of article 613a. The United Kingdom has circumvented this problem by applying the TUPE regulations to all insolvency proceedings in full. It appears, prima facie, that employees enjoy more protection in the event of the insolvency of their employer in Germany than in the United Kingdom.1545 This could

1539 Art 613a(4) BGB. 1540 Reg 8 of the TUPE regulations. 1541 See Schumacher 1994 ILJ 107 who argues that nothing hinders the restrictive construction

of the Regulations as applied in Germany. 1542 Not all claims are guaranteed by s 106 or 122 EP(C)A 1978. However, see the purposive

approach adopted in Litster. 1543 1985 ECR 469 (ECJ). 1544 In D’Urso (see supra) the ECJ held that the principal criterion to be considered was the

purpose of the procedure. 1545 E.g. in Germany, wages in arrears for the last six months before the opening of the

proceedings are regarded as debts of the estate, which must be paid prior to other preferential debts (s 59(3)(a) of the Bankruptcy Code) and wages in arrears from the seventh to the twelfth months rank as first-class preferential claims to be paid prior to other preferential debts (s 61(1)(a)). In the United Kingdom, four months’ wages can be claimed (par 9 of schedule 6 to the Insolvency Act 1986). Guarantee payments in German law are made in respect of the last three months of the employment relationship prior to the opening of proceedings (art 141a Employment Promotion Act) whereas under English law, guarantee payments cover up to eights weeks’ pay (s 122(3) EP(C)A). In Germany, the claim for the


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possibly indicate a more favourable policy towards employees. However, it does not explain the restrictive application of transfer provisions in Germany. Conversely, the fact that the transfer principle applies without limitation to transfers in insolvent circumstances under English law, does not imply that stronger employee protection is available than in Germany, as is apparent from the prima facie weaker insolvency protection relating to protected claims that is, in general, available in terms of United Kingdom insolvency law.1546 This seems to substantiate the argument that the application and the scope of rights and obligations covered by transfer provisions must be considered by having regard to the position of employees as a whole. All the protection available to employees in insolvent companies as well as the lack of protection that may exist must therefore be considered. 13.3 The South African position 13.3.1 Winding up The Insolvency Act 24 of 1936 regulates the effect of the insolvency of an employer1547 on employment contracts in section 38.1548 This section provides that contracts of employment are automatically terminated by operation of law with the sequestration of the employer’s estate1549 or the liquidation of an employee’s employer.1550 However,

guarantee payment arises as soon as the bankruptcy proceedings are initiated by the Court, but under the EP(C)A the entitlement only arises when the employment relationship is terminated. In English and in German law, the initiation of proceedings does not normally terminate employment (see Schumacher 1994 ILJ 106); see pars 13.2.4.1 & 13.2.4.2 supra .

1546 See comparison ibid. 1547 The legal form that employers take is not irrelevant. An employer could, e.g., be a natural

person, a company, a partnership or a close corporation. See Liversage A “’n Ondersoek na die toepassing van artikel 38 van die Insolvensiewet 24 van 1936 (Deel 1)” 1995 SA Merc LJ 46 50-67.

1548 S 38 provides that “the sequestration of the estate of an employer shall terminate the contract of service between him and his employees, but any employee whose contract of service has been so terminated shall be entitled to claim compensation from the insolvent estate of his former employer for any loss which he may have suffered by reason of the termination of his contract of service prior to its expiration”.

1549 See R v Levy & others 1929 AD 312 and Standard Bank of SA Ltd v Lombard & Another 1977 SA 808 (W) regarding the status of a partnership. S 13 of the Insolvency Act provides that the partnership has a separate estate for purposes of the Act.

1550 See s 339 of the Companies Act 61 of 1973 and s 66(1) of the Act on Close Corporations 69 of 1984. S 38 applies only if the company or close corporation is not able to pay its debts. If a solvent company or close corporation is liquidated the employment contracts are not automatically terminated. The liquidator thus has to elect to continue or terminate the contracts. See Blackman M “The employee and the insolvent company” 1993 ILJ 543 545. A company is unable to pay its debts when it has insufficient assets to pay all its debts in full, i.e. when it is insolvent (Blackman refers to Taylor v K oekemoer 1982 1 SA 374 (T) and Koekemoer v Taylor 1981 1 SA 267 (W) and states that fluctuations in the value of assets during the winding-up may result in s 38 being applicable one day and inapplicable the next).

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an employee does have a claim for damages due to this breach of contract.1551 This is not a beneficial position for any creditor to be in, and it is especially the case for employees who generally have no say in the sequestration or liquidation of their employer.1552 Employees do not have rights to notification, consultation or disclosure of information under the current law of insolvency. It is, furthermore, very difficult for an employee to claim from a company in the process of being wound up. The Court may stay an action against the company,1553 and when such order has been made, all actions against the company are suspended until the appointment of the liquidator.1554 In addition, no attachment or execution may take place in order to give effect to a judgement obtained by the employee if the winding-up has already commenced.1555 The date of “the sequestration of the estate of the employer”1556 is the date of the sequestration order.1557 Except for those claims that are granted preferential status in terms of section 98A of the Insolvency Act,1558 all other claims of an employee arising prior to liquidation are concurrent claims.1559 It is a globally accepted practice to grant a preferential status to employees’ claims on winding-up. The Law Commission in South Africa has stated that preference is given to employees because they helped to create or preserve the estate. And, even though this may also be true for other creditors, employees have no choice but to render their services on a credit basis since

.1551 See Olivier Employment Claims 40, Jordaan B “Transfer, closure and insolvency of

undertakings” 1991 ILJ 935 938-939 and Clark v Denny 1884 EDC 300 302. See also Lombard S & Boraine A “Insolvency and employees: an overview of statutory provisions” 1999 De Jure 300 301. Regarding the nature and amount of damages, refer to Liversage A “’n Ondersoek na die toepassing van artikel 38 van die Insolvensiewet 24 van 1936 (Deel 2)” 1995 7 SA Merc LJ 144-151. The Industrial Court had found (in terms of s 43 of the LRA 28 of 1956) that reinstatement could be ordered even where the employer was in liquidation or where the employer had been sequestrated (SA Boilermakers, Iron & Steelworkers, Shipbuilders & Welders Society v SA Cutlery (Pty) Ltd 1988 9 ILJ 1106 (IC)).

1552 See Blackman 1993 ILJ 543. An employee could seek the compulsory winding-up of a company in certain circumstances (see Blackman 543 and s 344(f) read with s 345(1) of the Companies Act).

1553 S 358 of the Companies Act, on the application of the company, a creditor or a member. 1554 S 359(1)(a), Olivier Employee Claims 41. 1555 S 359(1)(b). 1556 S 38. 1557 See Blackman 1993 ILJ 546-547 regarding winding up by the Court (winding up is deemed to

have commenced when the application for the winding-up is lodged with the registrar, see s 348 of the Companies Act) (in the case of a close corporation the position is the same, see the Close Corporations Act ss 66 and 68 read with s 348 of the Companies Act).

1558 Directors of the insolvent company and members of the insolvent close corporation are excluded from the provisions of this section.

1559 See Jordaan 1991 ILJ 956. In terms of s 98A, which came into operation on 1 September 2000, the balance of the free residue of the insolvent employer’s estate must be applied in paying: salaries or wages in arrears that do not exceed three months up to a maximum of R12 000 per employee; accrued leave pay up to a maximum of R4 000 per employee; any payment due in respect of any other forms of paid absence for a period not exceeding three months prior to the date of sequestration up to a maximum of R4 000 per employee; and severance pay due to an employee in terms of law, agreement or contract up to a maximum of R12 000 per employee. Money owed by the insolvent employer to funds such as pension and medical aid funds can also be paid out of the free residue up to a maximum of R12 000 per employee.


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their salaries are their only source of livelihood and they commonly have little knowledge of the employer’s financial affairs.1560 Even so, the preference system has its own undeniable weaknesses and it cannot be said that employees are reasonably protected in the event of the insolvency of their employer on the basis of such system alone.1561 1562 It is also evident that where employees render services after the commencement of the winding-up, these claims cannot rank as preferent claims unless they are regarded as part of the costs of the winding-up. There are only a few very limited other protection measures for employees on the insolvency of their employer. These include the possibility that the liquidator can enforce all the company’s rights against its directors and officers where the company has suffered damage as a result of their negligence or reckless or fraudulent conduct.1563 However, the burden of proof in such cases is very onerous. It is clear that the position where an employee can claim against a guarantee institution is to be preferred to the present regulation of employees’ positions in South African insolvency law.1564 13.3.2 Trading in insolvent circumstances An insolvent company could also continue to trade and not be wound up.1565 Employees are faced with scores of threats in this event. The workers do not have access to the necessary information nor the skills to assess it, and they are also not in the position to diversify their risk as other creditors can do by trading with many

1560 See Blackman 1993 ILJ 548 and The South African Law Commission Report on the Review of

Preferential Claims in Insolvency (1984) par 3.9.2. 1561 For a discussion of the weaknesses of the preference system see Blackman 1993 ILJ 549-551.

One of the most notable weaknesses is that preferent claims are paid out of the free residue, which is what is left (if anything is left) when the secured creditors have been paid (s 94 Insolvency Act). There is no “super priority” of employees’ claims. Furthermore, the amounts and time periods of employees’ preferent claims are very limited. Olivier (Employee Claims 42), concurring with Blackman, states that the most important weakness is perhaps the emphasis that is placed on the liquidation/sequestration of the employer’s undertaking rather than the rehabilitation thereof.

1562 The ranking of preferences against the free residue is as follows: funeral and death-bed expenses (s 96); cost of sequestration (s 97); costs of execution (s 98); salaries or wages of former employees of the insolvent (s 98A); preference in regard to certain statutory obligations (e.g. an amount owed to the Compensation Fund, SARS, etc) (s 99); taxes on persons or the incomes or profits of persons (s 101); preference under a general bond (s 102); and then non-preferrent claims (s 103).

1563 Ss 424 & 340 Companies Act. 1564 See the discussion of Directive 80/987/EEC of 1980 supra . 1565 This was accepted as a legitimate practice in Ex parte Strydom: In re Central Plumbing

Works (Natal) (Pty) Ltd 1988 1 SA 616 (D). See also Ex parte De Villiers: In re Carbon Developments (Pty) Ltd 1993 1 SA 493 (A). See also Lombard & Boraine 1999 De Jure 306-307.

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companies.1566 There does exist a remote possibility of personal liability of those who manage the affairs of the company in insolvent circumstances. However, the claimant would have to indicate proof of fraudulent and reckless trading.1567 13.3.3 Rescue proceedings It seems implicit that it would be beneficial to all involved if an insolvent undertaking could be salvaged. Two types of rescue proceedings are available in terms of company law: judicial management and schemes of arrangement or compromise.1568 Judicial management usually involves the placement of a moratorium on the debts of the company.1569 The judicial manager, who is appointed in terms of a Court order, then continues the business under supervision of the Master.1570 This proceeding is rare and has not been very successful in South Africa.1571 Employees’ post-judicial management claims are protected but not their claims to debts that are in arrears.1572 The second type of rescue proceeding involves schemes of arrangement or compromise in terms of section 311 of the Companies Act. In terms of this procedure, the company enters into a compromise or arrangement with its creditors or members. Such scheme can be entered into at any time, not only when the company is being wound up or is placed under judicial management. However, seventy-five per cent of the creditors and/or members attending a meeting or meetings summoned by the Court must agree to it, and the Court must also sanction the scheme.1573 A scheme of this nature can result in two outcomes:

1566 See Blackman 1993 ILJ 558. 1567 S 424 Companies Act. 1568 S 197(1)(b) LRA applies to a transferor being wound up or sequestrated as well as one that

has entered into a scheme of arrangement or compromise to avoid winding-up or sequestration.

1569 S 428(2) Companies Act. 1570 Employees do not have a right to disclosure of information or to consultation. It is only as a

creditor of the company that an employee can apply for the same (judicial management) (see Olivier Employee Claims 45).

1571 See Olivier Employee Claims 44-45, Blackman 1993 ILJ 559-560. 1572 Funds becoming available to the judicial manager may only (in the last instance) be applied

for payment of claims of pre-judicial creditors. The costs of the judicial management and the claims of post-judicial management creditors enjoy preference (s 234(2)). Blackman (1993 ILJ 560) shows that wages due to employees who remain employees for the period of judicial management qualify as “… liabilities … in the conduct of the company’s business” (s 435(1)(a)). Olivier (Employee Claims 45) refers to CWIU v The Master 1997 ILJ 454 (LC) as authority.

1573 Employees do not have locus standi as such to bring an application for the sanctioning of the scheme. Neither do they have any rights to be informed or consulted unless they seek the same as creditors. As creditors (whether preferent or concurrent), they need sufficient votes in order to impact on a scheduled meeting in this regard. See Blackman 1993 ILJ 561 & Olivier Employee Claims 45.


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• The company may continue to carry on its business (with the same or with new shareholders); or

• it may be sold,1574 resulting either in the company carrying on as another business or in its winding-up.

In the first scenario, employees continue in employment undisturbed, unless dismissed by the undertaking for bona fide operational requirements.1575 In this event normal rules of the law regarding unfair dismissals will be applicable and the employees will, for example, be entitled to severance pay.1576 However, this position becomes far more complicated if the scheme has been entered into after a winding-up order has been granted.1577 The Court then usually makes an order staying or setting aside the winding-up.1578 (It is not settled law whether the effect of such an order is to revive automatically any employment contracts that were terminated in terms of section 38 of the Insolvency Act upon commencing the winding-up.1579) The second scenario involves the sale of the undertaking, which naturally affects employees employed in such undertaking. Where an agreement to transfer is a term of a scheme of arrangement or compromise, employees are not afforded rights to consultation or disclosure in terms of either company or insolvency law.1580 However,

1574 It should be remembered that s 197 of the LRA does not apply to the transfer of an

undertaking by means of a sale of shares. See chapter 5 supra . For the rest, it has been submitted that the concept of “transfer” should be given a wide and purposive interpretation.

1575 See s 188 LRA. 1576 S 41 BCEA. 1577 See Olivier Employee Claims 46 & Blackman 1993 ILJ 562-564. 1578 S 354(1) Companies Act. 1579 Blackman (1993 ILJ 562-564) argues in favour of the automatic revival of employment

contracts. This is an important question, since it will often be the case, in the event of a transfer of an insolvent transferor or a transferor being sequestrated, that the employment contracts may have been terminated in terms of s 38 of the Insolvency Act and that the insolvent undertaking is only sold thereafter. Blackman argues that when a winding-up order is discharged, the position (unless the Court otherwise orders) is as if there had been no such order. To hold otherwise would enable a company to use winding-up as a weapon (against, inter alia, the employees and/or their union) “in what, from the beginning, was intended to be a compromise or arrangement”. Blackman (563) states that s 311 itself does not empower the Court to discharge the winding-up order. This power to set aside a final winding-up order is found in s 354(1). In practice, if a compromise or an arrangement takes place after winding-up, the winding-up is put to an end by an order staying the winding-up indefinitely. Blackman (564) shows that an order staying a winding-up automatically reinvests the directors with their office and from this he deducts that, unless the Court makes an order to the contrary, all employment contracts terminated by the winding-up are automatically revived – just as if there had been no winding-up. The very real possibility that some employees may have found employment elsewhere is not a bar to such a finding as the Court can make an order staying or setting aside the proceedings “on such terms and conditions as the Court may deem fit” (s 354(1)). Nothing prevents the Court from making it a term of the discharge that employees whose contracts are revived may elect whether or not to remain in employment.

1580 See Lombard & Boraine 1999 De Jure 308-313.

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labour law does assist employees in this regard to a certain extent, especially where there is a workplace forum in the undertaking that is being transferred.1581 As far as the employees’ position in the undertaking is concerned, one has to distinguish between the event in which there is a share-capital transfer and the event of the sale of the undertaking as a going concern. In the first instance, labour law does not assist employees as it is deemed (rightly or wrongly) that the legal identity of the employer has not changed and that the employees are thus unaffected.1582 In the second instance, the Labour Relations Act of 1995 provides for the automatic transfer of employment contracts to the buyer. In the event of insolvency, a scheme of arrangement or a compromise, the provisions of section 197(1)(b) and 197(2)(b) apply.1583 Employees therefore enjoy a great deal more protection in this event than they would have done in terms of common law.1584 Yet, the employees are not afforded the same degree of protection that their counterparts employed by solvent undertakings enjoy. Firstly, only the contracts of employment transfer and not any prior rights and obligations that existed between the employees and the transferor.1585 These claims thus remain claimable against the insolvent estate of the old employer.1586 Secondly, the Labour Appeal Court has held that the parties in section 189(1) of the Labour Relations Act can contract out of the transfer of contracts in terms of section 197(2)(b).1587 As a consequence, continuity of employment is not an undeniable corollary of a relevant transfer having occurred in insolvent circumstances. In summary, it seems that employees in insolvent undertakings are currently very vulnerable and that their sui generis relationship with the undertaking is mostly not recognised by the law of insolvency. In the event of the transfer of the undertaking as a going concern, employees are afforded protection in terms of labour law.1588

1581 S 84 LRA. See also Kebeni v Cementile Products (Ciskei) (Pty) Ltd 1987 8 ILJ 442 (IC) &

NUMSA v Metkor Industries (Pty) Ltd 1990 11 ILJ 1116 (IC). 1582 See chapter 5 supra for criticism of such a formalistic approach. 1583 See chapter 7 supra . 1584 For an exposition of the common-law regulation of the transfer of an undertaking, see

chapter 4 supra . 1585 This regulation may have unintended results. For example, a restraint of trade that was

applicable between the transferor and an employee will not transfer in terms of s 197(2)(b). The struggling undertaking that is being transferred is therefore even more susceptible to ruin, as employees can resign after the transfer without any sanction and take up employment with competitors of the undertaking.

