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Transferring Employees on an Outsourcing in South Africa: Overview
Practical Law Country Q&A 5-624-2585 (Approx. 9 pages)
Transferring Employees on an Outsourcing in South Africa: Overview
by Anli Bezuidenhout and JJ van der Walt, Cliffe Dekker Hofmeyr Inc
| Law stated as at 01 Feb 2023 • South Africa |
A Q&A guide to outsourcing in South Africa.
This Q&A guide gives a high-level overview of the rules relating to transferring employees on an outsourcing, including structuring employee arrangements (including any notice, information and consultation obligations) and calculating redundancy pay.
Transfer by Operation of Law
When dealing with outsourcing, an entire business function must be outsourced as opposed to outsourcing a class of employees or a service alone. An outsourcing usually involves the putting out to tender of certain services for a fee where the service provider performs the outsourced services and in return a fee is paid for its services by the customer.
Where a function is outsourced, a service provider (an independent contractor) takes control of the function as a whole and is responsible for providing the end product. The customer has no say over how the work is undertaken. The service provider employs the employees who perform the outsourced function. Therefore, the service provider retains control over its employees, is responsible for paying its employees, and has the authority to discipline its employees.
By outsourcing a function to a service provider, the customer no longer employs the employees undertaking the performance of that particular function and therefore negates its employment-related risk.
Section 197 of the Labour Relations Act No. 66 of 1995 (LRA) regulates the transfer of a business as a going concern. If section 197 applies to a specific transaction, all the contracts of employment in existence at the time of the transfer of business are transferred together with the business to the new employer. When due awareness is taken of the principles relating to the definition of a transfer as a going concern as well as a business, section 197 has been held to apply to transfers that occur when an employer decides to outsource a part of its activities to a service provider.
Not every outsourcing transaction will automatically fall within section 197. However, very little is required for its application. For example, if the service performed by the old and new service provider is the same, and some employees are taken over by the new service provider and the business can seamlessly be continued to be conducted by the new employer as a distinct economic entity: that would be sufficient to trigger the application of section 197.
Initial Outsourcing of Service Provision
A transfer occurs when a business (which may include the whole or a part of any business, trade, undertaking or service) transfers by one employer (old employer) to another employer (new employer) as a going concern (section 197, LRA). If these requirements are met, the transfer occurs by operation of law.
The requirements for the operation of section 197 of the LRA are that the whole or part of a business must be transferred by the old to the new employer as a going concern. All three requirements must be met for the section to be operative.
An initial outsourcing may trigger the application of section 197 of the LRA if the outsourcing constitutes the transfer of a business.
Provided that the requirements for the operation of section 197 of the LRA are met, a contract of employment transfers automatically from the old to the new employer. The dual purpose of section 197 of the LRA is to facilitate commercial transactions and protect the security of employment of employees in the process. The applicability of the section is contingent on the facts of each matter.
General Terms
If a transfer of a business takes place, unless otherwise agreed in terms of the provisions of the applicable section:
- The new employer is automatically substituted for the old employer in respect of all contracts of employment in existence immediately before the date of 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 were rights and obligations between the new employer and the employee.
- 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, is considered to have been done by or in relation to the new employer.
- The transfer does not interrupt an employee's continuity of employment, and an employee's contract of employment continues with the new employer as if with the old employer.
- The new employer complies with these requirements if that employer employs transferred employees on terms and conditions that are on the whole no less favourable to the employees than those on which they were employed by the old employer. However, this does not apply to employees if any of their conditions of employment are determined by a collective agreement.
Length of Service
The primary protection afforded to employees under section 197 is the right to continuity of employment. All of the rights and obligations that existed between the previous employer and the employees, will continue in force against the new employer, including the consideration of the employee's length of service.
Employee Benefits
The old employer must:
- Agree with the new employer to a valuation as at the date of transfer of:
- the leave pay accrued to the transferred employees of the old employer;
- the severance pay that would have been payable to the transferred employees of the old employer in the event of a dismissal by reason of the employer's operational requirements; and
- any other payments that have accrued to the transferred employees but have not been paid to employees of the old employer.
- Conclude a written agreement that specifies:
- which employer is liable for paying any amount referred to above, and in the case of the apportionment of liability between them, the terms of that apportionment; and
- what provision has been made for any payment contemplated above if any employee becomes entitled to receive a payment.
- Disclose the terms of the agreement contemplated above to each employee who after the transfer becomes employed by the new employer.
- Take any other measure that may be reasonable in the circumstances to ensure that adequate provision is made for any obligation on the new employer that may arise on transfers.
Pensions
The section of the LRA that regulates transfers does not prevent an employee from being transferred to a pension, provident, retirement, or similar fund other than the fund to which the employee belonged before the transfer, if the criteria in section 14(1)(c) of the Pension Funds Act No. 24 of 1956, are satisfied.
Other Matters
Unless otherwise agreed, the new employer is bound by any:
- Arbitration award made in terms of the LRA, the common law or any other law.
- Collective agreement binding under section 23 of the LRA.
- Collective agreement binding under section 32 of the LRA unless a commissioner acting in terms of section 62 decides otherwise.
An agreement to vary the automatic consequences of section 197 of the LRA must be in writing and concluded between either the:
- Old employer, the new employer or the old and new employers acting jointly.
- Appropriate person or body referred to in section 189(1) of the LRA.
Section 189 refers to any person the employer is required to consult in terms of a collective agreement, the workplace forum or the trade union.
4. If the employees do not transfer by operation of law but there is a commercial agreement in place for them to be transferred, what employment rights, obligations, and terms must the parties to the agreement adhere to or are common practice to honour? Is the position only governed by the commercial agreement between the parties?
