When an outsourcing agreement terminates any employees transferred in terms of the agreement are not automatically transferred back to the old employer or to any new service provider.

In South Africa Airways v Aviation Union of South Africa, handed down on 11 January 2011, SAA outsourced its infrastructure and support service department to an entity called LGM. These workers previously employed by SAA in this department were automatically transferred to LGM in terms of Section 197 of the Labour Relations Act. In 2007 SAA gave LGM notice of termination of the outsourcing agreement and indicated that it did not intend employing those workers who had previously been transferred to LGM. AUSA launched an urgent application to the Labour Court for a finding that the workers either transferred automatically back to SAA or to the new service provider engaged by SAA.

The Labour Court was required to consider the definition of "a transfer" in Section 197(1)(b) of the LRA being "the transfer of a business by one employer ('the old employer") to another employer ("the new employer") as a going concern". The Labour Court concluded that the word "by" in the literal context denoted that the transfer must be effected by the old employer (in that case SAA) and not the new employer (being the outsourced entity). Since the transfer would be by LGM, the Labour Court held that there was no automatic transfer of the employees from the outsourced entity back to SAA or to another service provider.

On appeal, the LAC found that a purposive approach, as opposed to a literal approach, was preferable in order to protect workers against job losses. On this basis the word "by" in Section 197(1)(b) should be read as "from" one employer to another, and therefore second generation transfers would be covered by Section 197.

The Supreme Court of Appeal found that Section 39(2) of the Constitution, which requires an interpretation of the law in accordance with the spirit and purport of the Bill of Rights, only applies where the meaning of the provision is not clear. The LAC had erred in adopting a purposive approach to the interpretation of Section 197 because this was at odds with the ordinary meaning of the words chosen by the legislature. More specifically, by interpreting the word "by" to mean "from", the LAC had "impermissibly distorted the meaning of the word".

The LAC had also erred in accepting that the evidence established that there was a transfer of a business activity as a going concern. The SCA said:

"Where parties wish to enter into an outsourcing agreement, and then for the business to revert to the outsourcer, or to be transferred to another provider, there must be a clear re-transfer, demonstrated through written contracts or conduct, of all assets and obligations of the business, including the transfer of workforce rights and obligations so that no difficulty arises in invoking the protection afforded by s197 to affected employees who have been involved in carrying out the services provided for in the initial outsourcing agreement."

These remarks should be borne in mind when drafting an outsourcing agreement one way or the other.

The decision of the SCA does not resolve the employers' current dilemma concerning whether Section 197 of the LRA applies to second generation outsourcing. A proposed amendment to Section 197 seeks to legislate for the LAC approach in the case of second generation transfers.

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