1586 In South Africa the “super priority” debate found in the United Kingdom (see supra ) is thus not applicable to the current statutory position. These claims against the old employer may be stayed and are only payable after secured claims have been satisfied (see supra).

1587 Foodgro, A Division of Leisurenet v Keil 1999 20 ILJ 2521 (LAC). See chapter 8 in this regard.

1588 S 197 & 84 of the LRA.


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However, this protection, although substantially more far-reaching than any protection that existed in terms of common law, is still of a limited nature.1589 Accordingly, it is submitted that the principled decision to limit the effect of section 197 in the event of the transfer of undertakings in insolvent circumstances must receive further attention. Given that it can be argued that the protection that employees enjoy in terms of insolvency law is unsatisfactory, it is doubtful whether it is socially justifiable that protection available in terms of labour law should also be limited. It is strongly advocated that until the framework of our insolvency law protection is adapted to ensure guaranteed payments, labour law could fulfil an important role in ensuring adequate protection of employees in insolvent undertakings that are transferred as going concerns. However, if a policy decision cannot be reached that section 197 should apply, unrestricted in effect, to both solvent and insolvent transfers, it is of paramount importance not to accept the current interpretation favoured by our Labour Court and Labour Appeal Court, namely that in section 197(2)(b) transfers, parties can contract out of the transfer of the contract of employment and thus also the continuity thereof. Even though a contrary agreement may be reached regarding the rights and obligations that transfer to the transferee, it is submitted that the contract of employment should automatically transfer, subject only to the power to object by an individual employee. It is also noticeable that at European Community level, the application of the Acquired Rights Directive is only non-compulsory in the event of a winding-up. In rescue proceedings, the Directive applies, as the procedure is not instituted with a view to liquidating the assets of the undertaking.1590 Even though a strong argument can be made out that transfer provisions should either apply to all transfers in insolvency circumstances or not at all, it is submitted that if, for example, section 197 was only applied restrictively in cases of winding-up or sequestration, this would add considerably to employment protection in other insolvency circumstances. The absence of the right of employees to disclosure of information and consultation regarding their employer’s pending insolvency/sequestration is untenable, as there seems to be no principled reason for this omission.1591 This failure is even more conspicuous

1589 E.g., rights and obligations prior to the transfer are not transferred and the transferee is

entitled to dismiss the transferred employees for operational reasons as long as the dismissal is in compliance with s 189 of the LRA. The interpretation of the LAC in Foodgro indicates that according to the Court’s interpretation, it is even possible to contract out of the transfer of the contract itself in a transfer in insolvent circumstances. This poor position of employees is further compounded by the fact that no system of guaranteed payments exists in South Africa at present.

1590 See par 13.2.3 supra . 1591 However, see par 13.3.4 & chapter 14 infra for a discussion of the proposed amendment of

this position.

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in view of the fundamental right to fair labour practices1592 as well as the enactment of the Promotion of Access to Information Act.1593 13.3.4 Interplay between labour and insolvency principles There appears to be an apparent conflict between section 197 of the Labour Relations Act and section 38 of the Insolvency Act. Section 38 states that employment contracts are terminated with the sequestration of the employer. Section 197(1)(b) and (2)(b), however, provide for the transfer of employment contracts (without interruption of continuity)1594 where the insolvent undertaking is transferred as a going concern. The legal dilemma is thus: if employees’ continuity of employment is unaffected, how does one reconcile this with the fact that contracts were in fact terminated (in terms of section 38)? On the basis of section 210 of the Labour Relations Act, which provides that the provisions of the latter Act enjoy preference in cases of conflict with other legislation (save an Act that expressly amends the Labour Relations Act or the Constitution), it has been argued that effect must be given to the Labour Relations Act. Once the undertaking is transferred as a going concern, the employment contracts must therefore also be transferred to the new employer. Our Courts have, however, not always favoured this interpretation.1595 Other uncertainties also seem implicit: What is the status of these “terminated” employment contracts between the date of termination (in terms of section 38) and the date of transfer? Is it only those employees who have not obtained alternative employment before the date of the transfer whose contracts are transferred in terms of section 197? Could an employee who had indeed found other employment, but, for example, this is only a temporary appointment, also demand to be transferred to the buyer? Do employees have any contractual claims during this period? If employees do have claims for wages, etc, does this form part of sequestration costs?

1592 S 23 Constitution of the Republic of South Africa 108 of 1996. 1593 2 of 2000. 1594 S 197(4). 1595 See Agricultural Plantation and Allied Workers Union v HL Hall and Sons (Group

Services) Ltd and others 1999 ILJ 399 (LC). In this case, the LC held that s 38 terminates the contract of employment and that “ the reach of the Labour Relations Act 1995 halts once insolvency enters the picture .” (403D-404A) This decision was followed by the recent award of Roelofsz v The PGA Club/The PGA Amateur Club 2001 22 ILJ 1442 (CCMA). In this case it was also alleged that, because only the assets of the company were sold, there was no transfer of an undertaking as a going concern. However, the company which, after the liquidation, purchased the assets of the old employer company, was held not to have been, at any stage, the new employer of the applicant due to the working of s 38. Olivier (Managing Employment Relations in South Africa 5-209) states, with reference to Hall, that “[t]his … would in the case of a transfer of an insolvent entity not do justice to the intention behind the drafting of section 197”.


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Other legalistic nuisances are also present that cannot simply be ignored by a blind reliance on section 210 and a purposive interpretation.1596 Several academics have therefore pleaded for statutory intervention and it appears that the new proposed section 38 and section 197A indeed consider this apparent conflict. The proposals put forward, however, do not indisputably remove the uncertainties that were indicated to exist.1597 As demonstrated earlier,1598 insolvency law produces a strong challenge to the acquired rights theory. This is because it is generally believed that a purchaser will be discouraged from acquiring and rescuing a company if the undertaking comes with the burden of employees’ contracts (and perhaps even prior rights and obligations). The arguments of Davies have, however, shown that the ultimate factor that will influence a liquidator to sell an undertaking piecemeal, rather than as a going concern, must always be the best interests of the creditors.1599 More often than not, selling the undertaking as a going concern (even with acquired rights of employees) should serve their best interests. In view of the fact that no statistical data exist to indicate that fewer undertakings are rescued because of transfer provisions, another theory has thus evolved. It has been submitted that the impact of the protection of acquired rights on the saving/rescuing of an undertaking is, perhaps, not the most important issue at stake in this debate involving both labour and insolvency law. The issue of priorities amongst creditors and “in particular, of the appropriate place for employees’ claims in the rank order” is rather the issue.1600 It would therefore be more honest to approach this debate from this direction, rather than that of the possible discouraging of rescues of undertakings (and resultant losses of employment): it is the effect of employee protection on priorities that rather seems to be the true basis of the insolvency law challenge. This may naturally be a valid challenge in itself. However, it is clear that preferential claims are not a foreign or rarely occurring phenomenon in insolvency law. From the viewpoint of employee protection, it is thus not unrealistic to investigate the possibility of further priority being bestowed on claims of employees due to their sui generis relationship with the undertaking and the real possibility of insufficient funds being available in the free residue to satisfy their already limited claims.

1596 For a critical discussion of the interplay between s 197 and s 38, refer to Schlemmer EC &

Oelofse AN “Konflik tussen die Wet op Arbeidsverhoudinge en die Insolvensiewet” 1996 TSAR 559.

1597 See par 13.3.5 & chapter 14 infra. 1598 See par 13.2.3 supra . 1599 See par 13.2.3 supra . 1600 Davies 1989 YEL 51.

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Another important aspect is that transfer provisions do not confer protection on employees where an insolvent undertaking is continued because of a sale of the shares in the undertaking, for example in terms of a scheme of arrangement. This does not constitute the transfer of an undertaking as a going concern and employee protection is therefore deemed unnecessary.1601 The absence of a guarantee fund in South Africa and its impact on employees is something that labour law cannot influence in any way, except for requiring the transfer of employment contracts in the event that an insolvent undertaking is transferred as a going concern, or by applying transfer provisions to these transfers without any restrictions. The absence of the rights to disclosure of information and consultation regarding an employer’s insolvency or imminent insolvency in both labour and insolvency law is very unfortunate. These rights are indispensable in the context of fair labour practices.1602 13.3.5 Evaluation of the future position of employees in South African

insolvency proceedings in circumstances of a transfer/potential transfer The proposed section 38 in the draft Insolvency Bill,1603 reads as follow:1604

Contract of employment suspended on insolvency of employer 38(1) The contracts of service of employees whose employer has

been sequestrated are suspended with effect from the date of the granting of a sequestration order.

(2) Without limiting subsection (1), during the period of suspension of a contract of service referred to in subsection (1)- (a) an employee whose contract is suspended is not

required to tender services in terms of the contract

1601 See again Ndima v Waverley Blankets Ltd 1999 BLLR 577 (LC). 1602 See par 13.3.5 infra for proposed amendments in this regard. 1603 Government Gazette No 21407 of 27 July 2000. 1604 S 98A of the Insolvency Act is amended (by the Insolvency Bill of 2000) by the substitution

for par (iv) of subsection (1) of the following paragraph: “(iv) any severance or retrenchment pay due to the employee in terms of any law, agreement, contract, [or] wage-regulating measure, or as a result of termination in terms of section 38”, thus according preferential status to severance pay due in terms of the amended s 38.


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and is not entitled to any remuneration in terms of the contract;

(b) no benefit in terms of the Basic Conditions of Employment Act, 1997, (Act No. 75 of 1997), accrues to an employee arising out of any contract of service that is suspended.

(3) For purposes of the Unemployment Insurance Act, 1966 (Act No. 30 of 1966), an employee whose contract of service is suspended is deemed to be unemployed from the date of such suspension and, subject to the provisions of that Act, is entitled to receive unemployment benefits in terms of section 35 of that Act.

(4) Nothing in this section shall be construed as precluding - (a) a trustee from engaging the services of any employee

whose contract of service has been suspended in terms of subsection (1);

(b) a trustee from concluding an agreement with an employee whose contract of service has been suspended in terms of subsection (1) to terminate that contract;

(c) an employee whose contract of service has been suspended from terminating that contract;

(d) an employee whose contract of service has been suspended or terminated in terms of this section from claiming compensation from the insolvent estate of his or her former employer for loss suffered by reason of the suspension or termination of a contract of service prior to its expiry.

(5) A trustee appointed in terms of this Act may terminate the contracts of service of employees of the insolvent employer.

(6) A trustee may not terminate a contract of service in terms of subsection (5) unless the trustee has consulted with - (a) any person who, immediately before the

sequestration, the insolvent employer was required to consult with in terms of a collective agreement as defined in section 213 of the Labour Relations Act, 1995 (Act No. 66 of 1995);

(b) if there was no such collective agreement, a workplace forum as defined in section 213 of the

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Labour Relations Act, 1995, that existed immediately prior to the sequestration;

(c) if there was no such workplace forum, any registered trade union having members whose contracts of service were suspended in terms of subsection (1) and who are likely to be affected by the proposed dismissal;

(d) if there is no such trade union, the employees whose contracts of service were suspended in terms of subsection (1) and who are likely to be affected by the proposed dismissal or their representatives nominated for that purpose.

(7) The purpose of the consultations referred to in subsection (6) is to seek to reach consensus on appropriate measures to save or rescue the whole or part of the business of the insolvent employer, whether by the sale of the whole or part of the business, a transfer as contemplated in section 197A of the Labour Relations Act, 1995, a scheme or compromise referred to in section 311 of the Companies Act, 1973 (Act No. 69 of 1973), or in any other manner.

(8) A trustee must consult with any party that has a right to be consulted with in terms of subsection (6) if - (a) that party submits written proposals to the trustee

concerning any matter contemplated in subsection (7);

(b) the trustee receives those proposals within 21 days of the appointment of a trustee in terms of section 55; and

(c) the trustee has not already initiated consultations in terms of subsection (6).

(9) A creditor of the insolvent employer may, with the consent of the trustee, participate in any consultation contemplated in this section.

(10) Unless otherwise agreed between a trustee and an employee, all contracts of service of employees of the insolvent employer suspended in terms of subsection (1) that have not already been terminated in terms of this section, subject to section 197A of the Labour Relations


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Act, 1995, terminate 21 days after the date of the appointment of a trustee in terms of section 55.

(11) An employee whose contract of service has been terminated in terms of this section is entitled to claim severance benefits from the estate of the insolvent employer in accordance with section 41 of the Basic Conditions of Employment Act, 1997 (Act No. 75 of 1997).

In summary, the reasons for the proposed amendments include the following: • A recognition that the current regulation in section 38 of the Insolvency Act 1936,

which entails that the sequestration/liquidation of an insolvent employer terminates all contracts of employment between that employer and the employer’s employees (resulting in the insolvency of an employer’s business), results in drastic consequences for employees. In addition, such employees are deprived of benefits such as severance pay in terms of section 41 of the Basic Conditions of Employment Act 75 of 1997. It is also recognised that despite the extreme consequences that insolvency holds for employees, neither employees nor their trade unions have any rights to be notified of legal proceedings brought to sequestrate/liquidate their employer.

• The Insolvency Amendment Bill, 2000, attempts to address these shortcomings by giving procedural rights to employees of insolvent employers, or their representatives such as trade unions, to be notified of the institution of legal proceedings to sequestrate an employer, and by regulating the substantive consequences of insolvency for employees in a more equitable manner.1605

• A series of amendments is made to sections 4, 9 and 11 of the Act. These changes create a right for employees (and their trade unions) of employers who are subject to voluntary or compulsory sequestration proceedings, to receive notice of the proceedings and to be served with any orders issued by the Court.

• Any person who voluntarily surrenders his or her estate for the benefit of creditors must serve a copy of the notice of surrender on any registered trade union that represents the employees of that employer and must also display a copy thereof at the employer's premises in a place to which employees will have access.

• Since a person instituting “compulsory” sequestration proceedings against a debtor may often not be aware of the trade unions concerned, an obligation is placed on the employer (the debtor) to furnish a copy of any petition for such sequestration within five days of receiving notice of the petition, to all registered trade unions that represent the employer’s employees and to display it to the employees as well.

1605 According to the Explanatory Memorandum to the Bill, par 1(3).

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Likewise, a copy of the rule nisi granting a provisional sequestration order must be served on any relevant trade union and employees. The combined effect of these provisions is to give employees and their trade unions advance notice of any sequestration proceedings (voluntary surrender or compulsory sequestration).1606

• The termination of a contract of employment in terms of section 38 does not constitute a dismissal for purposes of labour law. It is classified as a termination of a contract by operation of law.1607 Section 38 applies to both the insolvency of individual employers who trade in their personal name as well as to companies that are wound up because of insolvency. In contrast to the present section 38, section 37 of the Act provides that leases entered into by the employer continue in force for three months from the date of sequestration, unless the trustee terminates them earlier.

The proposed amendments can be summarised as follows: • It is proposed that the insolvency of an employer should only suspend obligations

between employers and employees in terms of their contracts of employment.1608 The effect of this would be that employees would not be required to tender their services in terms of their contracts and employers would not be obliged to remunerate them. Despite the fact that contracts of employees are suspended, employees will be deemed to be unemployed for purposes of the Unemployment Insurance Act, 1966, and will therefore be entitled to register for unemployment benefits as if they had been dismissed.1609 A trustee may also engage the services of certain of the employees of the insolvent employer in order to continue running a business.

• The trustee is given the power to terminate the contracts of service. The trustee may, however, not exercise this power unless the trustee has entered into consultations regarding measures that could be adopted to save a whole or part of the business with the employees, their trade unions or any other representatives of the employees.1610 If the trustee does not elect to initiate these consultations, the

1606 See, infra , the proposed s 197B of the Labour Relations Amendment Bill, 2001. 1607 See chapter 12, par 12.6 supra . 1608 It is submitted that an employee is of course free to give notice of resignation at any time

during this suspension, just as he/she would have had been able to do in any other circumstances.

1609 Benefits are not paid for the first week of unemployment; however, if the unemployment continues beyond that period, the benefit will also take into account the first week of unemp loyment (see Olivier et al Social Security Law 292). The reason for the unemployment, e.g. resignation, is generally irrelevant.

1610 It is submitted that the provisions of the LRA in ss 16, 189 and 89 regarding disclosure of information could be incorporated here. The provisions of s 84 regarding consultation with workplace forums could also be applied. This would result in a structured process of consultation. Arguments to the effect that such process is unduly time consuming could then be more readily disproved.


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trustee must enter into such consultations, if required to do so by the employees or their representatives. A creditor of the insolvent employer may also participate in these consultations with the consent of the trustee.

• The new proposed section 38(11) provides that, for purposes of severance benefits, these employees will be treated as employees who have been dismissed because of the employer’s operational requirements. The claim for severance benefits will be against the estate of the insolvent employer, which is regulated in terms of section 98A and which is also being amended to reflect this change.

