It can be challenging to determine definitively whether a particular outsourcing arrangement triggers section 197 of the Labour Relations Act No. 66 of 1995 ("the LRA") and thereby the automatic transfer of employees to the new employer. This issue is obviously relevant because, depending on the facts, outsourcing or insourcing arrangements can indeed constitute the transfer of a business and thus trigger an automatic transfer of employees. In the context of outsourcing and insourcing, attention to detail and understanding the provisions, and legal effect, of section 197 is crucial.
The transfer of employees happens automatically
At the outset it is important to have a clear understanding of section 197. Its purpose is to regulate the transfer of a business as a going concern and to protect employees' rights and duties with their old employer. When section 197 applies to a transfer, there are a number of important legal consequences, all of which apply by operation of law:
1. 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.
2. 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 been rights and obligations between the new employer and each such employee.
3. 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.
4. 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.
5. The employer must employ the transferred employees on terms and conditions that are overall no less favourable to the employees than those on which they were employed by the old employer. However, this consequence does not apply to employees if any of their conditions of employment are set by a collective agreement.
To what extent does section 197 apply to outsourcing or insourcing arrangements?
Not every case of outsourcing or insourcing will constitute the transfer of a business for the purposes of triggering section 197. The starting point should always be to accurately assess the factual matrix of the outsourcing or insourcing arrangement involved to determine whether it constitutes a transfer of a business.
Even though the LRA does not define what constitutes the transfer of a business as a going concern, the issue has received much attention over the years by our courts. The result is that several factors, taken together, could indicate that there is a transfer of a business. Some examples of factors that could indicate that there has been a transfer of a business would be where there is a transfer of the whole or part of a business operation, a business function, a business's assets, the employees of a business, or the customers of a business. The mere transfer of a service is not enough – there must be a transfer of a business to trigger section 197.
In the context of outsourcing and insourcing, there may, depending on the facts, be a transfer of a business and this could occur in the following instances:
- the initial outsourcing of a business function.
- the second-generation outsourcing of a business function.
- the return in-house of an outsourced business function.
- the insourcing of a business function.
Ultimately, and regardless of its kind or form, the substance of the outsourcing or insourcing arrangement will determine whether it constitutes the transfer of a business for the purposes of section 197. If it does, it will trigger the automatic transfer of the employees involved.
We are here to help
A thorough assessment of an outsourcing or insourcing arrangement is therefore imperative; not least of all because non-compliance with the LRA can be costly in dealing with avoidable labour claims and other issues that might frustrate contract implementation.
If there is any doubt about whether an outsourcing or insourcing arrangement triggers the application of section 197, it is important to seek expert legal advice. Our professionals in South Africa have years of corporate, commercial, M&A, labour, regulatory and tax experience in various sectors. We are best placed to assist you to navigate the legal landscape and in order to ensure that your transactions are legally compliant.
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.