South Africa: Legitimate Business Objective Trumps Deemed Employment

Last Updated: 18 May 2017
Article by St Elmo Wilken

A recent South African Commission for Conciliation, Mediation and Arbitration ("CCMA") ruling has provided clarity on issues of deemed employment in circumstances where multiple contractors are used.

The matter before the CCMA involved Shoprite, one of the largest food retailers in Africa. In order to provide its approximately 2 000 stores with stock in an efficient manner, Shoprite established seven distribution centres ("DCs") in South Africa. Initially, Shoprite operated the DCs itself, using its own employees, but later used a combination of temporary employment service provider employees and its own employees to operate the DCs. Shoprite then entered into a service level agreement ("SLA") with ADfusion Contract Management Services ("ADfusion"), a logistics company, to attend to the day-to-day logistical operation of its DCs and also seconded its employees involved in the day-to-day logistical operations to ADfusion. ADfusion contracted with various temporary employment services ("TESs") to provide it with employees to perform its obligations under the SLA with Shoprite.

The TESs' employees referred a dispute in terms of section 198D of the Labour Relations Act, 1995 (the "LRA") to the CCMA, seeking a determination that they were employees of Shoprite, in order for them to receive the same conditions of employment as the Shoprite employees . After conciliation failed to resolve the dispute, it was referred to arbitration.

The employees' case

The employees relied on section 198A of the LRA, which provides that employees of a TES who earn less than a specified threshold amount and who have been assigned to a client for more than three months will be deemed to be employees of the client.

The arbitration proceeded on the basis that the requirements of section 198A had been met and that the employees in this case were the employees of the client. However, the question was: who was the client – Shoprite or ADfusion?

The employee applicants argued that very little had changed since the introduction of the new arrangement. They continued to work in the same place and perform the same duties as they had previously. Although ADfusion had placed certain managers in the DCs, they still reported to Shoprite managers, who issued instructions and held meetings. They contended that everything ADfusion did was on behalf of Shoprite, and submitted that the arrangement was a sham to avoid giving them the same conditions of employment as those accorded to Shoprite employees. The employee applicants attempted to invoke the provisions of section 200B of the LRA, which provides as follows:

"For the purposes of this Act and any other employment law, 'employer' includes one or more persons who carry on associated or related activity or business by or through an employer if the intent or effect of their doing so is or has been to directly or indirectly defeat the purposes of this Act or any other employment law."

Shoprite's case

Shoprite argued that the management of DCs did not form part of Shoprite's core business. It outsourced the operation of the DCs to ADfusion because it was unable to obtain the efficiencies required in running the DCs and the valuable time of its various managers that could have been used for strategic planning was being wasted. Its management of the DCs fell far short of international performance indicators. Due to the enormous scale of Shoprite's DCs, ADfusion did not immediately assume total control. This took place in a phased approach. From 1 May 2016, ADfusion was in complete control of the logistical operation of Shoprite's DCs and was remunerated on a performance-outcome basis. Shoprite provided ADfusion with information with regard to stock replenishment and ADfusion then attended to the logistical execution of the information. Within the parameters of the SLA, ADfusion employed the services of TESs that it deemed necessary to provide the output required by Shoprite. ADfusion's running of the distribution centres led to an increase of 40% in efficiency.

Shoprite further argued that, in order for section 200B to be triggered, the employee applicants had to prove that the arrangement was a simulated transaction or a sham, however, they failed to advanced facts that it was a stimulated transaction.

The CCMA's ruling

The commissioner found that, by concluding the SLA with ADfusion, Shoprite sought to achieve a legitimate objective; ie, to improve the efficiency of its DCs, and that there was, accordingly, a rational commercial purpose for conclusion of the SLA. There had been no attempt to defeat the objects of the LRA and ADfusion – not Shoprite – was therefore the client. As a consequence, ADfusion was the deemed employer of the applicant employees.

A welcome finding – but more litigation likely

Recent amendments to the LRA limit the ability of employers to use TESs and fixed-term contracts of employment by defining what constitutes acceptable use of these mechanisms. Interestingly, the amendments do not seek to explicitly regulate the use of contractors. However, the possibility that unions would seek to rely on section 200B to limit the use of contractors was foreseen – especially given the vague formulation of the section. The precise ambit of the section will undoubtedly be the subject of future litigation, but, for now, the recognition by the commissioner that the use of a contractor in these circumstances is legitimate is to be welcomed.

ENSafrica represented Shoprite in this matter before the CCMA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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