It is clear that a conscious attempt was made to provide more equitably for employees in insolvent circumstances. However, the proposed amendment of section 38 of the Insolvency Act is unfortunately not without its flaws1611 and must be read together with the new proposed section 197A of the Labour Relations Act Amendment Bill, 2000, as well as the provisions of the Labour Relations Amendment Bill, 2001.1612 The problematic issues that remain include the following: • The proposed section 38 of the Insolvency Act, disturbingly, does not remove the

current conflict between section 197 of the Labour Relations Act and section 38 due to the short period (three weeks) for which contracts of employment are suspended before termination sets in. o It is doubtful whether the transfer of insolvent undertakings or parts thereof will

be implemented as quickly as this. The proposed section 38(10) provides that contracts of employment, subject to section 197A, terminate 21 days after the date of the appointment of a trustee. Section 197A provides for the automatic transfer of employment contracts in insolvent circumstances, but not for the transfer of any accompanying rights and obligations that existed prior to the transfer.1613 These entitlements will thus have to be claimed from the insolvent estate of the old employer.

o An agreement to the contrary regarding the transfer of the contracts is allowed under subsection 197(A)(2).1614

o The question that remains is what the position would be if the insolvent undertaking or part thereof is only transferred after this 21-day period. The current dilemma as to whether the contracts of employment terminated in terms of section 38, then “revive” and transfer to the buyer, thus remains with us.1615

1611 See chapter 14, par 14.2.3 infra. 1612 See chapter 14, par 14.2.3 infra. 1613 S 197A(1). 1614 See the criticism of the proposed parties in chapter 14 infra . It is also questionable whether

it should be possible, at all, to waive the protection contained in s 197. 1615 S 210 of the LRA provides that the LRA enjoys preference over any other Act, save the

Constitution or an Act that expressly overrides it. Refer to chapter 14 infra.

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o It thus seems as if the proposed amendment will only assist in those rare cases when the insolvent undertaking is transferred within 21 days of the appointment of a trustee. For the rest, legal uncertainty remains.

• Subsection 197(A)(2)(d) of the Labour Relations Amendment Bill, 2001, stipulates that despite the provisions of the Insolvency Act, 1936, if a transfer of a business takes place in the circumstances contemplated by section 197A(1), then, unless otherwise agreed, “the transfer does not interrupt the employees’ continuity of employment and their employment continues with the new employer as if with the old employer”. 1616

• It seems as if employees will, in future, have greater rights to disclosure and consultation, something which has been long overdue.1617

In the event that no transfer is foreseen, employees still have to be satisfied with the system of limited preferent claims rather than a system of guaranteed payments, although they now have a right to severance pay in addition to previous claims that ranked as preferent claims. The new proposed section 197A that deals with transfer of contracts of employment in circumstances of insolvency, as contained in the Labour Relations Amendment Bill, 2001, can be summarised as follows: • The section applies to the transfer of a business if the old employer is insolvent and

because a scheme of arrangement or compromise is being entered into to avoid winding up or sequestration for reasons of insolvency.1618

• Despite the provisions of the Insolvency Act, if this transfer takes place, then unless otherwise agreed in terms of section 197(6):

1616 The proposed s 197A(1)(d) of the LRA Amendment Bill, 2000 provided that “subject to any

suspension of their contracts of employment in terms of s 38 of the Insolvency Act, the transfer does not interrupt the employee’s continuity of employment and their employment continues with the new employer as if with the old employer”. This would have resulted in the same dilemma that exists with regard to the current s 38 and s197, namely, if employees’ continuity of employment is unaffected how does one reconcile it with the fact that contracts were terminated either at sequestration or insolvency or after 21 days but before a decision to transfer was taken? If s 197 has retrospective effect, it results in the position where the employees’ claims enjoy super preference as part of sequestration costs. They may also already have received payments in terms of ss 98A & 38 (see Schlemmer & Oelofse 1996 TSAR 559). However, it seems extremely unlikely that the latter (payment of claims) would ever occur before a decision to transfer is taken. The phrase “subject to” in the proposed s 197A(1)(d) was vague and it is thus to be welcomed that the Labour Relations Amendment Bill, 2001, does not make the continuity of employment contracts subject to the suspension thereof in terms of s 38. See also s 38(10) of the Insolvency Act & s 84 of the BCEA.

1617 However, see the comments regarding the conflict between the provisions of the proposed s 38 and s 197A in chapter 14 infra. See also the new proposed sections 197A & 197B contained in the Labour Relations Amendment Bill, 2001.

1618 S 197A(1).


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o the new employer is automatically substituted in the place of the old employer in regard to all contracts of employment that were in existence immediately before the old employer’s winding-up or sequestration;

o all the prior rights and obligations that existed at the time of the transfer remain enforceable between the old employer and each employee;

o anything done before the transfer by the old employer in respect of each employee will be considered to have been done by the old employer; and

o the transfer does not interrupt the employee’s continuity of employment.1619 • It is stipulated that sections 197(3), (4), (5) and (10) apply to a transfer in terms of

section 197A. These provisions include the following: o The new employer complies with this section if it employs transferred

employees on terms and conditions that are, on the whole, not less favourable to the employees than those on which they were employed by the old employer (unless the terms and conditions of employment of the transferred employees are determined by a collective agreement, in which case the collective agreement continues to apply) (section 197(3)).

o An employee can still be transferred to a pension, provident, retirement or similar fund other than the fund to which he/she belonged prior to the transfer, if the criteria in section 14(1)(c) of the Pension Funds Act 24 of 1956 are satisfied (section 197(4)).1620

o The collective agreements and arbitration awards (that bound the old employer in respect of the employees to be transferred immediately before the transfer and before the employer’s provisional winding-up or sequestration),1621 unless otherwise agreed,1622 bind the new employer. This includes any arbitration award (made in terms of the Labour Relations Act, the common law or any other law) and any collective agreement that is binding in terms of section 23 or section 32 of the Labour Relations Act (unless a commissioner acting in terms of section 62 decides otherwise in the latter case) (section 197(5)).

o The liability of any person to be prosecuted for, convicted of and sentenced for any offence is not transferred to the new employer (section 197(10)).

• A new right regarding disclosure of information is created: o In terms of a newly created duty, the old employer, when faced with financial

difficulties that could reasonably result in the winding-up or sequestration of the

1619 S 197A(2). 1620 See chapter 10 supra . 1621 S 197A(4). 1622 The parties to such an agreement are set out in s 197(6). They are: either the old employer,

or the new employer, or both employers acting jointly, on the one hand, and the appropriate person or body referred to in s 189(1), on the other.

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employer, must advise a consulting party contemplated by section 189(1) of such fact (section 197B(1)).

o An employer that applies to be wound up or sequestrated, whether in terms of the Insolvency Act or any other law, must, at the time of the application, supply any consulting party, as described in section 189(1), with a copy of such an application (section 197B)(2)(a)).

o Where an employer receives an application for its winding-up or sequestration, the employer must supply a copy of the application to any consulting party within two days of receipt, or if the proceedings are urgent, within 12 hours (section 197B(2)(b)).

o No further requirements are set regarding other information to be disclosed. o No duty to consult is mentioned in section 197B.

The principle of acquired rights is thus applied restrictively to the transfer of insolvent undertakings, as regulated by section 197A and section 197B. It is, however, at least, included even if only to a limited extent. Employees will be transferred and therefore security of employment is, in principle, promoted. It is, however, regrettable that the principle of the automatic transfer of employment contracts is subject to an agreement to the contrary. This is to be criticised, in particular, because of the proposed parties to such an agreement.1623 No “super priority” status is bestowed on the claims of employees, since rights and obligations at the time of the transfer remain valid only between the old employer and each employee. Continuity of employment is provided for, but it has been shown that the interplay between the new proposed section 38 and section 197A does not resolve the conflict that exists in this regard at present. It is now, expressly provided that the new employer is still bound by prior awards and collective agreements that were applicable between the old employer and employees.



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13.4 Concluding remarks In South Africa, transfer provisions apply to companies in insolvent circumstances. The principle of acquired rights is, however, applied restrictively. In these circumstances it is only the bare skeleton of the contract of employment that transfers (subject to the possibility of an agreement to the contrary) and none of the accompanying rights and obligations. Anything done before the transfer by the old employer in relation to an employee is considered to have been done by the old employer. Two issues were identified as relevant in considering the application of transfer provisions to the transfer of insolvent undertakings. Firstly, the question of whether it is justified to treat employees in insolvent companies differently from employees in solvent companies. Secondly, the question of whether the specific South African regulation of this issue is acceptable or not. At European Community level, it has become evident that it is generally accepted that the transfer principle may be excluded or limited in insolvency circumstances. The Acquired Rights Directive, article 5, allows Member States to elect whether or not to apply transfer provisions to these circumstances. This European Community position is, however, qualified by certain conditions. It has been shown that the exclusion of the transfer principle is only possible in the event of proceedings that have been opened in relation to a transferor with a view to the liquidation of the assets of the transferor that are under the supervision of a competent public authority. In all other proceedings (i.e. rescue proceedings), a Member State may apply transfer provisions to a limited extent, provided that such proceedings are under the supervision of a competent public authority. They can therefore provide that it is only the contract of employment that is transferred and none of the transferor’s debts that existed prior to the transfer. But for them to do this, the protection of employees in the event of the insolvency of their employer must be at least equivalent to that provided for in the Insolvency Directive 89/987/EEC of 1980. The Member States may also, or alternatively, provide that the transferor, on the one hand, and the employees, on the other hand, may agree to alterations to the terms and conditions of employees (due to the transfer), as far as current law or practice permits, in order to ensure the survival of the undertaking and, hence, to safeguard employment. Member States are expressly required to take appropriate measures with a view to preventing misuse of insolvency proceedings in such a way as to deprive employees of the rights provided for in the Directive.1624 It therefore seems, prima facie, that it should be possible to treat employees of insolvent undertakings and those of solvent undertakings differently in the event of the 1624 Art 5(4).

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transfer of such undertakings. This conclusion is, however, not unassailable where employees of insolvent employers enjoy little or insufficient protection in terms of insolvency law. At European Community level the possible exclusion of transfer provisions in insolvency circumstances, and the restriction thereof in other analogous proceedings, are found within the framework of Directive 80/987/EEC. This Directive provides for guarantee institutions to safeguard employees’ rights in the event of their employer’s insolvency. Social security entitlements are also guaranteed. Even so, the exclusion/restriction of the acquired rights theory has still been criticised by prominent lawyers on the grounds of principle.1625 The fact that the Directive, and the European Court of Justice have not outlawed the application of transfer provisions in these circumstances also indicates that their application could not, as such, be prejudicial to employees and that it is essentially a policy decision that is involved. In South Africa, section 197(1)(b) and (2)(b) regulate the transfer of insolvent undertakings. These provisions, as well as the new proposed section 197A, attempt to achieve a compromise between employee protection and the best interests of the creditors of the insolvent undertaking. Continued employment is thus guaranteed, unless otherwise agreed, but prior outstanding claims remain enforceable against the old insolvent employer. It has been indicated that employees cannot claim from a guarantee fund.1626 They rather have certain limited claims (in nature, amount and period) that enjoy preferential status against the free residue of the insolvent undertaking. Employees also do not enjoy any worthwhile rights to disclosure and consultation. If prior rights and obligations were to be transferred, so it is argued, a reduced price would be obtained for the undertaking and this would be to the detriment of the other creditors. It is sometimes even argued that this will also be to the detriment of the employees, as the sale/transfer may not take place, which would ruin any chance of continued employment. As Davies has convincingly shown, the latter argument seems to be untested and also improbable. The main challenge is thus the fact that fewer funds will be realised and that the secured and other classes of creditors will get less, whereas the employees’ claims will enjoy so-called “super priority”. It is submitted that both creditors and employees (as creditors, but also as wage-earners who are reliant on their employer) have valid cases. The complexity of the

1625 See the criticism of Davies in par 13.2.3 supra . 1626 The absence of a guarantee fund can most probably be attributed to the question of who

will be responsible for the financing of such a fund. Several options exist: the fund could be financed from public funds or it could be funded by employers or by both public revenue and employer contributions. Some might even argue that employees could also make some kind of contribution. It is submitted that it is financing, and not objections based on principle, that will determine the success or failure of a campaign for the establishment of such a fund.


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policy issues involved is clear when one considers the regulation of this issue in, for example, Germany and the United Kingdom. Both these countries have a guarantee fund and yet debates continue regarding the appropriateness of applying transfer provisions to the transfer of insolvent undertakings. In the United Kingdom, even while guaranteeing certain employment claims, it was still thought appropriate to apply the TUPE regulations without limitation to transfers in insolvent circumstances. Should this not serve as a strong indicator to South Africa that our regulation of this issue is probably not socially justifiable? The protection of employees in the event of the insolvency of their employer can thus be said to be quite weak in South Africa. Our courts have only recently begun to hold that a voluntary sequestration should be treated as a dismissal.1627 The preferential status and ranking of employees’ claims against an insolvent undertaking has been improved considerably by the introduction of section 98A of the Insolvency Act. However, the weaknesses of a preferent claim system still remain apparent. With the enactment of section 197, and the proposals contained in section 197A and 197B of the Labour Relations Amendment Bill, 2001, read together with the amended section 38 of the Insolvency Act, employees are in a much better position than they were in terms of common law. The question, however, still remains as to whether more could and should be done in this regard.

1627 See Hammond and others v L Suzman Distributors (Pty) Ltd 1999 ILJ 3010 (CCMA) &

National Union of Leatherworkers v H Barnard NO & another (LAC) Case no. DA14/2000 dated 29 June 2001, unreported.

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CHAPTER FOURTEEN

PROPOSED LEGISLATION

14.1 General During the course of the year 2000, the South African Government introduced a Labour Relations Amendment Bill encompassing proposed amendments to the Labour Relations Act 66 of 1995.1628 The amendments did not seem to indicate a shift in the government’s labour market policy. In fact, the ministerial mandate of the review process was to focus on correcting and clarifying sections of the Act that have had unintended consequences over the last five years.1629 In these amendments, a completely renovated section 197 was proposed.1630 This section was then substantially reworked and the Labour Relations Amendment Bill, 2001, contains these final amendments.1631 Although some of the problematic aspects of the existing section were addressed, several issues have been neglected and the proposed regulation of some issues appears quite peculiar. The fact that a whole new section 197 was proposed, indicates clearly that the legislator is aware of the vagueness and incompleteness of the current statutory provision. This chapter will give an exposition of the shortcomings of the proposed amendment of section 197 (and of section 38 of the Insolvency Act of 1936). Drawing from the discussions in the thesis thus far, comments will be made about these shortcomings. In conclusion, some substantive proposals will then be made as to the regulation of the transfer of employment contracts in South Africa. It is submitted that legislative amendment of South African company law is also required in order to ensure that directors of companies take cognisance of the interests of their employees.1632 It is in the areas of disclosure of information and consultation, in particular, that company law is conspicuously silent. This, however, calls for a separate and specialist study of relevant company statutes, something which has not been attempted in this thesis.

1628 Amendments were also proposed for the BCEA 75 of 1997 and the Insolvency Act 24 of

1936. 1629 See Le Roux PAK “Proposed changes to the LRA: a summary of the Labour Relations

Amendment Bill” 2000 10 Contemporary Labour Law 1. 1630 See Labour Relations Amendment Bill, 2000 in Government Gazette No 21407, 27 July 2000. 1631 This Bill has been published as the Labour Relations Amendment Bill, 2001 (No 77 of 2001).

It has already been approved by Cabinet at the time of writing. Reference is made to proposed sections, even though they are, technically, clauses of the Bill.

1632 See chapter 2 supra .


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14.2 Labour Relations Amendment Bills of 2000 and 2001 The first proposed section 197, proposed in section 47 of the Amendment Bill of 2000, read as follows:

Transfer of contract of employment 197(1) In this section –

(a) “business” includes the whole or a part of any business, trade or undertaking;

(b) “transfer” means the transfer of a business by one employer (“the old employer’) to another employer (“the new employer”) as a going concern.

(2) A transfer of a business is covered by this section, if – (a) an economic entity, consisting of an organised

grouping of resources, that has the object of performing an economic activity is transferred; and

(b) the economic entity retains its identity after the transfer.

(3) If a transfer of a business takes place then unless otherwise agreed in terms of subsection (7) – (a) the contracts of employment in existence immediately

before the transfer of employees employed by the old employer in the business that is transferred transfer automatically to the new employer;

(b) all the rights and obligations between the old employer and an employee at the time of the transfer continue in force as if they had been rights and obligations between the new employer and the employee;

(c) anything done before the transfer by or in relation to the old employer will be considered to have been done by or in relation to the new employer; and

(d) the transfer does not interrupt the employees’ continuity of employment and their employment continues with the new employer as if with the old employer.

(4) the new employer complies with subsection (3) as the case may be if it employs a transferred employee on terms and conditions of employment that are -


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(a) the same as those on which the employee was employed by the old employer;

(b) on the whole not less favourable to the employee than those on which they were employed by the old employer; or

(c) agreed to in terms of subsection (7). (5) To determine whether the terms and conditions of

employment on which an employee is employed by the new employer are the same or as favourable to an employee as those on which the employee was employed by the old employer, regard must be had to the employer’s contribution to any retirement, medical or similar fund, but not to any benefits that the employee is entitled to from that fund.

