Transferring employees on an outsourcing in South Africa: overview

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.

To compare answers across multiple jurisdictions, visit the Transferring employees Country Q&A tool.

This Q&A is part of the global guide to outsourcing. For a full list of jurisdictional Q&As, visit www.practicallaw.com/outsourcing-guide.

For the general rules relating to outsourcing, visit Outsourcing: South Africa overview.

Contents

Transferring employees

Transfer by operation of law

1. In what circumstances (if any) are employees transferred by operation of law?

Initial outsourcing

Section 197 of the Labour Relations Act No. 66 of 1995 (LRA) regulates the automatic transfer of employees' contracts of employment by operation of law in circumstances where the whole or a part of any business, trade, undertaking or service transfers from one employer to another as a going concern. In determining whether or not section 197 applies to a transaction where specific services are outsourced, a court will have regard to the substance of the outsourcing transaction rather than the form that it takes.

However, it is important to draw a distinction between the outsourcing of a business or part as a going concern, and the provision of an outsourced service. In circumstances where a service has simply been contracted out in such terms that the outsourcee is responsible for making appropriate business infrastructure arrangements (for example, securing staff, letting property, acquiring fixed assets, machinery or implements, computers, computer networks), the cancellation of a contract only means that the outsource will:

  • No longer provide the service.

  • Retain all the infrastructure that it had utilised to provide the service to the client.

Whilst the term "going concern" is not defined in the LRA, the Constitutional Court in Aviation Union of South Africa and Another v South African Airways Proprietary Limited and Others [2012] 3 BLLR 211 (CC) (Aviation Union case) confirmed its previous finding regarding the meaning of this term and concluded:

  • In deciding whether a business has been transferred as a going concern, regard must be had to the substance and not the form of the transaction.

  • A number of factors will be relevant to the question of whether a transfer of a business as a going concern has occurred, including:

    • the transfer or otherwise of assets both tangible and intangible;

    • whether or not workers are taken over by the new employer;

    • whether customers are transferred; and

    • whether or not the same business is being carried on by the new employer.

This list of factors is not exhaustive and none of them is decisive individually.

In addition the court confirmed that:

  • Whether an outsourcing arrangement attracts the application of section 197 is to be determined in the same way as any other possible transfer.

  • The court will scrutinise the outsourcing transaction in question and the factual circumstances surrounding it, to determine whether, on the applicable test, section 197 is triggered.

If an outsourcing transaction is subject to section 197, the new employer is automatically, by operation of law, substituted for the old employer for all contracts of employment in existence immediately before the date of the transfer. It is not necessary for the old and the new employer to agree that the employees will be transferred, nor is the consent of the employees required.

Change of supplier

In the Aviation Union case, the Constitutional Court held that there is also no reason, in principle, why section 197 should not apply to second generation outsourcing.

Whether a second generation, or for that matter, any further outsourcing arrangement attracts the application of section 197 is determined in the same way as any other possible transfer. Therefore the court will scrutinise the transaction in question and the factual circumstances surrounding it, to determine whether, on the applicable test, section 197 is triggered.

Termination

Whether termination (an insourcing arrangement) attracts the application of section 197 is determined in the same way as any other possible transfer (see above, Change of supplier).

 
2. If employees transfer by operation of law, what are the terms on which they do so?

General terms

If section 197 of the Labour Relations Act 66 of 1995 (LRA) applies:

  • The new employer is automatically substituted in place of the old employer in respect of all contracts of employment that exist immediately before the date of transfer.

  • All the rights and obligations between the old employer and each transferring employee at the date of transfer continue in force as the rights and obligations between the new employer and each transferring employee.

  • Anything done prior to the transfer by or in relation to the old employer, including dismissal of an employee or the commission of an unfair labour practice, would be considered to have been done by or in relation to the new employer.

  • The transfer does not interrupt each transferring employee's continuity of employment (past service with the old employer must be recognised by the new employer).

Section 197(3)(a) of the LRA provides that the new employer must then employ the transferring employees on terms and conditions of employment that are on the whole not less favourable to the transferring employees than those that applied to them at the old employer, prior to the transfer. Therefore the transferring employees can be employed on other terms and conditions of employment provided they are no less favourable to the transferring employees. If the transferring employees were employed by the new employer on terms less favourable, the transferring employees could resign from the new employer's employ and claim an unfair dismissal in terms of section 186(1)(f) of the LRA.

However, Section 197(3)(b) of the LRA provides that section 197(3)(a) of the LRA would not apply to those employees whose terms and conditions of employment were governed by a collective agreement. If the terms and conditions of employment of employees are governed by a collective agreement, then the terms of the collective agreement prevail and, as such, the employees cannot be employed on terms and conditions of employment that deviate from the collective agreement and irrespective of whether the different terms and conditions of employment are on the whole no less favourable as contemplated in section 197(3)(a) of the LRA.

Further, section 197(7)(a) of the LRA provides that the new employer must conclude an agreement with the old employer with regard to a valuation as at the date of the transfer which provides for:

  • Leave pay accrued to the transferring employees.

  • Severance pay that would have been payable to the transferring employees in the event of retrenchment at the date of transfer.

  • Any other payments that accrued to the transferring employees as at the date of transfer but not as yet paid to them by the old employer as at the date of transfer.

Section 197(7)(b) of the LRA provides that the new employer must also conclude an agreement with the old employer that specifies which employer will be liable for paying the amounts contemplated in section 197(7)(a) of the LRA or if apportioned, the terms of that apportionment. For example, it could be agreed that the old employer and the new employer will be responsible for paying any of the amounts contemplated in section 197(7)(a) of the LRA on a 60:40 basis. Alternatively, the new employer could assume responsibility for all such payments after transfer. The agreement must also specify the provisions that have been made if any transferring employee becomes entitled to receive payment of these monies.