This position is regulated by the commercial agreement between the parties. In some instances, the parties may choose to recognise years of service and annual leave liability, but this is not necessarily standard practice and would depend on the facts of the matter. In any event, the employees' consent would be required to effect the transfer.
Harmonisation
5. Is a transferee required to harmonise the terms and conditions of transferring employees with those of its existing workforce? If so, what does it mean to harmonise terms in your jurisdiction? What are the risks for the transferee of not harmonising terms, or failing to do so correctly?
This is possible provided the new employer employs transferred employees on terms and conditions that are, on the whole, no less favourable to the employees than those on which they were employed by the old employer. There is no specific requirement to harmonise the terms and conditions of employment of the employees who have transferred: the only consideration is whether the employees have transferred on terms and conditions which are, on the whole, no less favourable.
6. If there is no legal requirement to harmonise terms and conditions of transferring employees with those of its existing workforce, what are the risks and challenges for the transferee of harmonising, or choosing not to harmonise, the terms and conditions of transferring employees with those of its existing workforce?
The risk associated with harmonisation is that the transferring employees may allege that their terms and conditions of employment are, on the whole, less favourable than the terms and conditions of employment they had enjoyed previously.
Equal pay for work of equal value claims may also be lodged but these can be defended on the basis that the employees were transferred with an entitlement to terms and conditions of employment which were, on the whole, no less favourable.
Dismissals
Dismissals for operational reasons (such as redundancies/retrenchments) can be implemented provided these are not related to the business transfer under section 197 of the LRA (that is, for the dismissal to not be null and void, there must be an operational requirement that is separate to the transfer itself that justifies the proposed dismissal).
Dismissals implemented for misconduct and incapacity (such as poor performance) may, however, be implemented before or after the transfer as normal, provided this is the true reason for the dismissal.
8. What liability could arise for the transferor or the transferee for any dismissals before the transfer?
If section 197 of the LRA applies, the liability for the dismissal will transfer with the employees, unless the parties have agreed otherwise in their agreement.
In most cases, the parties will agree for the transferor to retain responsibility for any dismissals implemented prior to the transfer date (and consequently the transferee for dismissals following the transfer date, see also Question 9).
9. What liability could arise for the transferor or the transferee for any dismissals after the transfer?
With regards to transfers under section 197 of the LRA, for a period of 12 months following the date of transfer, the old employer (the transferor) will be jointly and severally liable with the new employer (the transferee) in relation to any employee who becomes liable for a payment in relation to section 197, and/or as a result of any termination based on operational requirements, unless the old employer can show that it has fully complied with the provisions of section 197.
Section 197 of the LRA must also be read in conjunction with both:
- Section 186(1)(f) of the LRA, which provides that the definition of dismissal includes where an employee has been terminated with or without notice because the new employer, after a transfer in terms of section 197 or 197A, provided the employee with conditions or circumstances at work that are substantially less favourable to the employee than those provided by the old employer.
- Section 187(1)(g), which renders any dismissal made for any reason related to a business transfer as "automatically unfair."
The extent of the parties' liability for such matters is usually negotiated between the parties and provided for in the terms of their agreement.
Redundancy Pay
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 of the Basic Conditions of Employment Act No. 75 of 1997 (BCEA) (section 41, BCEA).
Under section 35 of the BCEA, an employee's wage is calculated by reference to the number of hours the employee ordinarily works.
For the purposes of calculating the wage of an employee by time, an employee is deemed ordinarily to work:
- 45 hours in a week, unless the employee ordinarily works fewer hours in a week.
- Nine hours in a day, or seven and a half hours in the case of an employee who works for more than five days a week.
An employee's monthly remuneration or wage is four and one-third times the employee's weekly remuneration or wage, respectively.
If an employee's remuneration or wage is calculated, either wholly or in part, on a basis other than time or if an employee's remuneration or wage fluctuates significantly from period to period, any payment to that employee, under the BCEA, must be calculated by reference to the employee's remuneration or wage during either:
- The preceding 13 weeks.
- If the employee has been in employment for a shorter period, that period.
Secondment
Information, Notice and Consultation Obligations
12. What information must the transferor or the transferee provide to the other party in relation to any employees? Are there any time limitations or requirements?
The parties are required to reach agreement on valuing:
- Leave pay accrued to the transferred employees of the old employer.
- Severance pay that would have been payable to the transferred employees of the old employer in the event of a dismissal by reason of the employer's operational requirements.
- Any other payments that have accrued to the transferred employees but have not been paid to employees of the old employer.
- This information must be provided to each employee who, after the transfer, becomes employed by the new employer. The only time limitation is that the value of the above amounts must be agreed between the parties as at the date of transfer.
13. Are there any restrictions or limitations on the personal data of employees that can be shared between the transferor and the transferee?
An employer can process general personal information without an employee's consent where such processing either:
- Protects a legitimate interest of the employee.
- Is "necessary for pursuing the legitimate interest of the responsible party or of a third party to whom it is supplied."
Nevertheless, the most risk-averse approach is to ensure that consent has been obtained from the employees prior to the processing of any personal information during the employment period and as required.
Employee Objection to Transfer
15. What action can an employee take if they object to transferring on an outsourcing and what effect does their objection have?
The transferee is automatically, without the need to consult or obtain consent from any parties, substituted in the place of the transferor in respect of all contracts of employment. All of the rights and obligations (whether contractual or otherwise) that existed between the previous employer (the transferor) and the employees, will continue to be in force against the new employer (the transferee).
Therefore, as the transfer occurs by operation by law, an employee cannot object to the transfer if the requirements of section 197 of the LRA are met.