(6) Unless otherwise agreed in terms of subsection (7), the new employer is bound by - (a) any organisational right granted in terms of Chapter

III binding on the old employer immediately before the transfer in respect of any workplace that is transferred; and

(b) any collective agreement binding on the old employer in terms of section 23 immediately before the transfer in terms of which a registered trade union is recognised by the old employer as representing employees in a workplace that is transferred.

(7) An agreement contemplated in subsection (3), (4) or (6) must be concluded between - (a) either the old employer, or the new employer, or the

old and new employers acting jointly, on the one hand; and

(b) the appropriate person or body referred to in section 189(1), on the other.

(8) (a) An employer may not dismiss an employee on account of a transfer covered by this section.

(b) Paragraph (a) does not preclude - (i) the old employer from dismissing an employee in

accordance with the provisions of this Chapter for a reason based on the old employer or the new employer’s operational requirements; or

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(ii) the new employer from dismissing an employee in accordance with the provisions of this Chapter for a reason based on its operational requirements.

(9) The old and new employer are jointly and severally liable in respect of any claim concerning any term or condition of employment that arose prior to the transfer.

(10) The provisions of this section do not transfer or otherwise affect the liability of any person to be prosecuted for, convicted of, and sentenced for, any offence.

The Bill also proposed the insertion after section 197 of the following section: Transfer of contract of employment in terms of the Insolvency

Act

197A(1) Despite section 197(3), if a transfer contemplated by section 197(2) takes place in accordance with section 38 of the Insolvency Act, 1936 (Act No. 24 of 1936) then unless otherwise agreed in terms of subsection (2) – (a) the contracts of employees employed by the old

employer in the business that is transferred that were in existence immediately before the old employer’s provisional winding-up or sequestration transfer automatically to the new employer;

(b) all the rights and obligations between the old employer and each employee at the time of the transfer remain rights and obligations between the old employer and each employee;

(c) anything done before the transfer by the old employer in respect of each employee will be considered to have been done by the old employer;

(d) subject to any suspension of their contracts of employment in terms of section 38 of the Insolvency Act, the transfer does not interrupt the employee’s continuity of employment and their employment continues with the new employer as if with the old employer.


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(2) An agreement contemplated by subsection (1) means a scheme of arrangement or compromise referred to in section 311 of the Companies Act, 1973 (Act 69 of 1973) or other agreement contemplated by that section.

(3) Section 197(4), (5) (8) and (10) apply to a transfer in accordance with section 38 of the Insolvency Act, except that any reference to an agreement in those sections must be read as a reference to an agreement contemplated by subsection (2).

(4) Section 197(6) applies to a transfer in accordance with section 38 of the Insolvency Act in respect of an organisational right or collective agreement binding on the employer immediately before the employer’s winding-up or sequestration.

(5) Section 197(3) and (9) do not apply to a transfer in accordance with section 38 of the Insolvency Act.

The Labour Relations Amendment Bill of 2001, however, introduced yet another section 197 and 197A as well as a completely new section 197B. It is thus necessary to indicate the scope of these provisions, in contrast to that of the 2000 Bill set out above. Transfer of contract of employment

197(1) In this section and in section 197A - (a) “business” includes the whole or a part of any

business, trade, undertaking, or service; (b) “transfer” means the transfer of a business by one

employer (“the old employer”) to another employer (“the new employer”) as a going concern.

(2) If a transfer of a business takes place then unless otherwise agreed in terms of subsection (6) - (a) the new employer is automatically substituted in the

place of the old employer in respect of all contracts of employment in existence immediately before the date of transfer;

(b) all the rights and obligations between the old employer and an employee at the time of the transfer continue in force as if they had been rights and

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obligations between the new employer and the employee;

(c) anything done before the transfer by or in relation to the old employer, including the dismissal of an employee or the commission of an unfair labour practice or act of unfair discrimination, will be considered to have been done by or in relation to the new employer; and

(d) the transfer does not interrupt an employee's continuity of employment, and an employee’s employment continues with the new employer as if with the old employer.

(3) The new employer complies with subsection (2) if it employs transferred employees on terms and conditions that are on the whole not less favourable to the employees than those on which they were employed by the old employer, unless the terms and conditions of employment of the transferred employees are determined by a collective agreement, in which case the collective agreement continues to apply.

(4) Subsection (2) does not prevent an employee being transferred to a pension, provident, retirement or similar fund other than that the fund to which they belonged prior to the transfer if the criteria in section 14(1)(c) of the Pension Funds Act, Act 24 of 1956, are satisfied.

(5) (a) For the purposes of this subsection, the collective agreements and arbitration awards referred to are agreements and awards that bound the old employer in respect of the employees to be transferred immediately before the date of transfer.

(b) Unless otherwise agreed in terms of subsection (6), the new employer is bound by – (i) any arbitration award made in terms of this

Act, the common law or any other law; (ii) any collective agreement binding in terms of

section 23 of this Act; and (iii) any collective agreement binding in terms of

section 32 of this Act unless a commissioner acting in terms of section 62 decides otherwise.


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(6) An agreement contemplated in subsection (2) must be concluded between – (a) either the old employer, or the new employer, or the

old and new employers acting jointly, on the one hand; and

(b) the appropriate person or body referred to in section 189(1), on the other.

(7) The old employer must – (a) agree with the new employer to a valuation as at

the date of transfer of - (i) the leave pay accrued by the transferred

employees of the old employer; (ii) the severance pay that would have been paid

to the transferred employees of the old employer; and

(iii) any other payments that have accrued to the

transferred employees but not paid to employees of the old employer;

(b) conclude a written agreement that specifies - (i) which employer is liable for paying any

amount referred to in paragraph (a) and in the case of the apportionment of liability between them the terms of that apportionment; and

(ii) what provision has been made for any payment contemplated in paragraph (a) if any employee becomes entitled to receive a payment;

(c) must disclose the terms of the agreement contemplated in subparagraph (b) to each employee who after the transfer will become employed by the new employer; and

(d) take any other measure that may be reasonable in the circumstances to ensure that adequate provision is made for any obligation that may arise by the new employer in respect of paragraph (a).

(8) For a period of 12 months after the date of the transfer, the old employer is jointly and severally liable with the new

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employer to any employee who becomes entitled to receive a payment contemplated in subsection (7)(a) as a result of the employee’s dismissal for a reason related to the employer’s operational requirements or the employer’s liquidation or sequestration, unless the old employer is able to show that it has complied with the provisions of this section.

(9) The old and new employer are jointly and severally liable in respect of any claim concerning any term or condition of employment that arose prior to the transfer.

(10) The provisions of this section do not transfer or otherwise affect the liability of any person to be prosecuted for, convicted of, and sentenced for any offence.”


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Transfer of contract of employment in circumstances of insolvency

197A (1) This section applies to a transfer of a business- (a) if the old employer is insolvent; and (b) because a scheme of arrangement or compromise

is being entered into to avoid winding up or sequestration for reasons of insolvency.

(2) Despite the provisions of the Insolvency Act, 1936 (Act No 24 of 1936), if a transfer of a business takes place in the circumstances contemplated by subsection (1) then unless otherwise agreed in terms of section 197(6) – (a) the new employer is automatically substituted in the

place of the old employer in all contracts of employment in existence immediately before the old employer's winding-up or sequestration;


(c) anything done before the transfer by the old employer in respect of each employee will be considered to have been done by the old employer;

(d) the transfer does not interrupt the employee's continuity of employment and their employment continues with the new employer as if with the old employer.

(3) Section 197, (3), (4), (5), and (10) apply to a transfer in terms of this section and any reference to an agreement in those sections must be read as a reference to an agreement contemplated by subsection 197(6).

(4) Section 197(5) applies to a collective agreement or arbitration binding on the employer immediately before the employer’s provisional winding-up or sequestration.

(5) Section 197(7), (8) and (9) do not apply to a transfer in accordance with this section.”

Disclosure of information concerning insolvency

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197B(1) An employer that is facing financial difficulties that could reasonably result in the winding-up or sequestration of the employer must advise a consulting party contemplated by section 189 (1).

(2)(a) An employer that applies to be wound up or sequestrated whether in terms of the Insolvency Act or any other law, must at the time of making application, provide a consulting party contemplated by section 189(1) with a copy of the application.

(b) An employer that receives an application for its winding up or sequestration must supply a copy of the application to any consulting party contemplated by section 189(1) within two days of receipt, or if the proceedings are urgent, 12 hours.

These sections deal specifically with the transfer of employment contracts but some other sections in the Labour Relations Act 66 of 1995 and the Labour Relations Amendment Bills of 2000 and 2001 also have relevance to this topic. 14.2.1 General dismissal provisions Section 186 determines what exactly constitutes a “dismissal”. Section 186(e) currently provides for a constructive dismissal. The Amendment Bill, 2001, contains this type of dismissal in the proposed section 186(e). The Amendment Bill, 2001, introduces section 186(f),1633 which includes under the definition of “constructive dismissal”, that:

[a]n employee terminated a contract of employment with or without notice because the new employer after a transfer in terms of section 197 provided the employee with conditions of work that are substantially less favourable to the employee than those provided by the old employer.

The notion of “substantially less favourable conditions of work” as the basis for an employee’s constructive dismissal, is not suitable and it is suggested that the wording in section 186(f) should at least be amended to read “provided the employee with conditions of work that are as a whole substantially less favourable”.1634 Even

1633 The LRA Amendment Bill, 2000 did not contain such a provision. 1634 To coincide with the proposed wording of the new proposed s 197.


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this phrase still leaves one with an uncomfortable feeling: Why should there be a substantial downgrading of conditions of work before an employee can complain about this state of affairs? Section 186(f) (as drafted in the 2001 Bill) could, in principle, have the effect that, in the situation where an individual objects to a transfer as a result of the proposed parties in section 197(6) having reached an agreement to amend his/her conditions of work to his/her detriment, his/her contract could be deemed to be terminated by his/her employer. On closer inspection it appears, however, that the proposed section 186(f) does not cover the objection of an employee to transfer.1635 This confirms that the 2001 Bill does not grant the power to object to employees or regulate the consequences of the power to object.1636 Where an employee, after a transfer, shows that the new employer provides him/her with substantially less conditions of employment, the employee can elect to claim specific performance or to claim a constructive dismissal. Section 186 should also accommodate the suggested amendments to section 38 of the Insolvency Act of 1936 in that the termination of a contract of employment due to the sequestration or liquidation of the employer now constitutes a dismissal. This is a dismissal for operational requirements and employees are now entitled to severance pay when such termination is applicable. Section 186(g) should therefore be inserted to take this fact into account. This section could, for example, read that “the termination of a contract of employment in terms of section 38 of the Insolvency Act 24 of 1936” will now constitute a dismissal. This will serve as confirmation of this new dispensation. According to the Amendment Bill of 2001, a new section, namely section 187(1)(g), is to include a transfer-connected dismissal under automatically unfair dismissals.1637 Sections 186 and 187 (as proposed in the Amendment Bill, 2001) will therefore mean that the termination of the employment contract because of a transfer (as well as, it is submitted, the offering of “substantially less favourable conditions of work” by the new employer after a transfer) is considered to be an automatically unfair dismissal.1638

1635 It has been submitted on several occasions that the legislator might want to consider

treating an objection to transfer not as a dismissal but as an inherent power of an employee, resulting in continued employment with the transferor. Prima facie it seems that an objection to transfer is not meant to fall under a constructive dismissal, as s 186(f) only refers to the “new employer” and to termination by an employee “ after a transfer”.

1636 See chapter 7 supra . 1637 The LRA Amendment Bill, 2000 did not contain such a provision. 1638 It is not clear in the present Bill that a dismissal in terms of s 186(f) will indeed constitute an

automatically unfair dismissal. It is, however, clear that it should qualify, as the dismissal is

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However, in some jurisdictions, such termination of the employment contract is treated as ineffective. The employee is therefore entitled to continue/resume services with the old or new employer. It is submitted that the principle that reinstatement or re-employment are the primary remedies, as contained in section 193 of the Labour Relations Act, should be strictly adhered to in the event of a dismissal because of a transfer. This would result in a similar outcome as a dismissal that is considered void or ineffective. It is thus submitted that section 193 should make provision under a new subsection 4 that: “If a dismissal is an automatically unfair dismissal as envisaged in section 187(1)(g), the Labour Court must order the old or new employer to reinstate or re-employ the dismissed employee, unless subsection 193(2)(a) or (c) applies.” This will mean that the dismissal is of no effect and that it does not succeed in obstructing the transfer of employment contracts to the transferee.1639 It would be convenient if subsection 193(4) could provide that either the old employer or new employer must reinstate or re-employ the dismissed employees. The Labour Court could then consider which option would be most beneficial for the employee concerned (depending on whether the transfer of a solvent or insolvent undertaking is at issue).1640 It is submitted that in the event of a compensation order, joint and several liability could also apply for the transfer of solvent undertakings.1641 However, if transfers of insolvent undertakings are regulated differently than transfers of solvent undertakings,1642 a compensation order

connected to a transfer since the new conditions of work that form the basis of the constructive dismissal exist because of the transfer.

1639 See the discussion supra in chapter 12. S 193(2)(a) stipulates that the LC or an arbitrator must require the employer to reinstate or re-employ the employee, unless the employee does not wish to be reinstated or re-employed. S 193(2)(c) refers to the situation where it is not reasonably practicable for the employer to reinstate or re-employ the employee.

1640 Where the old employer is solvent, it seems that if the employee was to be reinstated by the transferor, he/she could claim the transfer of his/her contract due to the fact that it would have transferred to the transferee but for the automatically unfair dismissal. Where the old employer is insolvent, the employee might be reinstated by the transferee, even if subject to the qualification that previous rights and obligations remain valid between the employee and the transferor. Hence it may be argued that, in the event of a dismissal that resulted in the contract of employment not transferring to the transferee, the reinstatement or re-employment order should be given against the transferee. (Stated differently, if a contract would have transferred but for the unfair dismissal, the transferee, and not the transferor, should reinstate or re-employ the dismissed employee.)

1641 I.e. joint and several liability. In s 197(8) of the Labour Relations Amendment Bill, 2001, provision is expressly made for joint and several liability of the old employer and new employer. Such provision is for a period of 12 months after the date of the transfer and for a claim (see s 197(7)(a)) for payment of leave pay, severance pay and any other payments that have accrued but have not been paid to employees of the old employer, if these claims are as a result of the employee’s dismissal based on the operational requirements or the employer’s liquidation or sequestration. Section 197(8) stipulates that this is the position “unless the old employer is able to show that it has complied with the provisions of this section”. It is not clear what is meant with this qualification. It is assumed that the reference is actually to s 197(7). The proposed s 197(9) provides for joint and several liability with regard to claims that arose prior to the transfer.

1642 I.e. if s 197 is applied restrictively to such insolvency-related transfers.


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should be made enforceable against the old employer only (and not against the transferee who is only burdened with the transfer of bare contracts of employment and no accompanying rights and obligations). It has been argued supra1643 that it is necessary to redefine “operational requirements” to prevent a wide interpretation of this term from bringing transfer dismissals within the scope of no-fault dismissals, without there being any bona fide and appropriate operational grounds. Section 213 could include a second paragraph under the definition of “operational requirements” providing that “in the event of a dismissal in transfer circumstances, as described in section 197, the operational requirements must pertain to a need for a change in the composition of the workforce in the workplace”.1644 It should be made clear that the actions of the new employer are also covered by section 187. Thus, should a new employer terminate a contract due to a transfer, or should section 186(f) apply, this should also constitute an automatically unfair dismissal. The scope of section 187 should therefore cover all transfer dismissals, irrespective of whether the old employer or new employer effected such a dismissal and whether it was an express or constructive dismissal. The proposed subsection (6) of the new section 197 stipulates that an agreement to the contrary, contemplated in subsection (2), must be between the old employer or the new employer or both the old and new employer and the appropriate party listed in section 189(1) of the Act. Section 197(2) regulates the following aspects: • The automatic transfer of employment contracts; • the transfer of rights and obligations that existed between the old employer and each

employee; • the consideration of anything done by the old employer before the transfer, including

the dismissal of an employee or the commission of an unfair labour practice or an act of unfair discrimination, as having been done by the new employer;

• the preservation of continuity of employment with the transferee. These are the most important aspects of the employment relationship that are encompassed by the acquired rights theory. It seems very unfortunate, therefore, that the waiver of these rights is considered to be appropriate and even desirable. It is,

1643 See chapter 12. 1644 See the wording of the Acquired Rights Directive, art 613a and the TUPE regulations in this

regard. All of these provisions use the phrase “economic, technical or organisational reasons entailing changes in the workforce”(own emphasis) (art 4(1) of the Directive).