Section 197(7)(c) of the LRA provides that the general terms of the agreement reached in terms of section 197(7)(b) must be disclosed to each transferring employee.

Section 197(8) provides that for a period of 12 months after the date of the transfer, the old employer and the new employer are jointly and severally liable to an employee who becomes entitled to receive a payment contemplated in section 197(7)(a), as a result of, among others, a transferring employee's redundancy unless the old employer is in a position to prove that it complied with the provisions of section 197(7) and has discharged its obligations under that section.

Pensions

Section 197(4) of the LRA provides that a transferring employee can be transferred to a pension, provident, retirement or similar fund other than the fund to which the transferring employees belonged prior to the transfer, if the criteria in section 14(1)(c) of the Pension Funds Act are satisfied.

Employee benefits

Other than the specific provisions contained in section 197(4) of the LRA, employee benefits would need to be addressed in terms of sections 197(3)(a) and 197(3)(b) of the LRA (see above, General terms).

Other matters

Unless otherwise agreed, arbitration awards and collective agreements that bind the old employer immediately prior to the date of transfer, will bind the new employer from the date of transfer.

Redundancy pay

3. How is redundancy pay calculated?

The Basic Conditions of Employment Act 75 of 1997 (BCEA) provides for severance pay of one week's remuneration for every completed year of service (where past service with the old employer is recognised). However, severance pay is subject to consultation during the course of a retrenchment exercise which is governed by section 189 or 189A of the Labour Relations Act No. 66 of 1995, which could result in the agreement of an enhanced severance pay amount.

Harmonisation

4. To what extent can a transferee harmonise terms and conditions of transferring employees with those of its existing workforce?

Dismissals

5. To what extent can dismissals be implemented before or after the outsourcing?

Section 187(1)(g) of the Labour Relations Act 66 of 1995 (LRA) provides for an automatically unfair dismissal where a dismissal occurs as a consequence of a transfer, or reasons related to a transfer, contemplated under section 197 of the LRA. For example, if the old employer retrenched employees prior to the date of transfer, and in anticipation of the transfer, the employees could invoke the provisions of section 187(1)(g) of the LRA. In this case the retrenchment could entitle each laid off employee to either:

  • Reinstatement with the old employer or with the new employer.

  • An award of compensation of up to 24 months' remuneration.

However, if the new employer assesses that its post transfer operational requirements may require certain retrenchments, then the new employer would be entitled to embark on a retrenchment exercise in accordance with the provisions of sections 189 or 189A of the LRA. There may be restrictions on such retrenchments during the process contemplated in the Competition Act (see Question 8).

National restrictions

6. To what extent can particular services only be performed by a local national trained in your jurisdiction?

The Immigration Act No. 13 of 2002, as amended, prohibits foreign nationals (who are not permanent residents) from being employed in South Africa, unless they have a valid work permit.

Further, the public officer of a company (that is, the person responsible for ensuring that the company complies with the requirements of the South African Tax and Revenue Services) must reside in South Africa. However, there is no requirement that the public officer cannot be a foreign national.

Secondment

7. In what circumstances (if any) can the parties structure the employee arrangements of an outsourcing as a secondment?

If the employee arrangements of an outsourcing are structured as a secondment, this can result in the outsourcing transaction falling under the provisions of section 197 of the Labour Relations Act No. 66 of 1995 so that the outsourcee is automatically substituted as the employer of the seconded employees.

Information, notice and consultation obligations

8. What information must the transferor or the transferee provide to the other party in relation to any employees?

Where section 197 of the Labour Relations Act No. 66 of 1995 applies to an outsourcing, and the new employer is automatically substituted as the employer of the transferring employees, the old employer must furnish the new employer with all the transferring employees' employment information, including personnel files, disciplinary/performance history as well as full details of remuneration and benefits.

Where an outsourcing agreement constitutes a "merger" under the Competition Act (see Outsourcing: South Africa overview, Question 4 ( www.practicallaw.com/7-505-4428) ), the competition authorities will consider the impact of the "merger" on the public interest, including employment.

The parties to an intermediate or a large merger must notify the employees of the proposed transaction to enable them to make submissions to the competition authorities on the impact of the proposed transaction on employees.

The competition authorities can impose conditions to remedy any harm to the public interest, including the imposition of conditions preventing or limiting job losses resulting from the proposed transaction.

 
9. What are the notice, information and consultation obligations that arise for the transferor and the transferee in relation to employees or employees' representatives?

Section 197 of the LRA provides for the automatic substitution of the new employer in the place of the old employer in respect of all contracts of employment that exist immediately before the date of transfer. There is accordingly no express provision in section 197 of the LRA requiring the old employer and/or the new employer to furnish notice or information to the transferring employees or to consult with the transferring employees, or with their representative trade unions, regarding the transfer of the transferring employees’ contracts of employment in terms of section 197 of the LRA, save for the requirements contained in section 197(7)(c) of the LRA that provides that the terms of the agreement reached in terms of section 197(7)(b) must be disclosed (see Question 2, General Terms).

However, it is advisable to provide information to and to consult with the transferring employees, or with their representative trade unions regarding the transfer and more specifically the terms and conditions of employment that will apply to the transferring employees after transfer.

 

Contributor profiles

Andrew Bembridge, Director

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Justin Balkin, Director

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Ridwaan Boda, Director

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Sue Hayes, Director

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Waldo Steyn, Director

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