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furthermore, totally inexplicable why the legislator chose to persist with the envisaged parties in section 189(1) of the Act. This results in the situation where a workplace forum or registered union could agree to the transfer of employees on different terms than provided for in section 197(2), irrespective of that individual employee’s viewpoint in this regard. It also means that another party besides the affected employee could agree not to transfer his/her contract to the transferee. It is proposed that the hierarchy in section 189(1) is unsuitable for the waiver of rights and is more suitable for consultation issues (see discussion infra). It is submitted that only an employee concerned should be able to waive the protection of section 197. Any amendment to section 197, whether it is with regard to the automatic transfer of the contract or whether it is with regard to the rights and obligations that transfer, should thus be agreed to by the employees affected (or their specially nominated representatives) and the old/new employer or both. If this is not done and other parties agree to substantial alterations, an employee would most likely be entitled to claim the protection conferred in terms of the newly proposed section 186(f).1645 14.2.2 Transfer of employment contracts Even though the proposed section 197 is an improvement on the current section 197, there are still several issues that must be addressed. The decision to allow for the waiver of any of the rights granted in this section must certainly be questioned. Even though the Explanatory Memorandum to the Amendment Bill of 2000 referred to the fact that section 197 will make it easier for employers to transfer undertakings, since retrenchment packages and consultations can be avoided, it is submitted that the principal aim of this section is (and must be) to protect employees’ rights in the event of the transfer of an undertaking.1646 It is suggested that it is inappropriate that such protective legislation could be subject to the possibility of a waiver by employees or the parties in section 189(1) of the Act. (The possibility of a new employer unilaterally amending conditions of employment, as was contained in the 2000 Bill, has fortunately been dropped from the newly proposed section 197.) These and other problematic issues will now be considered. • Section 197(1) of the Amendment Bill

1645 See also chapters 7 & 8 supra regarding the individual’s right to make these choices. 1646 In this regard, the sentiments of the LAC in Foodgro, A Division of Leisurenet v Keil

(discussed, supra , in chapter 1) could be considered again. The goal of comparable supranational and international provisions is also clearly employee protection that is based on social policy.


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It is submitted that section 197(1)(a) could read as follows, in order to explain clearly what type of undertakings are indeed included and to ensure a wide and purposive interpretation of the notion of a “business”:

“Business” includes the whole or part of any business, trade or undertaking, whether public or private and whether engaged in profit-making activities or not.

It is submitted that s 197(1)(b) could read as follows, in order to indicate clearly the wide scope of section 197:

"Transfer" means the transfer of a business by one employer (the old employer) to another employer (the new employer) as a going concern in terms of, but not restricted to, a contract or an administrative or legislative act.

It is submitted that the legislator can prevent unnecessary litigation and uncertainty regarding the scope of these concepts by utilising these descriptions that have aided the European Court of Justice and other national courts of Member States of the European Community in defining these concepts. The proposed definitions are still wide enough to allow for flexibility and further development for purposes of unique South African conditions. • Section 197(2) of the Amendment Bill It is submitted that it is a pity that the proposed subsection (2) that was contained in the proposed section 197 of the 2000 Bill, was not retained in the 2001 Bill. That amendment, which gives more content to the notions of “undertaking or part of an undertaking” and “a going concern”, was drawn from the Acquired Rights Directive. It was thought that the long-established case law of the European Court of Justice could have been of significant assistance to the South African Labour Court and the Labour Appeal Court in deciding whether a transfer of a going concern has in fact occurred. However, it is clear that even in the jurisdictions covered under the Directive, where similar provisions have been in use for more than three decades, it is still challenging to reach a principled conclusion on this issue in every case. Many uncertainties remain, especially in the case of labour intensive contracts. It should be accepted that section

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197 does not per se exclude an outsourcing exercise from the scope of transfer provisions.1647 The aspects covered in the most recent section 197(2) have been described supra.1648 This subsection confirms that all aspects of the employment relationship are subject to the transfer principle. The phrase “all rights and obligations between the old employer and employee” is still utilised and has been interpreted to include employee protection in the wide sense of the word, covering not only contractual claims, but also statutory claims, delictual claims, etc.1649 Section 197(2)(c) now expressly includes liability for dismissals, unfair labour practices and unfair discrimination. This list is not a closed list and other claims could also transfer to a transferee. Section 197(2) is, as a whole, subject to a contrary agreement (concluded in terms of subsection (6)).1650 It has already been noted that it is questionable whether the waiver of any or all of these provisions should be possible. To allow this would impact negatively on the interests of the old employer, since this would open the door for potential buyers to shop around for a “better deal”. Furthermore, it would also be prejudicial to employees since undue influence could be exercised in order to obtain such an agreement to the detriment of the employees. The transfer of employment contracts should ensue automatically whenever an undertaking is transferred as a going concern. This is consistent with the nature and purpose of protective employment legislation. It is particularly regrettable that it is possible to waive continuity of employment, which is guaranteed separately in terms of section 197(4) at present. This regulation is furthermore in direct opposition to the ruling of the Labour Appeal Court in this regard.1651 In view of the fact that the parties in subsection (6) can waive the protection contained in section 197(2) (thus other parties than the affected employees themselves), it seems even more incredible that no power to object is recognised. It has been shown that, in terms of our constitutional framework, it is impossible to require an employee to work for an employer against his/her own free will.1652 This has also been the conclusion of several European Court of Justice decisions (as well as of the German Federal Labour Court). The principle of freedom of contract, the right to dignity and the right not to be subjected to forced labour mitigate against disregard for such an inherent right of every individual.1653 It is submitted that an employee must be able to object to his/her

1647 See chapter 6 supra . 1648 See par 14.2.1. 1649 See chapters 8-10 supra . 1650 See the comments supra , regarding the proposed parties to such a contrary agreement not

being appropriate. 1651 See the discussion of Foodgro, A Division of Leisurenet v Keil in chapter 7 supra . 1652 See chapter 7 supra . 1653 Refer to chapters 1 & 7 supra.


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contract being transferred in terms of section 197 and that such refusal should not be treated as either a resignation or as a dismissal. This would deny the employee any worthwhile protection whatsoever and would not recognise the fact that an employee has a justifiable interest in the person for whom he/she works. It has been submitted that, as a result of its express wording, section 186(f) does not apply in this situation. It does not seem, therefore, as if an objection is treated as either a resignation or as a constructive dismissal. The right to object and the consequences of such a right are thus not regulated at all. It is submitted that section 197(2) should continue to regulate this issue in another subsection, namely subsection 197(2)(e). This could read as follows: “in the event that a contract of employment is not transferred because of the employee’s objection to transfer to the transferee, the employee’s contract of employment shall be regarded as continuing with the transferor”. • Section 197(3) & (4) It is envisaged1654 that a transferee complies with subsection (2) if it employs the transferred employees on terms and conditions that are, on the whole, not less favourable to the employees. If the terms and conditions of employment of employees were stipulated in a collective agreement, that collective agreement continues to apply. An employer is not prevented from transferring an employee to a pension, provident, retirement or similar fund other than the fund to which he/she belonged prior to the transfer if such transfer is in compliance with section 14 of the Pension Funds Act 24 of 1956.1655 Once again, no provision is made under either section 197(3) or (4), for consultation or disclosure of information by the old or new employer. A new employer is thus, implicitly, supposed to determine on its own whether or not terms and conditions are, on the whole, not less favourable to the employee than those on which the employee was employed by the old employer. No dispute route and dispute procedure are provided for regarding a dispute as to whether or not the terms and conditions offered by the transferee are in fact less favourable to the employees on the whole. No indication is given of what factors should be taken into consideration to determine whether the conditions are, on the whole, less favourable than previously. It is submitted that “terms and conditions of employment” must be interpreted widely to

1654 Proposed s 197(3). 1655 Proposed s 197(4).

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encompass more than just, for example, the aspects mentioned in subsection 197(5) of the 2000 Bill (i.e. employer contributions to retirement, medical or similar funds). The proposed section 191(5)(a)(ii) stipulates that where an employer provided an employee with substantially less favourable conditions of work after a transfer in terms of section 197 or 197A (unless the employee alleges that the contract of employment was terminated for a reason contemplated by section 187) the dispute will be referred to conciliation and if unsuccessful to arbitration. This provision, however, does not assist employees as this provision envisages that an employee must have resigned in order for an arbitrator to evaluate the fairness of such constructive dismissal. It is submitted that there should be a dispute route that an employee can invoke before this final stage, of claiming an unfair dismissal, is reached. It appears that an arbitrator will only be able to commence arbitration immediately after certifying that the dispute remains unresolved if the parties in subsection (5)(a) do not object. The fact that a transferee may employ transferred employees on different terms and conditions than before the transfer, subject to the qualification that these should , on the whole, not be less favourable, will definitely lead to litigation.1656 In the absence of clearer guidelines, this will also result in the over-hasty use of section 186(f). If the reference were to “work practices” and not to “terms and conditions of employment”, the provision would have been justifiable.1657 It is submitted that the proposed section 197(4) is actually inconsequential, as the judgements of the Labour Court and Pension Funds Adjudicator have already acknowledged this to be the current position.1658 The section does, however, serves as confirmation of these judgements. The wording of the section implies that there is no obligation on an employer to transfer an employee from the employee’s present fund to another fund. It merely seems to be permissible for an employer to do so.1659 It is also not clear whether an employer can unilaterally transfer an employee to another fund. It is submitted that this issue is more complex. The rules of the relevant funds will, for example, also play a role. The employee should, naturally, also be consulted in this regard. Where a new employer does not have its own fund, which is possible since it is not compulsory to have such a fund in South Africa, it will be problematic for the old and

1656 See also the discussion under s 186(f). 1657 For the distinction between these concepts, refer to chapter 8, par 8.1 supra . 1658 Refer to chapter 10 supra . 1659 S 197(2), however, covers all rights and obligations that existed “between the old employer

and an employee”.


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new employers. This is because an employee would be able to complain that his/her terms of employment is substantially less favourable as a result of the absence of such fund.1660 • Section 197(5) Section 197(6) of the Amendment Bill of 2000 expressly included the transfer of certain collective rights, more specifically organisational rights1661 and recognition agreements.1662 The new Bill is not so clear on these issues. Section 197(5), as found in the 2001 Bill, stipulates that collective agreements and arbitration awards referred to in that section pertain to agreements and awards that “bound the old employer in respect of the employees to be transferred immediately before the date of transfer”. This is ambiguous as it could be understood to imply that rights or obligations contained in a collective agreement, which existed between the old employer and a union immediately before the date of transfer, that are not applicable between old employer and the transferred employees will not transfer to the new employer. Section 197(5)(b) stipulates that the new employer will be bound by: • any arbitration award made in terms of the Act, common law or any other law; • any collective agreement binding in terms of section 23; and • any collective agreement binding in terms of section 32 (unless a commissioner,

acting in terms of section 62, decides otherwise). The proposed section 197(5) is therefore unnecessary since section 197(2)(b) has already provided that all the rights and obligation in force between an old employer and each employee prior to the transfer continue in force after the transfer. The phrase “rights and obligations between old employer and each employee” is wide enough to cover these rights and obligations. What still remain outside the scope of section 197(2) (and section 197(5)) are rights and obligations that existed between the old employer and a union (or workplace forum) immediately before the transfer. Section 197(5) could also, however, be interpreted to include all rights and obligations in an agreement that was concluded with an old employer in respect of employees to be transferred, meaning a collective agreement that bound those employees and old employer.1663 It is submitted that the legislator’s intention should be formulated more clearly. 1660 Refer to chapter 10, pars 10.3 & 10.4. 1661 Proposed s 197(6)(a). 1662 Proposed s 197(6)(b). 1663 However, see s 23(1)(b) that states that a collective agreement only binds a party to an

agreement and the members of the other party to the agreement, in so far as the provisions are applicable between them. See also s 23(1)(c) that states that the members of a trade union and the employers who are members to a employers’ organisation that are party to the

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Section 197(5)(b) is also subject to a contrary agreement that may be concluded in terms of section 197(6). The proposed parties to such an agreement have previously been criticised. One could perhaps add to earlier remarks in this regard that the Amendment Bill of 2001 also amends section 189(1)(a), which states that an employer must consult certain parties, in the context of operational requirements.1664 It is clear that such proposed parties are appropriate in the context of consultation proceedings. It is submitted, however, that they are wholly inappropriate in the context of the waiving and/or alteration of employee protection provisions contained in section 197. • Section 197(6) An agreement to be concluded in relation to sections 197(2) and (5) must be concluded between:1665 • either the old employer, or the new employer, or the old and new employers acting

jointly, on the one hand; and • the appropriate person or body referred to in section 189(1), on the other. The new section 189(1)(a) stipulates that an employer must, when contemplating the dismissal of one or more employees for reasons based on the employer’s operational requirements, consult with the following:

189(1)(a) any person whom the employer is required to consult

in terms of a collective agreement; (b) if there is no collective agreement that requires

consultation – i. a workplace forum, if the employees likely to be

affected by the proposed dismissals are employed in a workplace in respect of which there is a workplace forum; and

ii. any registered trade union whose members are likely to be affected by the proposed dismissals;

(c) if there is no workplace forum in the workplace in which the employees likely to be affected by the proposed dismissals are employed, any registered

agreement are only bound where the collective agreements regulates: terms and conditions of employment or the conduct of the employers in relation to their employees or the conduct of the employees in relation to their employers.

1664 See the comments on the proposed s 197(6) infra. 1665 Proposed s 197(6).


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trade union whose members are likely to be affected by the proposed dismissals;

(d) if there is no such trade union, the employees likely to be affected by the proposed dismissals or their representatives nominated for that purpose.

The old or new employer, or both acting jointly, can consequently reach an agreement (relating to the automatic transfer of employment contracts, the rights and obligations being transferred, liability for acts prior to the transfer, the continuity of employment of transferred employees, as well as the transfer of rights contained in collective agreements or arbitration awards) with the party named in a collective agreement (this would generally be a registered union) or with a workplace forum and a registered union, if no such agreement exists. If no workplace forum exists, the agreement can be reached with a registered union whose members are affected by the transfer or, if no such union exists, with the employees or their nominated representatives. A workplace forum is not specifically accorded legal personality in terms of the Labour Relations Act and this is problematic where the workplace forum is a party to an agreement rather than being a party to consultation proceedings that do not involve a contractual agreement to waive/amend rights and obligations. The status of an agreement concluded with a workplace forum is also unclear. It seems that an employer will have to obtain the agreement of both the workplace forum and a union, where applicable, in terms of the new proposed section 189(1)(a). Due to the exclusionary hierarchy in this section, the individual employees will seldom be the other party to an agreement that is concluded in terms of section 197(6). This regulation deserves severe criticism. The general principle (as found at supranational and international level)1666 that no amendments due to the transfer should be allowed, is not only disregarded but the parties involved in these amendments will, as a rule, not even involve the individuals concerned. To make matters even worse, it is not only the amendment of transferring rights and obligations that is envisaged. The very principle regarding the transfer of employment contracts in the event of the transfer of an undertaking is indeed also envisaged. The regulation of the issue of waiver and amendments is thus criticised. It is, in addition, regarded as astonishing that allowance for contrary agreements, in terms of subsection 6, is made without granting any rights to information and consultation regarding an envisaged transfer to the parties involved (and to the employees or their nominated

1666 See chapter 8 supra .

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representatives).1667 The provisions in section 189 regarding disclosure of information for purposes of consultation in terms of section 189(1)(a) are not made applicable in these circumstances, either by section 197 or by section 189. It has been submitted that information should be made available regarding, inter alia: • the timing of the transfer; • the likely consequences for employees; • the reasons for the transfer; and • measures envisaged in relation to the employees.1668 Such information should be given in good time before the transfer and there should be a sanction for breaching the obligation to inform and consult.1669 It is again submitted that the parties in section 189(1)(a) are more appropriate as parties for consultation than for reaching contrary agreements under subsection (6). • Section 197(7) & (8) Effect is given to a new principle in the 2001 Amendment Bill’s regulation of an agreement between old and new employers regarding apportionment of liabilities as found in section 197(7). The old employer must agree with the new employer to a valuation (on the date of transfer) of accrued leave pay, severance pay that would have been paid by the old employer and any other payments that have accrued to the employees and that are still unpaid at such time.1670 The old employer must then conclude an agreement (presumably with the new employer) that specifies which employer is liable for paying any amount as listed above. In the case of the apportionment of liability between the old employer and new employer, the terms of that apportionment must be specified.1671 In addition, the provision that has been made for any payment contemplated in paragraph 197(7)(a), if any employee becomes entitled to receive a payment, must also be specified.1672 This agreement must be disclosed to each employee who will be transferred.1673 In this respect it thus appears that this agreement between the old and new employer is supposed to enjoy preference over the express terms of section 197(2)(b), which stipulates that (unless otherwise agreed) all the rights and obligations between the old employer and each employee (at the time of the transfer) continue in force as if they had 1667 See chapter 11 supra . 1668 See chapter 11, par 11.3.2 supra . 1669 See par 11.3.5 supra . 1670 Proposed s 197(7)(a). 1671 Proposed s 197(7)(b)(i). 1672 Proposed s 197(7)(b)(ii). 1673 Proposed s 197(7)(c).


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been rights and obligations between the new employer and each employee. The agreement to the contrary, to which section 197(2) is made subject, refers, however, to an agreement in terms of section 197(6). It is therefore unclear what the status of an agreement, concluded in terms of section 197(7), between the old and new employers is. It is submitted that, irrespective of such an agreement, the transferred employees will still be able to claim accrued leave pay, for example, from the new employer in terms of section 197(2). The new employer may then reclaim any payment made, contrary to an agreement with the old employer, from the old employer. Section 197(7) thus creates a right of redress for the new employer, subject to the terms of the agreement with the old employer. (Where the new employer is not bona fide this section could, in principle assist employees as they could claim from the transferor who may, or may not, have been in collusion with the transferee. However, if a right to object were recognised employees could object to the transfer of their contracts to a suspect transferee.) However, this is only one possible interpretation. Another interpretation could require of employees to act in accordance with the agreement reached in terms of section 197(7). It is, however, submitted that it is unclear on which basis they could be made bound by an agreement reached between the transferor and transferee. Provision is made that, for a period of 12 months after the transfer, the old employer is jointly and severally liable with the new employer for claims contemplated in section 197(7)(a) as a result of the employee’s dismissal because of the employer’s operational requirements or liquidation or sequestration.1674 Consequently, the old and new employer cannot exclude this joint and several liability. An old employer will not be able to circumvent liability in terms of section 197 by engaging in sham transactions that result in the retrenchment of employees (or the liquidation of the transferee’s new employees) shortly after such a transfer. It is again submitted that if a right to object were recognised, employees would be able to refuse to transfer, for example, to a financially struggling transferee. • Section 197(9) and (10) The proposed section 197(9) stipulates that the old and new employers are jointly and severally liable in respect of any claim that arose prior to the transfer. The inclusion of these sections is welcomed and will hopefully assist the Labour Court and the Commission for Conciliation, Mediation and Arbitration in resolving the issue of the party or parties against whom an unfair dismissal award, for example, should be given in transfer circumstances. Where claims arise due to the dismissal of transferred

1674 Proposed s 197(8).

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employees (thus dismissal after a relevant transfer) because of the operational requirements of the employer, the principle of joint and several liability is limited to 12 months after the transfer.1675 In this instance the claims arising as a result of the dismissal of the employees for the new employer’s operational requirements, after the transfer, is thus also made subject to the principle of joint and several liability. Criminal liability of an old employer is not transferred in terms of section 197 or 197A. 14.2.3 Transfers in insolvent circumstances1676 The Explanatory Memorandum to the Insolvency Amendment Bill, 2000, states that the Bill tries to address the drastic consequences of an employer’s insolvency on its employees by: • giving procedural rights to employees of insolvent employers, or their

representatives such as trade unions, to be notified of the institution of legal proceedings to sequestrate an employer; and

• regulating the substantive consequences of insolvency for employees in a more equitable manner.1677

The proposed regulation of transfers in insolvent circumstances has been covered earlier.1678 One can summarise the proposed dispensation as follows: In terms of the amendments to sections 4, 9 and 11 of the Insolvency Act, a right is created for employees of employers who are the subject of voluntary or compulsory sequestration proceedings to receive notice of the proceedings and to be served with any orders issued by the Court. Section 38, which currently provides that the sequestration of the estate of an employer terminates all contracts of employment between the employer and employees, is amended to provide for something other than a termination of contract by operation of law. The Amendment Bill proposes that the insolvency of an employer should only suspend obligations between employers and employees in terms of their contracts of employment.1679 The effect of this provision would be that employees are not required to tender their services in terms of their contracts of employment and employers are not be obliged to remunerate them.1680 Despite the fact that contracts of employees are only suspended, employees will be deemed to be unemployed for 1675 Ibid. 1676 See also chapter 13, in particular par 13.3.5 supra . For dismissals in insolvent circumstances,

see chapter 12, par 12.6 supra . 1677 See chapter 13 supra . 1678 Refer to chapter 13, par 13.3.5. 1679 Proposed s 38(1). 1680 Proposed s 38(2).


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purposes of the Unemployment Insurance Act of 1966, and will therefore be entitled to register for unemployment benefits as if they had been dismissed.1681 A trustee may reach agreement with an employee to terminate his/her services.1682 The employee whose contract has been suspended is not precluded from terminating that contract1683 and an employee whose contract has been thus suspended or terminated in terms of the section is not precluded from claiming compensation from the insolvent estate for loss suffered by reason of such suspension or termination of a contract prior to its expiry.1684 It is also proposed that the suspension of employees’ contracts does not preclude a trustee from engaging the services of any employee in order to continue running a business.1685 The trustee is given the power to terminate the contracts of service of the employees in terms of the proposed new section 38(5). This power may, however, not be exercised unless the trustee has entered into consultations regarding measures that could be adopted to save a whole or part of the business with the employees, their trade unions or any other representatives of the employees. It is also provided that a creditor of the insolvent employer may participate in these consultations, with the consent of the trustee.1686 The new proposed section 38(11) provides that, for purposes of severance benefits, employees whose services are terminated as a result of insolvency will be treated as employees who have been dismissed because of the employer’s operational requirements. The claim for severance benefits will be against the estate of the insolvent employer.1687 Section 197A provides for the automatic transfer of employment contracts in insolvent circumstances without any accompanying rights and obligations that existed prior to the transfer.1688 These entitlements will thus have to be claimed from the insolvent estate of the old employer. It is submitted that the parties that can reach an agreement to the contrary in terms of subsection 197(A)(2) are unacceptable. It is improper for outside parties to be able to veto the transfer of employment contracts. The comments made in this regard under section 197 also apply here. It is positive that section 197 still covers insolvent transfers. With the amended section 38 and sections 98A & 99 introduced by the Judicial Matters Second Amendment Act

1681 Proposed s 38(3). 1682 Proposed s 38(4)(b). 1683 Proposed s 38(4)(c). 1684 Proposed s 38(4)(d). 1685 Proposed s 38(4)(a). 1686 Proposed s 38(9). 1687 In terms of the new s 98A. 1688 S 197A(2).

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122 of 1998, much better provision is made for employees in insolvent circumstances. This is in line with international custom and practice. However, employees are still not protected in these circumstances to the extent that one would like to see. This is, in particular, due to the inherent weaknesses of a system of preferent claims and the absence of a guarantee fund in South Africa.1689 14.3 Summary of the shortcomings of the proposed legislation The following developments can be criticised due to principled flaws in their underlying philosophy: • The fact that the automatic transfer of employment contracts and continuity of

employment are made subject to an agreement to the contrary. • The fact that there is no express power to object and that the consequences of such

objection are not regulated. • The absence of guidelines as to the content of important concepts, such as “going

concern”, “business”, etc. • The fact that disclosure of information and the right to consultation are not

addressed at all in sections 197 or 197A. The disclosure that is required in relation to an application of sequestration/liquidation, although welcome, is very limited in nature. No provision is made for disclosure of information or consultation regarding a proposed transfer, its timing, effect or consequences.

• The allowance of the waiver of any or all the protection afforded in terms of these provisions, by the employees or even by other parties listed elsewhere in the Act, is inappropriate.

• The possibility of amendment of prior existing rights and duties by parties other than the affected employees.

• The unclear provision dealing with the transfer of collective rights and duties of employee representatives in the new workplace.

• The regulation of transfer-connected dismissals in the sense that the present defence of operational requirements, which is allowed by section 197, focuses on the needs of the employer and could thus be interpreted so widely as to enable transferors and transferees to escape the operation of section 197.

• It is not clear that reinstatement will be the primary remedy for a transfer-connected dismissal. It is also not clear that a dismissal will not prevent a transfer of contracts from occurring, even having regard to the phrase “contracts of employment in existence immediately before the transfer” in section 197(2)(a).

1689 See also chapter 13 supra .


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• The proposed section 38 of the Insolvency Act does not remove the current conflict between section 197 of the Labour Relations Act and section 38. This is because of the short period (three weeks) for which contracts of employment are suspended before termination sets in. It is doubtful whether transfers of insolvent undertakings, or parts thereof, will be effected this quickly. Section 38(10) nevertheless provides that contracts, subject to section 197A, terminate 21 days after the date of the appointment of a trustee.

14.4 A draft model of provisions for the transfer of employment contracts in

South Africa 14.4.1 Transfer of undertakings in solvent circumstances The following draft model is proposed in the event of the transfer of undertakings in solvent circumstances.

Transfer of contract of employment 197(1) In this section –

(a) “Business” includes the whole or part of any business, trade or undertaking whether public or private and whether engaged in profit-making activities or not.

(b) “Transfer” means the transfer of a business by one employer (the old employer) to another employer (the new employer) as a going concern in terms of, inter alia, a contract or an administrative or legislative act.

(2) The transfer of a business is covered by this section, if – (a) an economic entity, consisting of an organised

grouping of resources, with the object of performing an economic activity, whether this activity is central or ancillary, is transferred; and

(b) the economic entity retains its identity after the transfer.

(3) If the transfer of a business tak es place – (a)(i) the contracts of employment in existence

immediately before the transfer of employees employed by the old employer in the business that is

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transferred transfer automatically to the new employer;

(a)(ii) in the event that a contract of employment is not transferred because of the employee’s objection to transfer to the transferee, the employee’s contract of employment shall be regarded as continuing with the transferor;

(a)(iii) an employee must make his/her objection to transfer known to the transferor before the transfer takes place and the transferor must then inform the transferee;

(b) after a transfer, all the rights and obligations between the old employer and an employee at the time of the transfer continue in force as if they had been rights and obligations between the new employer and the employee;

(c) anything done before the transfer by or in relation to the old employer shall be considered to have been done by or in relation to the new employer; and

(d) the transfer does not interrupt employees’ continuity of employment and their employment continues with the new employer as if with the old employer.

(4) The new employer complies with subsection (3) as the case may be if it employs a transferred employee on terms and conditions of employment that are - (a) the same as those on which the employee was

employed by the old employer; or (b) agreed to in terms of subsection (7)(1); and (c) that are on the whole not less favourable to the

employee than those on which he/she was employed by the old employer.

(5)(1) To determine whether the terms and conditions of employment on which an employee is employed by the new employer are the same or as favourable to an employee as those on which the employee was employed by the old employer, regard must be had, inter alia, to:


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(a) the employer’s contribution to any retirement, medical or similar fund, but not to any benefits that the employee is entitled to from that fund;

(b) the employee’s job function; and (c) the employee’s remuneration.

(5)(2) In the event of a dispute regarding the compliance of the transferee with subsection 3, the dispute must be referred to the CCMA or a council for conciliation prior to the transfer or within a reasonable period after the transfer, and if still not conciliated, then to advisory arbitration. Nothing in this section prevents a party from referring a dispute regarding non-compliance to the Labour Court after the relevant steps in this section have been followed.

(6) Unless otherwise agreed in terms of subsection (7)(2), the new employer is bound by - (a) any organisational right granted in terms of Chapter

III and that is binding on the old employer immediately before the transfer in respect of any workplace that is transferred; and

(b) any collective agreement binding on the old employer in terms of section 23 or 32 immediately before the transfer.

(7)(1) An agreement contemplated in subsection (3) or (4) must be concluded between - (a) either the old employer, or the new employer, or the

old and new employers acting jointly, as applicable, on the one hand; and

(b) the affected individual or his/her specially elected nominee, on the other.

(7)(2) An agreement contemplated in subsection (6) must be concluded between - (a) either the old employer, or the new employer, or the

old and new employers acting jointly, as applicable, on the one hand; and

(b) the parties listed in section 189(1) of the Act, on the other.

(8)(a) An old or new employer may not dismiss an employee on account of a transfer covered by this section.

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(b) Paragraph (a) does not preclude the old or new employer from dismissing an employee prior to a transfer or after a transfer in accordance with the provisions of this Chapter for a reason based on that employer’s operational requirements.

(9)(1) The old and new employer are jointly and severally liable in respect of any claim concerning any term or condition of employment that arose prior to the transfer.

(9)(2) The transferor should notify the transferee of all the rights and obligations that will be transferred to the transferee under subsections (3), (6) and (9)(1), so far as those rights and obligations are or ought to have been known to the transferor at the time of the transfer. A failure by the transferor to notify the transferee will not affect the transfer of such right or obligation but may result in a right of redress for the transferee against the transferor.

(10)(1) The transferor and transferee shall be required to inform the representatives of their employees affected by the transfer or the employees themselves if no such representatives exist of the following: (a) the date or proposed date of the transfer; (b) the reasons for the transfer; (c) the legal, economic and social implications of the

transfer for the employees; and (d) any measures envisaged in relation to the employees,

or if no measures are envisaged, that fact. (10)(2) Such information must be given in good time and before

any final decision is taken regarding the possible transfer. (10)(3) Where the transferor or transferee envisages measures in

relation to the employees or if an agreement in relation to subsection (3) or (4) is envisaged, they shall consult the representatives of these employees, or the employees themselves if no such representatives exist, in good time on such measures or on such agreement, with a view to reaching an agreement. The transferor and transferee must consider any representations made by the employees and their representatives and should indicate in writing their reasons for not agreeing, if that should be the case.


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(10)(4) Subsection (3) does not in any way affect the provisions of section 197(3) & (4) and an employee must agree to any alteration to his/her terms and conditions of employment.

(10)(5) In the event of a dispute over disclosure of information or consultation, the dispute shall be referred to the CCMA or a council for conciliation, and, if conciliation is unsuccessful, to arbitration.

(10)(6) The obligations laid down in this subsection shall be complied with unless the transferor and/or transferee can show that there were special circumstances which rendered it not reasonably practicable for them to perform the duty and that they took all such steps towards its performance as were reasonably practicable in the circumstances.

(10)(7) Where an arbitrator finds that a complaint under this section is well founded, it shall make a declaration to that effect and may: (a) order the employer to pay appropriate compensation; (b) order the stay of transfer-proceedings until the

obligations of disclosure and consultation have been complied with; or

(c) order any transfer that has occurred in breach of these obligations invalid.

(10)(8) The obligations laid down in this section shall apply irrespective of whether the decision resulting in the transfer is taken by the employer or an undertaking controlling the employer. In considering alleged breaches of these obligations, the fact that such a breach occurred because the information was not provided by an undertaking controlling the employer shall not be accepted as an excuse.

(11) The provisions of this section do not transfer or otherwise affect the liability of any person to be prosecuted for, convicted of and sentenced for any offence.

14.4.2 Transfer of undertakings in insolvent circumstances With regard to transfers in insolvent circumstances, the following model could be used as a starting point:

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Transfer of contract of employment in terms of the Insolvency Act 197A(1) Despite section 197(3), if a transfer contemplated by

section 197(2) takes place in accordance with section 38 of the Insolvency Act 24 of 1936, then unless otherwise agreed in terms of subsection (2) – (a)(i) the contracts of employment in existence

immediately before the transfer of employees employed by the old employer in the business that is transferred before the old employer’s provisional winding-up or sequestration, transfer automatically to the new employer;

(a)(ii) in the event that a contract of employment is not transferred because of the employee’s objection to transfer to the transferee, the employee’s contract of employment shall be regarded as continuing with the transferor;

(a)(iii) an employee must make his/her objection to transfer known to the transferor before the transfer takes place and the transferor must then inform the transferee;


(c) anything done before the transfer by the old employer in respect of each employee shall be considered to have been done by the old employer;

(d) the transfer does not interrupt the employees’ continuity of employment and their employment continues with the new employer as if with the old employer.

(2) An agreement contemplated by subsection (1) means an agreement between:


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(a) either the old employer (in liquidation), or the new employer, or the old and new employers acting jointly, as applicable, on the one hand; and

(b) the affected individual or his/her specially elected nominee, on the other.

(3) Sections 197(4), (5) (8) and (10) apply to a transfer in accordance with section 38 of the Insolvency Act, except that any reference to an agreement in those sections must be read as a reference to an agreement contemplated by subsection (2).

(4) Sections 197(6) and 197(9)(2) apply to a transfer in accordance with section 38 of the Insolvency Act in respect of an organisational right or collective agreement binding on the employer immediately before the employer’s winding-up or sequestration.

(5) Section 197(11) applies to a transfer in accordance with section 38 of the Insolvency Act.

14.4.3 Other general provisions in the Labour Relations Act Sections in the Labour Relations Act of 1995 that deal with dismissal, automatically unfair dismissals and remedies for unfair dismissal must also be amended in order to accommodate the proposed amendment of section 197 of the Act. The proposed section 186 now also needs to reflect the possibility that a transferred employee can complain about non-compliance by the transferee with the proposed section 197(3). A resignation due to substantially less beneficial terms and conditions of employment will then constitute a constructive dismissal.1690 Furthermore, amendments to section 38 of the Insolvency Act must also be accommodated. These should read as follows:

186(f) [A]n employee terminated a contract of employment

with or without notice because the new employer, after a transfer in terms of section 197, provided the employee with conditions of work that are, as a whole,

1690 See also the proposed s 187(1)(g) in terms of which a dismissal due to a transfer by either an

old or new employer will be automatically unfair.

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substantially less favourable to the employee than those provided by the old employer;

186(g) [t]he termination of a contract of employment in terms

of section 38 of the Insolvency Act 24 of 1936. 191(5)(v) [t]hat a new employer, after a transfer in terms of

section 197 provided the employee with conditions of work that are substantially less favourable to the employee than those provided by the old employer, and an advisory award has been obtained after unsuccessful conciliation.

Transferors and transferees should not be able to prevent section 197 from applying by dismissing employees before a relevant transfer. The following amendment to section 193 is therefore proposed:

193(4) If a dismissal is an automatically unfair dismissal as

envisaged in section 187(1)(g), the Labour Court must order the old or new employer to reinstate or re-employ the dismissed employee, unless subsection 193(2)(a) or (c) applies.

It has been submitted supra, that it is necessary to redefine “operational requirements”. Section 213 could thus be amended to include a second paragraph under the definition of “operational requirements” providing that:

in the event of a dismissal connected to a transfer in terms of section 197, the operational requirements must pertain to a need for a change in the workforce in the workplace.


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14.5 Concluding remarks The current statutory provision that deals with the transfer of employment contracts in the event of the transfer of an undertaking or part thereof as a going concern has resulted in a great deal of uncertainty. The Labour Court and Labour Appeal Court have also not been able to reduce the uncertainty that exists regarding the scope and application of section 197. The regulation of the transfer of an undertaking in circumstances of insolvency is furthermore problematic because of the conflicting provisions found in section 38 of the Insolvency Act. In addition to these problems relating to interpretation, certain omissions in the current statutory provisions also need to be considered. These relate, in particular, to the absence of the right to information and to consultation, the transfer of collective rights and obligations, the right to object to transfer and the prohibition of the waiver of core rights in this regard. The Labour Relations Amendment Bill, 2000, as well as the Labour Relations Amendment Bill, 2001, put forward a whole new section 197. Furthermore, the transfer of undertakings in insolvent circumstances will, in future, be regulated separately, namely in section 197A. Limited rights to disclosure of information are, in addition, contained in section 197B. The proposed transfer provisions have weaknesses as well as strengths. The proposals that have been submitted to be flawed have been identified and summarised in this chapter.1691 These include: the fact that the automatic transfer of employment contracts and continuity of employment are subject to an agreement to the contrary; the absence of the power to object;1692 the elusiveness of the concepts of “transfer”, “going concern”, etc, the meaning of which are entirely left to our Courts;1693 the omission of the right to disclosure of information and the right to consultation regarding the transfer or imminent transfer of an undertaking;1694 the allowance of the waiver of any or all the protection afforded in terms of these provisions by the employees, or even by other parties listed elsewhere in the Act (including the possibility of the amendment of prior existing rights and duties by parties other than the affected employees);1695 the unclear regulation of collective rights and duties of employee representatives in the new workplace;1696 the regulation of transfer-connected dismissals in the sense that the present defence of operational requirements, which is

1691 See par 14.3 supra . 1692 See chapter 7 supra . 1693 Refer to chapters 5 & 6 supra. 1694 See chapter 11 supra . 1695 See chapter 8 supra . 1696 See chapter 9 supra .

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allowed by section 197, focuses on the needs of the employer and could thus be interpreted so widely as to enable transferors and transferees to escape the operation of section 197;1697 and the continued uncertainty regarding the interplay between section 197A and section 38 of the Insolvency Act (as amended by the Insolvency Amendment Bill of 2000).1698 On a more positive note, the automatic transfer of employment contracts is provided for (but derogation is, however, possible). It is made clear that such transfer cannot be prevented by reason of a potential transferee’s refusal alone. The inclusion of a dismissal as an automatically unfair dismissal in section 187 because of a transfer is welcomed. This adds significantly to employee protection in transfer situations. The classification of an employee’s resignation as a constructive dismissal, because the transferee offers less favourable conditions, is also welcome. This regulation, however, is not the most beneficial regulation that the legislator could have proposed. The employee does not seem to have a right to object and to remain with the transferor in these circumstances.1699 Rather, such employee has to claim an unfair dismissal.1700 The transferor is required to disclose existing obligations towards employees immediately prior to the transfer to the transferee, which will add significantly to the transparency of the whole transaction. The agreements to be reached regarding prior entitlements listed in section 197(7)(a), will hopefully contribute to a transferee’s right to redress, where applicable. The provision regarding joint and several liability cannot be faulted in principle. The right to disclosure of information, found in section 197B, concerning the insolvency or sequestration of employers is also welcomed. This right is, however, very limited in nature.1701 The fact that section 197A provides for the automatic transfer of employment contracts (in insolvency circumstances) without any accompanying rights and obligations has been questioned in view of the poor protection that employees enjoy in terms of insolvency law. This is the result of, in particular, the absence of a guarantee fund and the inherent weaknesses of a system of preferent claims.1702 An attempt was made to propose a model for the regulation of the transfer of undertakings, in solvent as well as insolvent circumstances. It is submitted that even though the draft model follows the current dissimilar treatment of solvent and insolvent

1697 See chapter 12 supra . 1698 See chapter 13 supra . 1699 See also chapter 7 supra . 1700 The alternative seems to require that the employee transfers to the transferee, without

prejudice of rights, and then institutes legal proceedings to require specific performance of rights and obligations, as they existed prior to the transfer.

1701 See also chapter 11 supra . 1702 See chapter 13 supra .


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undertakings, this is not really desirable. It may even be argued that such regulation is also not socially justifiable. The arguments for and against a restrictive application of transfer provisions in insolvent circumstances have been canvassed and evaluated earlier in this thesis.1703 Where such a distinction is made it is strongly advocated that such restrictive application of transfer provisions should only apply in the event of insolvency. Rescue proceedings should therefore (as is the case in the European Union) not result in such limited protection being available to employees in terms of labour law – at least not until hitherto unsubstantiated claims (regarding the danger that fewer undertakings will be rescued if transfer provisions apply without limitation)1704 are substantiated by acceptable data in this regard.

1703 Ibid. 1704 In this regard, refer to the challenge to this argument formulated by Davies in chapter 13, par

13.2.3.

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CHAPTER 15

REFLECTIONS AND CONCLUSIONS

15.1 General The employment relationship that arises from the locatio conductio operarum is a personal contract between employer and employee and is pre-empted by, and concluded on the basis of, an unequal relationship. The right of control and the authority exercised by an employer perpetuates this unequal relationship. Such unequal relationship and the inability of common law to cater for or to counter it, necessitated the enactment of protective labour legislation. In the sphere of the transfer of undertakings, statutory intervention has ensued, in particular at European Community level, in order to safeguard the job security and general status of employees in these circumstances. Provisions for the automatic transfer of employment contracts in the event of the transfer of an undertaking, trade or business as a going concern are aimed at safeguarding the position of employees in order to ensure that the mere change in the legal identity of the employer for whom they work does not per se result in their services either being terminated or being continued on lesser terms and conditions. These regulations were necessitated by the common-law position in which a transferee has no legal obligation to engage employees, or to do so on any prearranged terms and conditions, and to respect seniority, continuity of employment and so forth. However, although such regulation was originally intended to protect the employee (recognising the right of an employee to freely choose his/her employer), it resulted in a position where employees did not enjoy continuity of employment and where, as a whole, it worked to their disadvantage in the modern labour market. The Industrial Court and Labour Appeal Court under the Labour Relations Act of 1956 could only assist employees to a limited extent (that essentially entailed protection of a procedural nature). It has been argued in this thesis that constitutional principles require a wide and purposive interpretation of statutory provisions contained in all labour laws in order to give effect to the fundamental right to fair labour practices. It has also been proposed that economic and commercial efficiency cannot be pursued without taking into account socio-economic and other factors in South Africa (including the values of social justice, labour peace and the democratisation of the workplace). Even though the principle of freedom of contract is severely curtailed by transfer provisions, it has been submitted that even if one could argue that some limitation of one or more fundamental rights is


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involved (which is highly debatable), such limitation will be justifiable in view of the limitations clause contained in the Constitution. Our Labour Court and Labour Appeal Court have recognised that provisions of this kind have an important social component.1705 It has, therefore, been submitted that transfer provisions formally import a new social value into South African labour law, one that is on par with international trends in this regard and that needs to be acknowledged and saluted. Employees do not only have an interest in whom they work for, but also in continued employment in a constantly evolving and very competitive economy in the global marketplace. Although employees play an undeniably important role in the functioning and prosperity of all companies, company law does not have much regard for the interests of employees. Labour law may, for the most part, protect the interests of employees, but it has become clear that labour law will not always be able to do this sufficiently. In the event of the transfer of an undertaking by means of a majority share acquisition, for example, it is evident that labour law provisions will not apply at present. Even if labour law were to reach that far, important consequences arise if a purely labour law approach to these matters were to be endorsed. Firstly, labour law cannot really dictate management prerogatives within the company law sphere. Participation in decision-making is not best addressed through labour law. (Although the interests of the shareholders are often the main object of the company, it has been shown that the long-term best interests of the company as a whole require the consideration of other interests than just those of the present and future shareholders.) Secondly, labour law focuses on information and consultation, not on employee decision-making or the influence of employees on decisions, corporate policies or strategies. This leads to the position where one is obliged to conclude that, in essence, company law has not yet recognised the principle that labour is not a commodity. The social component of an employment relationship between company and employee is therefore largely neglected. Upon reflection, it seems implicit that where labour law and company law could take greater cognisance of the underlying principles and values involved in labour and business, this could be of great benefit for both companies and workers. Sound economic principles and employment protection must co-exist, as they are dependant on each other for enduring prosperity. Where companies accept their social responsibility to the community as a whole and to their employees, in particular, it is evident that employees and their representatives also need to act responsibly, in good faith and with the goal of furthering the interests of their employer. True democratisation 1705 See Foodgro, A Division of Leisurenet v Carol Keil.

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of the workplace should be pursued, and consultation may arguably be considered to entail a first step towards such goal. It has been submitted that an approach that favours consultation and disclosure should thus be seen as a first step towards an end objective, and not as the achievement of the object in itself.

In chapter four of this thesis the conclusion arrived at is that common law does not provide satisfactory protection of employees’ interests in the event of the transfer of an undertaking (or part of an undertaking) as a going concern. Statutory intervention is therefore indispensable. How these statutory measures should operate is a question for debate. Statutory intervention has been present in all Member States of the European Community since 1980, and even prior to that in some jurisdictions. Even though there is a Directive applicable at European Community level, this Directive is only binding on Member States as to the result to be achieved. The means adopted to achieve the result are left to the discretion of the individual Member States. The Acquired Rights Directive provides for the automatic transfer of employment contracts whenever there is a legal transfer or merger1706 of an undertaking, business or part of an undertaking or business.1707 Rights and obligations originating from the employment contract or employment relationship are transferred to the transferee,1708 with certain limitations regarding old age, invalidity and survivor’s benefits under supplementary schemes outside the statutory social security schemes in Member States.1709 Dismissal because of the transfer is prohibited, but operational requirement dismissals are not outlawed. If a contract or employment relationship is terminated because the transfer will result in a substantial change in working conditions to the detriment of the employee, the employer is regarded as responsible for the dismissal.1710 The status and function of employee representatives are protected where the transferred undertaking preserves its autonomy and extensive provision is made for information and consultation.1711 Employees’ interests in the event of the transfer of an undertaking should not be considered in isolation, as other measures dealing with the protection of employees’ interests in situations, such as the insolvency of their employer or collective redundancies, are also relevant.

1706 See chapter 5 supra . 1707 See chapter 6 supra . 1708 See chapters 7 & 8 supra . 1709 See chapters 8 & 10 supra . 1710 See chapter 12 supra . 1711 See chapters 9 & 11 supra .


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15.2 Guidelines in the European regulation of transfers of undertakings that appear to be of importance for South Africa

15.2.1 The automatic transfer of contracts of employment and the power to

object Provisions pertaining to the transfer of employment contracts and accompanying rights and obligations in the event of the transfer of an undertaking as a going concern result in the automatic transfer of such contracts. This has always been the position at European Community level. An interpretation in terms of which such transfer is dependant on the consent of the transferor and/or transferee is untenable, having regard to the purpose and nature of these provisions. As recognised by our Labour Appeal Court in Foodgro v Keil, the provisions of section 197 are primarily aimed at the protection of employees over and above the common-law regulation in this regard. The fundamental rights to fair labour practices, to freely exercise a trade, occupation or profession and the right against forced labour, strongly mitigate against the compulsory transfer of a personal contract such as an employment contract. Furthermore, an approach that disregards the employee’s consent to or refusal of the transfer of his/her contract of employment deviates from the common-law position more than is necessary. However, certain conditions could be set within which an employee must exercise his/her choice. For example, it could be required that this option be exercised before the transfer takes place and that the employee must make his/her choice known to the transferor in writing (who must then inform the transferee) (in the United Kingdom and Germany an employee can make his/her objection known to either the old or new employer). The consequences of an employee’s choice of objecting to the transfer of his/her contract to the transferee could be treated as follows: • a resignation (then the employee would not be entitled to claim severance benefits,

since there has been no dismissal); or • a dismissal (thus a constructive dismissal) if there was a good or reasonable reason

for the employee’s objection or even in the event of any objection, reasonable or otherwise; or

• the contract could continue unaffected with the transferor. The European Court of Justice has looked beyond the formal situation of employees before and after a transfer and has concentrated on the practical effects of the transfer. The Court has also not hesitated to apply article 4(2) of the Directive, despite the fact

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that there had been no formal change in the employments contracts concerned. The transferor could thus be deemed to have dismissed its employees, as article 4(2) provides for a constructive dismissal due to substantial alterations, to the detriment of the employee, in the employee’s terms of employment. It was submitted that the right to continue with the transferor is the preferable consequence of a refusal to transfer.1712 This is similar to the position that can be found in Germany. This decision is, by nature, to be made by the affected individual and not some other party listed in section 189(1) of the Act. If this suggested regulation does not meet approval and an objection is treated as a constructive dismissal, an objection would have to be evaluated to determine whether it was made on reasonable grounds, which implies a wider scope than just foreseen breach of contract by the transferee. This task of evaluating the reasonableness of an objection will result in much legal uncertainty. To treat an “unreasonable” objection to transfer as a resignation, as is the position in the United Kingdom, is altogether inapt. This result negates the inherent freedom that every worker has to choose his/her own employer. 15.2.2 The notion of a transfer The case law of the European Court of Justice indicates that “a legal transfer or merger” is considered to have occurred whenever there is a change in the natural or legal person who carries on the business in question, regardless of the type of transaction that caused the transfer. In South Africa, our Labour Court has also endorsed a wide and purposive interpretation of section 197 and, more specifically, of the notion of a transfer. The Court has accepted that the legislator envisaged more possibilities than a straightforward sale and that the important consideration is whether or not the undertaking is “taken over” by the new employer.1713 It is clear that an undertaking can be taken over even in the absence of an agreement between the transferor and transferee, and that the intention of the parties, although relevant, is not the ultimate consideration. The true nature of the transaction will be crucial. A transfer can therefore be effected by means of a sale, or some other kind of disposition, or by operation of law.1714 It does not matter whether the transfer is effected by a series of two or more transactions.1715 The Courts have stated that this enquiry depends ultimately on fact and degree. 1712 Refer to chapter 7supra . 1713 See chapter 6, par 6.3.4.2 regarding outsourcing. 1714 See the discussion in chapter 13, supra , regarding insolvency circumstances. 1715 See chapter 6, par 6.3.4.2 supra .


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It is submitted that there will be a relevant transfer if, following a legal transfer or merger, there is a change in the legal or natural person who is responsible for carrying on the business and who, by virtue of that fact, incurs the obligations of an employer vis-à-vis employees of the undertaking, regardless of whether or not ownership of the undertaking is transferred. 15.2.3 The transfer of a business, trade or undertaking as a going concern The notions of “business, trade or undertaking or part thereof” have a well-established meaning at European Community level, i.e., an economic unit or economic entity which refers to an organised whole consisting of persons and (tangible and/or intangible) assets by means of which an economic activity is carried on and having an objective of its own, albeit one that is ancillary to the objects of the undertaking; a whole which, moreover, can be part of an even larger corporate whole. No distinction per se is made between public and private undertakings, undertakings operating for gain or not, undertakings that operate as a whole and undertakings that are severable, etc. The approach that would seem to be the theoretically more sound one to implement, involves that a Court first has to decide whether a transfer occurred. Secondly, the Court has to consider whether what was transferred was a business, trade or undertaking or part thereof, and whether it was transferred as a going concern. If these enquiries are answered in the affirmative, the Court must then consider the legal consequences or effect of such a relevant transfer. Whenever an identifiable economic entity is transferred so that its identity is retained, transfer of employment contract provisions should apply. This, it has been proposed, is the substantive core of the notion of the “transfer of an undertaking as a going concern”. It has been suggested that the transfer of an economic entity retaining its identity is a helpful criterion in determining the transfer of an undertaking as a going concern. The transfer of ownership is not of crucial importance. For a relevant transfer to occur, a business, trade or undertaking or part thereof must be in actual operation before the transfer. Such a business, trade or undertaking or part thereof must continue to be in operation after the transfer, even though there might have been a short shut-down. The same or similar activities must be continued after the transfer. South African courts have

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adopted an approach similar to that followed by the European Court of Justice in Spijkers. The Labour Court has thus endorsed an approach, in Schutte, that examines substance and not form and that makes an overall assessment of all the facts pertaining to a case without treating any particular one as conclusive. This could be likened to the dominant impression test for determining whether a person is an employee or an independent contractor. The true nature of the agreement/transaction between the transferor and transferee must thus be determined. The intention of the parties is not the determining criterion.1716 Although the South African courts have not always expressly considered the factors laid down by the European Court of Justice in Spijkers in all their cases, their approaches have essentially involved the consideration of similar factors. It has been submitted that a purely casuistic approach must be avoided. The Courts must develop certain guidelines: for example, the factors that are considered relevant should be identified; they should be given some comparative weight; and a general test to be satisfied should be adopted, even if it would necessarily be a flexible one.1717 The adoption of a purposive approach should be visible at all times. Whenever an identifiable economic entity is transferred so that its identity is retained, the transfer of employment contract provisions should ensue. This should be the case even if it is only a part of a business, trade or undertaking that is transferred as a going concern. Outsourcing transactions should therefore, in principle, not be treated differently, as the general rules should also apply here.1718 15.2.4 Transfer of collective rights and obligations and the right to disclosure

of information and to consultation

South African regulations pertaining to the transfer of collective rights and obligations differ fundamentally from those of the European Union, United Kingdom and Germany as far as collective rights and obligations (other than those falling under section 23(3) of the Labour Relations Act) are concerned. It has been submitted that the omission of the transfer of collective rights and obligations is especially unclear, having regard to our constitutional framework and the primacy accorded to collective bargaining in both the Constitution and in the Labour Relations Act.1719 It is argued that both policy and practical considerations beg for the inclusion of these rights and obligations. Social policy indicates that it is clear that transfer provisions are 1716 Accepted in Schutte, Kgethe, Fourie, Hugo & Burman Katz. 1717 Refer to chapter 6, par 6.3.3. 1718 Refer to chapter 6, pars 6.2.3 & 6.3.4. 1719 Refer to chapter 9.


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intended to protect employees in the wide sense, meaning that it is not only the individual relationship between employer and employee (as regulated in the employment contract) that should be considered. In terms of the Acquired Rights Directive, collective rights and obligations pertaining to the individual relationship are therefore entrenched for a period of one year and provision is made for extensive rights of disclosure of information and consultation. Employee representatives also retain their status and function where the transferred undertaking preserves its autonomy. Such regulation contributes to achieving the goal of minimising the effect on transferred employees of a change in the person/institution responsible for carrying on an undertaking. At European Community level, extensive rights to disclosure of information and to consultation are in place whenever there is an imminent transfer. In South Africa, the Industrial Court required disclosure of information, consultation and dealings in good faith between a transferor and transferee as early as 1987, even in the absence of a statutory provision regulating the transfer of employment contracts. The present South African position regarding disclosure of information in the context of transfers of undertakings is out of date and unsatisfactory. This is in particular the case in view of the constitutional right to fair labour practices. A position that allows employees’ contracts of employment to be transferred without them being informed about this at an early stage, without giving them an opportunity to participate in this process, is unacceptable. Simple obligations of disclosure and consultation will not on its own result in the democratisation of the workplace, but could at least be said to contribute to the achievement of harmonisation in the workplace. It is thus submitted that the legislator must, as a matter of urgency, amend the current position to include expressly a duty to disclose and to consult with affected individuals and/or their nominated representatives. Not only should workplace forums be involved as is presently required, but other interested stakeholders should also benefit from disclosure and consultation. Workplace forums, unions and non-unionised employees should be approached in this regard - an inclusive approach is thus proposed. The result of non-compliance should be sufficiently severe to ensure compliance with these duties. Even though it has been shown that the content of a “duty to consult” has a relatively well-established meaning in South African labour law (expanded by the jurisprudence of the Labour Court and Labour Appeal Court), it was suggested that the “duty to

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disclose information” should stipulate the issues that a transferor and transferee must disclose to affected employees and their representatives.1720 15.2.5 Dismissals because of the transfer of an undertaking The transfer of an undertaking as a going concern has been identified as a scenario that requires that employees’ rights need to be especially safeguarded. Employees should therefore not be dismissed because of a transfer. Public policy requires that a dismissal under these circumstances should be treated as ineffective. At European Community level, such a dismissal is not allowed. However, dismissals for operational requirements, in the narrow sense, are still possible. It has been submitted that the legal effect of a pre-transfer dismissal as well as of a post-transfer dismissal should be sufficiently severe, such as causing the dismissal to be automatically unfair and ineffective. In doing so the goal of transfer provisions is acknowledged and the protective effect of transfer provisions is not made voluntary and dependant on the transferor and the transferee’s acceptance thereof. A pre-transfer dismissal should not prevent the transferral of the employment contract to the transferee. At European Community level, any alteration to a transferred employee’s working conditions that is substantial and to his/her detriment, is regarded as a constructive dismissal. Member States may, however, provide more beneficially for employees. Germany, for example, has implemented an approach in terms of which an employee can object to the transfer of his/her contract of employment and can then continue in employment with the transferor. If an employee elects to transfer, the employee will have to claim specific performance from the transferee. If the transferee fails to honour its obligations, a constructive dismissal will then be relevant. It has been indicated that a constructive dismissal (due to a substantial change in terms and conditions of employment because of the transfer, or due to the unilateral harmonisation of conditions with those of the transferee’s employees), will have to qualify as automatically unfair and carry the same consequences and remedies as an express dismissal by reason of a transfer.1721 To regulate otherwise would make it possible for a transferor or transferee to disguise the dismissals due to the transfer as something other than what they actually are. As indicated earlier, the position where an employee objects to the transfer, for example due to an insubstantial alteration in his/her working conditions or simply because of the change in identity of the employer, should preferably not be treated as a resignation (as is the case in the United Kingdom). In these circumstances and assuming

1720 See chapter 11, par 11.3.2. 1721 See chapter 12, par 12.5.1.


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that a constructive dismissal is not applicable, there should be a right to remain with the transferor. (It should also not be forgotten that at European Community level no amendments because of a transfer is allowed precisely for the purpose of employee protection.) The present definition of “operational requirements” as found in section 213 of the Labour Relations Act, which refers to “needs of the employer”, is clearly problematic in transfer circumstances. An employer could, for example, argue that it is an operational requirement to dismiss employees in order to get a more attractive offer for the undertaking. It is submitted that, even though a purposive interpretation of the Act should prevent such a rationalisation from being accepted, it would, for the sake of legal certainty, be better to expressly limit the definition of “operational requirements” in circumstances of transfers. In both pre-transfer and post-transfer dismissals, it is not only the appropriate remedy for a claim of unfair dismissal that is important but also the entity against whom such an order for relief can be made. Two scenarios must be catered for: firstly, dismissals due to a transfer and, secondly, other unfair dismissals. The primary remedy in transfer dismissals must always be reinstatement or re-employment as the statutory intervention contained in section 197 of the Labour Relations Act envisages the continued employment of employees, regardless of a change in the legal identity of their employer. This is also the case in the event of the transfer of an undertaking in insolvent circumstances. If an order is made for the payment of compensation difficulties can arise in the context of insolvency circumstances, as only contracts of employment transfer in these circumstances and not prior rights and obligations. It has been submitted that a transferee should also give effect to an order for reinstatement or re-employment in other cases of unfair dismissal (i.e. dismissals that were not connected to the transfer).1722 15.3. Particular aspects that need further consideration in the South African

context of the transfer of undertakings 15.3.1 The concept of “employee” In South Africa, an “employee” is defined narrowly in our legislation and the Courts have utilised the dominant impression test to determine the status of an individual in

1722 See chapter 12, par 12.5.2.

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cases of doubt.1723 It is suggested that the notion of an “employee” must be interpreted widely so as to achieve the object and purposes of the Labour Relations Act as defined in section 1 thereof. It has been shown that it is only those persons employed by the transferor at the time of the transfer that benefit from the protection of transfer provisions.1724 There is little certainty as to whether the concepts of “employee” and of “contract of employment” cater sufficiently for more modern forms of employment, the occurrence of which is rapidly escalating. These include non-standard employment or atypical employment, temporary employment services, dependant contractors and even the self-employed. Groups of companies and other complex employment relationships also result in problematic questions regarding the scope of application of transfer provisions. The Labour Relations Amendment Bill, 2001, in the proposed section 200A, creates a presumption as to who is an employee. This may assist individuals in claiming the protection contained in section 197 of the Labour Relations Act. However, this proposed section only creates a rebuttable presumption and does not effectively widen the present definition of “employee”. 15.3.2 Transfer by one employer to another employer The concept of a “transfer” has been shown to refer to a specific result, regardless of the type of transaction that leads to that result and regardless of whether or not ownership of the undertaking is transferred.1725 The result that is envisaged refers to a situation where there is a change in the legal or natural person who is responsible for carrying on the business and who, by virtue of that fact, incurs the obligations of an employer vis-à-vis employees of the undertaking. The notion that a transfer of an undertaking must take place from one employer to another employer could raise questions regarding whether both voluntary and involuntary transfers are included. Consideration needs to be given to this question, as employee protection cannot apply in the absence of a “transfer”. 15.3.3 Outsourcing Transfer provisions expressly include the transfer of a part of an undertaking, trade or business as a going concern. In most instances it will not be difficult to accept that a “transfer” had occurred in these instances. The more difficult questions will usually

1723 Refer to chapter 5, par 5.2 supra . 1724 Ibid. 1725 Refer to chapter 5, pars 5.3 & 5.7.


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pertain to whether or not a “part of a business, trade or undertaking” was transferred and whether or not it was transferred as a “going concern”. The notions of “part of a business, trade of undertaking” and of a “going concern” have been analysed and discussed in depth.1726 It was concluded that instances of outsourcing can and should, in principle, be accommodated within the general approach to these questions. It does not appear to be theoretically or socially justifiable to set additional requirements that have to be complied with in these circumstances. If the legislator does not want these kinds of transactions to be included under the protection contained in section 197, it should expressly exclude these transactions. The Courts cannot distort the general conditions contained in and tenor of section 197 to arrive at the same conclusion. Such exclusion will, however, be susceptible to attack. Employees involved in these outsourcing exercises would be correct to question the basis for such distinction. This is particularly so because these employees fall in the category of workers who are most often subjected to the transfer of their employers’ undertaking (albeit only a part of an undertaking) and are therefore most in need of protection. Outsourcing exercises are by and large found in the service industry. A major part of this industry’s workforce consists of lower-paid and unsophisticated employees. In the case of cleaning services, the majority of employees involved are women. This could result in questions being raised regarding indirect discrimination if outsourcing transactions were to be treated differently from other transfers. Where first-generation and second-generation outsourcing is treated dissimilarly, equality issues will arise as well. 15.3.4 Pensions, health provision, etc It has been submitted that since section 197 of the Labour Relations Act does not exclude occupational benefits, including those pertaining to old age, invalidity and survivors’ benefits, no undue limitation should be read into the section. The only limitation that does apply is that only rights and obligations applicable between employer and employee transfer to the transferee in terms of section 197(2)(a). In the event of the transfer of an undertaking in insolvent circumstances, in terms of section 197(2)(b), the employees will have to look to the old (often insolvent) employer for relief.1727

1726 See chapter 6 supra . 1727 See chapters 10 & 13 supra .

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Where the old employer granted a medical allowance, the current jurisprudence on unfair labour practices indicates that it will probably be considered as part of the remuneration of the employee, rather than a “benefit”, and the transferee will thus be bound to provide the same.1728 This is, of course, not the case in the event of a transfer in insolvent circumstances. Retirement and health provision are important components of employees’ benefit packages these days. A provision that specifically deals with these issues may, therefore, be desirable. 15.3.5 Joint and several liability Although the current section 197 does not provide for joint and several liability, the Labour Relations Amendment Bill, 2001, does. In terms of the proposal contained in the 2001 Bill, an old and new employer will be jointly and severally liable in respect of claims (concerning any term or condition of employment) that arose prior to the transfer. It is also envisaged that joint and several liability may apply where, for a period of 12 months after the date of the transfer, any employee becomes entitled to receive payments (relating to leave pay, severance pay and any other payments that have accrued to the transferred employees but have not been paid by the old employer) as a result of the employee’s dismissal for a reason related to the employer’s operational requirements or the employer’s liquidation or sequestration. This will be the position unless the old employer can show that it has complied with the provisions of the section. It is submitted that the principle of joint and several liability, while being suitable for claims that have materialised prior to the transfer, is not necessarily suitable for non-existing claims that may or may not arise in future. The rationale for this liability should thus be reconsidered. 15.3.6 Transfers in circumstances of insolvency Transfers in circumstances of insolvency need to be considered against the backdrop of the poor insolvency protection that is currently available to employees in South Africa.

1728 Even if such allowances are classified as “benefits”, they will still form part of the rights and

obligations that existed between the old employer and employees. They will therefore be subject to the transfer.


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Consideration needs to be given to the restrictive application, or otherwise, of transfer provisions in these circumstances. This essentially involves the consideration of social policy issues. If transfer provisions continue to apply restrictively in these circumstances, it is submitted that further consideration needs to be given to determining which insolvency proceedings should trigger this restrictive application. The very real possibility of the fraudulent use of these proceedings should also be addressed in some appropriate way (voluntary liquidation/sequestration is, for example, very vulnerable to fraudulent use). South African law currently allows for contrary agreements to be reached in both solvent and insolvent transfers. This can assist the potential rescue of an undertaking considerably. It is, however, doubtful whether it should be possible to waive the automatic transfer of contracts in these circumstances. The apparent conflict between insolvency law and labour law in this field should be laid to rest once and for all. This could be achieved, for example, by not placing a time limit on the suspension of employment contracts under section 38 of the Insolvency Act.1729

1729 Refer to chapter 13, par 13.3.4.

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15.3.7 Employee representation The most appropriate forum of employee representation in transfer situations is not always easily determinable. This is, however, an issue that must receive further attention. Recognition should be given to the fact that different scenarios may require different parties to be involved in proceedings. The relevant scenarios or stages in a relevant transfer include: the election, by an employee, whether to transfer or not; disclosure of information and consultation; negotiations regarding the transfer of prior rights and obligations; negotiations regarding transfer of collective rights and obligations; the status of representatives, etc. 15.3.8 Disclosure of information and consultation As already suggested, the absence of the right to disclosure of information and to consultation in transfer situations needs to be addressed as a matter of urgency. 15.3.9 Amendments and waivers At present, employees and a transferor/transferee are not forbidden from agreeing to the amendment of prior rights and obligations because of a transfer. This regulation places undue pressure on employees and old employers, since a potential transferee can “shop around for a better deal”. Even though it is accepted that some amendments should be allowed, in view of the principle of employee protection, it is submitted that consideration should be paid to whether or not these amendments may be to the detriment of the transferred employees. The possibility of waiving the protection contained in transfer provisions is a fundamental issue that deserves considerably more attention and debate. It has been advocated that both these issues (amendments and waivers) should be approached as issues that should be for the ultimate consideration of an individual employee.1730 The employee is thus the suitable party to any agreement in this regard.

1730 Refer to chapter 8 supra .


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15.3.10 Sanctions Insufficient attention is paid, at present, to the issues of enforcement and sanctions/remedies. Employees and their representatives should be able to prevent the transfer of an undertaking, or part of an undertaking, until all statutory requirements have been complied with. To this end, they should be able to obtain an order for specific performance, disclosure of information or another order as the case may be. The sanctions for non-compliance should also be further considered. Here, in addition, the different stages in a transfer exercise must not be forgotten. The sanction for a dismissal because of a transfer will be regulated as a result of the Labour Relations Amendment Bill, 2001, in future. However, it is not so clear what the sanction is, for example, for failure to transfer an employee’s contract. It is especially in the context of disclosure of information and consultation, which is not provided for at present, that an appropriate sanction for non-compliance is extremely important. 15.4 Concluding remarks The transfer of undertakings in modern times is not a rare occurrence. It cannot be denied that these transfers have a significant impact, not only on employees, but also on old and new employers. The short-term and long-term interests of these parties are often not the same and statutory intervention in this field has consequently been present at international level for a long time, and in South Africa since 11 November 1996. This thesis has accepted the primary goal of transfer provisions (essentially being that of employee protection) and has regarded this as indispensable for achieving the fulfillment of the fundamental right to fair labour practices. In order to ensure justice towards all parties, it is, however, necessary that these statutory measures should persistently be scrutinised and debated. The value of well-known comparative experiences in foreign jurisdictions should never be underestimated. It should, however, not be over-estimated either. Regulating the transfer of an undertaking as a going concern in a way which is fitting for South Africa, at present, should be explored. It is submitted that we have not yet arrived at a point where we can say that the current regulation of transfers in South Africa is the most appropriate, that it results in the minimum amount of legal uncertainty and that it fulfils

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the primary objects of our Labour Relations Act, which, among others, strives to give effect to the right to fair labour practices.


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BertVerfG)

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473

ANNEXURE A Article 613a BGB (The German Civil Code Translated with an Introduction by Simon L. Goren (Fred B Rothman & Co Littleton, Colorado 1994) 114-115.) Rights and duties when business is transferred

(1) If a business or part of a business is transferred by contract to another owner, the latter enters into the rights and obligations resulting from the employment contracts existing at the time of the transfer. If these rights and obligations are governed by the terms of a collective agreement or by an agreement within the firm, they become the basis of the employment relations between the new owner and the employees and they may not be modified to the detriment of the employees within a year from the date of transfer. Sent. 2 does not apply if the rights and obligations under the new owner are settled by the terms of a new collective agreement or another agreement within the firm. The rights and obligations may be modified before the completion of the period indicated in sent. 2, if collective agreement or agreement within the firm is not in force any longer, or in case of the absence of a mutual binding agreement the new owner and employees agree to come within the scope of application of another existing agreement.

(2) The former employer and the new owner are liable as joint debtors for the obligations arising out of (1) insofar as such were in existence before the time of the transfer and fell due before the lapse of one year from that time. If such obligations are due after such time, the former employer is liable only for the fraction of the total period of assessment which reflects the period which had elapsed by the time of the transfer.

(3) Subsection (2) does not apply if a juristic person ceases to exist through merger or transformation of legal structure; article 8 of the Law on Corporate Change of Form, as amended as of 6 November 1969 (Official Gazette 1 S.2081) remains unaffected.

(4) The termination of employment of an employee by the former employer or by the new employer on account of the transfer of the business or a part of the business is of no effect. The right to give notice of termination on other grounds remains unaffected.

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LABOUR LAW IMPLICATIONS OF THE TRANSFER OF AN …